Rising fuel prices mean container costs are sure to jump
By Larry Thomas -- Furniture Today, March 24, 2008
High Point — Against a backdrop of record fuel prices and the worst business climate in more than a decade, U.S. furniture importers are facing contentious contract negotiations with the shipping lines that bring their furniture here from Asia.
Nearly all importers have shipping contracts that expire April 30, and it's a given that the price of sending each container to the United States will go up. The real debate begins when shippers and furniture importers sit down to talk about the size of the increase.
"The posturing has begun," said David Bennett, vice president of sales at Globe Express Services, a logistics provider who negotiates contracts on behalf of several furniture companies. "There is a potential for more difficult negotiations this time."
The overriding issue, according to Bennett and several others preparing for negotiations, is fuel. Specifically, it's the low-grade marine diesel fuel used by cargo ships.
Such fuel is priced by the ton, and last month, the price hit a record $518 per ton, according to the Transpacific Stabilization Agreement, a trade association for 15 shipping lines that move cargo between Asia and the U.S.
A year ago, the TSA says it was selling for $295 per ton.
Niels Erich, a spokesman for the group, said that's an increase that shipping lines simply can't absorb, noting that it's not unusual for ships to burn 200 tons of fuel per day during their 12- to 14-day journey from Asia to the West Coast. (Shipments to East Coast ports, which have to navigate the Panama Canal, can take 26 to 32 days.)
"That's by far the biggest component of our operating costs," Erich said.
Although many existing contracts allow vessel operators to implement fuel surcharges, most have caps or other restrictions about how and when they're implemented. For all new contracts, TSA says its members will be insisting on uncapped surcharges that can be tacked on every month, based on a formula developed by TSA.
That idea rankles people like James Garst, executive director of Container Group LLC, a North Carolina-based buying association for furniture importers. He says a full, uncapped surcharge will add $800 to $900 to the cost of every container — a huge increase given that it currently costs about $1,800 to $2,000 to ship a container to the West Coast.
"Most of the vessel operators are making money, but this does not stop them from thinking that they do all the heavy lifting and importers and exporters make all the money," Garst said.
He conceded that importers probably will have to allow shipping lines to add some type of surcharge, but he's adamant that he won't accept an uncapped surcharge that can be added every month without negotiation.
"Vessel operators are about to employ creative methods of increasing the cost of transportation," Garst added.
In addition to fuel surcharges, TSA says its members will be asking to increase base rates by $400 per 40-foot container for West Coast cargo and $600 per container for East Coast shipments.
While negotiators for furniture companies doubt shipping lines will get all the price hikes they want, they concede some increase is inevitable, despite the fact that retail business in the United States has slowed considerably since the current contacts were hammered out last spring.
"If they can't get their rates up, they're going to take their ships elsewhere, possibly to shipping lanes for India or Europe ...and that's not doing anybody any good," said Bennett.
Steve Wolfe, vice president of business development at Zenith Global Logistics, said he believes the final increases won't be as onerous as TSA members are seeking because shipping companies won't want to damage the good working relationships they've had with furniture importers in recent years.
"The steamship companies like furniture because it brings them a lot of volume and it's a pretty stable business. It's not a seasonal product like toys," said Wolfe, who will be negotiating for importers bringing in about 20,000 containers during the next year.
But it's those same seasonal products that cause additional headaches for furniture importers because shipping companies are asking for a surcharge of $400 per container during the peak shipping season of June 1 through Oct. 31.
Wolfe said some furniture companies have succeeded in eliminating peak season charges from past contracts because furniture isn't a seasonal product, but such issues are dealt with on a case-by-case basis.
"We all depend on (shipping lines). We are willing to help them out," he said. "But I think they have some unrealistic goals."
And if the shipping contract problems don't cause nightmares for logistics people, the upcoming contract negotiations between West Coast dock workers and port operators just might do it.
The contract between the Pacific Maritime Assn. and the International Longshore and Warehouse Union (ILWU) expires this summer, and while the two sides are on friendly terms now, Garst said that could change overnight.
"Dock workers will try to increase wages and preserve jobs, as shippers and terminal operators introduce technology that will eliminate the need for dock workers," Garst explained.
Garst clearly is hoping the contract can be settled without a repeat of September 2002, when the Maritime Association locked out dock workers during contract talks after workers staged a slowdown at West Coast ports.
That action shut down ports for several days during the peak holiday shipping season, and it took weeks to unload the backlog of goods.
To protect themselves, Garst said importers and logistics providers should consider shipping to Mexican or Canadian ports, or use East Coast ports in the U.S. and then move the containers by rail to their final destination.
