Carriers not to blame for port congestions – Executive Insights with Stephen Nothdurft – VP of HMM, Midwest

Executive Insights is a series by Shipping and Freight Resource that provides useful insights and thoughtful analysis on what is happening in the maritime, shipping, freight, logistics, supply chain, and trade industries.. Executive Insights is your chance to pick the brains of industry veterans, leaders, and enablers..

The supply chain disruptions that the world is experiencing currently involve and affect various stakeholders involved in the business of shipping and freight.. There have been various discussions back and forth on who is responsible for certain aspects of the disruption and the discussions are ongoing..

In this edition of Executive Insights, we caught up with Stephen Nothdurft, Vice President – Midwest Region at HMM, to discuss the various issues surrounding these supply chain disruptions and its impact from a liner’s perspective..

SFR : Can you give a brief background of yourself, how long have you been in the industry, and what you are up to currently..??

SN : Sure. I am a native of the Midwest, I have been involved in the ocean shipping community for over 35 years, It seems like only a few months, but it’s been a very long time. I’ve worked for a number of carriers from various backgrounds and did spend a little bit of time in Southern California, with a carrier there for a number of years.

So had some exposure to the port activities during my time there. But most of my career has been in the Midwest, in particular in Chicago and working this market, and particularly in the commercial side, with a little bit of background in operations, but basically in commercial sales and sales management throughout my career.

SFR : So, HMM is back in the black with the highest operating profit in its history of US$2.06 billion in the first half of 2021, 12 container ships on order, already on the record books for the world’s largest container ship…. It seems everything is on the up and up for HMM.. You must be feeling exhilarated..??

SN : Yeah, it’s a very positive and encouraging time, not just here at HMM, but I would say for the entire ocean community. All the carriers are doing very well having managed to I think pay down debt, make reinvestments in the product. I think that’s very important. So yeah, I think it’s a very exciting time.

For many years, employees and workers within the ocean shipping community have been constantly being beaten up and pushed around and that is reflected when you don’t have a positive balance sheet. So to be able to have these turnarounds that have taken place in the last few years, and again not just for HMM but for all the carriers, I think it’s a very, very positive feeling for all the employees in the industry.

SFR : Understandably, the mood with liners is quite high right now.. But if we cast our minds a few years back, what kind of an impact did the demise of Hanjin have for HMM and other Korean shipping lines..??

SN : Yeah, very true. At that time, I think it became become evident that it was going to be impossible for both carriers to be sustained. And the government felt the need to have a lead carrier or a national shipping line in Korea, but having both companies are trying to salvage both was just not going to be viable. So they put it to each of the organizations, both Hanjin and HMM to come up with a plan, and ultimately, it was determined that HMM’s plan was better. Subsequently, HMM moved forward with the support of the Korean government fully behind the organization.

SFR : Did the carriers as a group or HMM as a company foresee what has been happening in the shipping industry since the onset of the pandemic..??

SN : No one could have really envisioned firstly how tragic it seemed in terms of a veritable stop in the movement of goods due to the pandemic. If you go back to the very beginning with China having to close things down, especially after the release of the virus coming from Wuhan, suddenly there was no cargo moving. At that point in time carriers were understandably very anxious, because it was very difficult to know what might transpire moving forward.

I don’t think the carrier community could have envisioned in any way that the appetite for goods and purchases coming from the Asian rim could have been to the extent that it has been for the last 18 months. So it’s been great news, but I don’t think there were a lot of people that had crystal balls that would have indicated this type of thing back when the tide turned.

SFR : What in your view is the main reason for such an exponential increase in freight rates..??

SN : I think, to be honest, this goes back to Adam Smith’s Invisible Hand, and is very much a supply and demand issue. We continue to this day to be deluged with requests for bookings and opportunities for cargo in an unprecedented and in a way never ever really witnessed previously. This has essentially led to the price escalation. It’s not exclusively at the hands of the carriers though that the prices are escalating.

Customers themselves have a desire to get their product moving and are advancing the prices. So the comment, “what does it take to get on the ship” is very much coming from the shipper’s side. And the ocean carriers are doing what they can to accommodate all requests. But there’s only a finite number of containers, there’s only a finite number of slots each week. And there’s more cargo available than there is capacity. And that has been the case, really since last summer.

SFR : What was the catalyst for the issues relating to port congestion that we are seeing globally but mainly on the USA West Coast..?? Do you think that this situation will last as long as the pandemic still rages..??

The unprecedented flow of cargo has created a lot of impact on the ports globally. Certainly here in the US, the focus has been primarily on the Southern California region, although there really has not been a port in North America that’s not been impacted in some way. There were lines in Savannah, there have been port skips in Oakland because of their inability to cover the capacity. But the focal point has been Southern California and understandably so. It is the largest complex here in North America. So I think really one of the reasons that the problems have escalated, it comes back to the inability of the receivers to accept cargo in a timely fashion. And that is attached most likely to the inability for labor to be working in warehouses and shortage of drivers.

But when receivers are unable to devan the boxes, take cargo out and get it moving through their pipelines, that is really what caused the ripple effect. Once a parking lot fills up at a distribution center, they can’t take any more containers and those containers then wind up sitting at the ocean terminals. So it is very much a domino effect, with labor being a core factor in that process. There are many reasons why there was and continues to be a lack of labor here in the US.

Many of these things touch upon perhaps the way the government treated the pandemic and in some ways, it was easier for people to remain at home, as opposed to joining the workforce. Savings rates are currently are at a near-record high in America and this comes back to people having quite a bit of money, some of it earned, some of it government supplemented and without a service, industry to spend it. So most have been trying to spend that money on consumer goods contributing to the increase in demand.

So coming back to the situation on the West Coast, the pandemic is going to continue creating these problems as new variants come out, as the situations ebb and flow. I think what is really at the core is that the importers receiving their goods in North America have to find a better way to push that product through their pipelines.

SFR : There have been many reports about severe capacity shortages both in terms of ships and containers.. What are the reasons for this tonnage capacity shortages especially when many bigger ships are deployed on the US trade routes..

I think it’s important to note that the current idle container fleet globally is somewhere around 4%. Every box ship that is available is virtually floating in service. What we are facing here, though, is just an unprecedented need and requirement for equipment and vessel space. So although all ships afloat, are loading, running, going from Asia to various destinations in Europe, Latin America, and certainly North America, the demand has just continued to exceed supply. So I don’t know that it’s really a shortage of ships. It was unanticipated that there would be such a need for so much volume based upon historical trends.

SFR : Were there any shifts or reallocation in vessel capacities to and from the US to other trade routes because of overcapacity..??

Yes, there was some change in some trade routes, and I think this stems very much from profitability. As an example, the North Atlantic trade between Europe and North America is a very historic trade, but it is also a very slow trade to rebound financially, certainly relative to Asia, Europe, or the Trans-Pacific.  There were a number of carriers that elected to cannibalize some of their North Atlantic trades and take that tonnage, whether it manifests itself as entirely new services, or simply as extra loaders. They took those ships out of service in trades such as the North Atlantic and other places around the globe and put them in markets that made the most sense financially.

SFR : There were also reports of empty container shortages especially on the US trade, but empty containers are being repositioned back to FE/SEA regularly and increasing, so why is there a shortage..??

SN : I think it’s been the inability of the ocean carriers to get those empty boxes back to Asia and this comes back somewhat as well to the situation in the terminals, at least in the United States, and particularly in Southern California as they’re congested, they’re full and there have been difficulties as you’re discharging the ship, with the loads to be able to load back all the empties, that the carrier would like to have stowed on the vessel especially with the port stay in mind.

So this has been a side effect of the congestion in Southern California in particular, that the vessels have not been able to load out as profiled as they would like. This is an important part of the process for the ocean carriers as this is the mechanism for revenue. If these containers don’t get back, and I can say, at least on behalf of HMM, we’re doing our level best to have them go back, loaded, with revenue to the carrier. It’s very important that they are returned to Asia because we can’t load the inbound goods without having the empty boxes back in, in the Far East.

SFR : What is your view on the Container Dwell Fee that the San Pedro Bay Ports have announced but deferred a few times now..?? Are the ports justified in charging the carriers for it..?? Who do you think should be liable for this..??

SN : The congestion started largely in part because of the inability of receivers to take delivery of their goods and effectively move them through the pipeline. The ports themselves were trying to find a way to improve the delivery process. I don’t think that the container dwell fee, as it is established currently, is the proper mechanism to make that happen. It doesn’t really fix anything, it doesn’t change the dynamics of receivership, doesn’t cure an aging truck driver community in the United States, it doesn’t change or add to the people in warehouses that are needing to devan these containers.

Curiously though, there has been some positive benefit from the “discussion” of this charge. Even though it has yet to be implemented, there has been some improvement in the container flow on the waterfront in Southern California, in the Pacific Northwest as well. So if it was meant to produce some success, through fear of cost, it has done so.. We’re nowhere near fixed or out of the woods as it relates to the problems along the waterfront, but there have been some clear positive results in the last number of weeks, certainly during the month of November, that pickups were starting to improve. And I think that at the end of the day, is what the port’s had hoped to and the terminals really had hoped to happen.

SFR : Isn’t that a bit contradictory though, because you mentioned the congestion is because the customers are not able to pick up the containers in time. But on the other hand, the carriers are being billed for that..??

SN : That’s why the ocean carrier community made it quite clear that while the invoice may initially be coming to the ocean carriers, the pass-through was going to take effect there, and that this fee would be moved directly to the importers to be covered. I don’t know if the ports when they looked at implementing this fee, thought that they could use the carriers as that wedge in order to make things happen.

At least speaking for my organization, we have been pushing our import community to return the containers and get them cleared again because we need containers at origin to continue to move products. For better or worse, the fee, while it has not yet been implemented, certainly has an impact on the market thus far.  But how long we’re going to be able to stretch that and how effective will that be, it’s hard to tell.

But there has been some positivity from it although it’s not a long-term fix. I think this is merely something that will temporarily, perhaps motivate the movement of cargo, but it doesn’t cure limited capacity in land space and the labor issues that we’ve seen today.

SFR : What percentage of your empty containers are stuck inland..?? There have been reports that there are a lot of containers in the wrong places across the US right now..??

SN : So on the inland side, it depends on carrier to carrier, but by and large, many carriers have reduced their intermodal lift. This is in part due to the time taken in discharging a container in Southern California, moving it into Chicago, and by the time that container is devanned and given to an exporter to reload export cargo, that’s an additional 2-4 weeks for that process to be completed. If you put that in perspective to a container that discharges in California and is quickly devanned and moved back to the terminal with export cargo, it may only take a week’s turnaround time.

So understanding the need to have the equipment back at origin, many of the carriers have kind of frowned upon excess movement into the interior, because they need the boxes as promptly as possible, and they’re doing everything they can to get them back at origin. That’s also created a bit of a problem on the West Coast as there is not enough trans-load space in order to strip cargo from containers and load it into domestic units for movement into the interior. So there have been other parts of the pipeline in the chain that has been stressed because of the various changes that have taken place in the importation of products.

SFR : So it seems like an overall crazy situation all around.. But now that HMM is back in the black, there have been many media reports about the privatization of HMM and that state-run KDB is considering selling shipping line HMM ‘in phases’.. Is there any truth to this and what is the general feeling about this..??

I think certainly the government’s intentions at the time that they assumed control of HMM, was to of course, get it stable, have the organization be in a position to operate and support the market, in particular, the exporters of Korea, and then turn it back into private hands.

So there wasn’t any long-term desire to be a player in the ocean shipping world, by the powers that be in Seoul. So, yes the talks of taking the company private, are valid and you may have heard and seen many folks involved with KDB and KOBC speaking about the need to do this as quickly as they can. It’s most likely that the purchaser will also be a Korean organization. whether it’s an existing manufacturer that sees synergies from having a shipping unit, or perhaps a connection with a Korean-based forwarding organization, that may see this as a next step, similar to the CEVA/CMA, Damco/Maersk scenario. But in general, the government is looking to get back to the business of governing and leaving the business of shipping in private hands.

SFR : Before we wrap up, Steve, if you had to put a date or a period as to when you think this mess in the supply chain would be sorted..??

SN : It is very difficult to say because of all the things that still continue to linger on with, with COVID. We’ve seen port closures in Asia that have been for weeks at a time and if it is not port closures, factories have been closed for quite some time, just due to the spread of COVID. And that puts a real problem on the vessels and the scheduling. We know Chinese New Year is looming. It’s early this year, and it’s going to shut things down for a period of time. But we know that there’ll be a tremendous surge of cargo beforehand and likely following that.

In addition, following the New Year is the Olympics in China and Beijing, and there will likely be some impact there. It’s very important to have blue skies for the Olympics, so there could be some shuttering of factories that might take place in certain locations. So these are just first quarter factors that I think are going to come into play and going to have some impact.

There may be some reasonable correction by the time we get to the end of the 2nd Quarter of 2022, and at least here in North America, we are going to see these effects lingering into 2023, but how severe those will be, will hinge greatly upon the ability to contain the virus and the variants that have followed (that is if we don’t see any kind of additional outbreaks to a large degree either here or in Asia), but now the problem is real and the ability to get to address it continues to be a challenge.

Also, another important point is the International Longshore and Warehouse Union (ILWU) contract negotiations which are highly relevant to how the progress of the supply chain will be in 2022. As far as I can see, there is no reason to believe these negotiations will go smoothly and the potential for waterfront disruption due to labor seems highly likely and if that happens, it could cripple the entire supply chain in the USA.

So we can hope the 2nd Quarter of 2022 will bring about some improvement, but then traditional peak season starts again here in the United States. So like everybody, we’ll just have to wait and watch and see what happens.