Containing the Container Nuisance
- 1. 1 | C o n t a i n i n g t h e C o n t a i n e r N u i s a n c e Containing the Container Nuisance By Santiago Enrique Abstract In the world of intermodal transportation the shipping industry comes out on top when it comes to economies of scale. Thanks to Malcolm Purcell McLean, containerization made shipping the world's most economic and green mode of transporting goods around the globe. According to the Journal of Commerce, during the first quarter of 2015 the United States saw an 8.3 percent drop in containerized exports followed by a further second quarter drop of 2.1 percent. With a strong dollar, American goods have become more expensive and hence the US to Asia exports have slowed down. As United States ports estimated a strong 20 million TEUs entering the United States from China during 2015, the US will only be expecting to export around 11.7 million TEUs back to the Asian market. This container imbalance creates a problem with the storage and containment of the 8.3 million empty TEUs. This paper will be looking at three specific questions that carriers and shippers will have to ask themselves in the following months, i.e. what financial and environmental problems do empty containers pose, who owns these empty containers and what should be done in order to minimize the empty container problem caused by the trade imbalance between China and the US? The discussion of container management is vital for today’s maritime industry as the industry faces growth. 1. Introduction The United States Bureau of Economic Analysis has released in the "U.S. Census Bureau of Economic Analysis NEWS,” that in the past three years from 2013 to 2015 there has been an unequal balance of trade in the United States.1 Import costs in USDs exceeds that of any export, this means that the U.S. is spending more on trade than what it is receiving through tariffs and tax. While more than 90 percent of U.S. imports are handled through the United States Port System and as American Trade stays imbalanced so do the amount of containers being exported and imported. As containers become inexpensive to build, carriers and shippers alike find it more economic to buy new containers where it suits them instead of shipping empty containers back to their origins or where they are needed. As the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership are being forged, the amount of goods that will enter the US will increase exponentially. For example, currently the United States imposes about a 40% tariff on clothing imported from Europe.2 With the TTIP and free trade agreements, imports from Europe on clothing would grow 1 Census Bureau, U.S. "U.S. Census Bureau U.S. Bureau of Economic Analysis NEWS." Http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf. 6 Jan. 2016. Web. 8 Jan. 2016. 2 Bowman, Sam. "The Five Things You Need to Know about TTIP." Http://www.capx.co/. Adam Smith Institute, 4 Mar. 2015. Web. 8 Jan. 2016.
- 2. 2 | C o n t a i n i n g t h e C o n t a i n e r N u i s a n c e at a higher rate than today supposing that tariffs stay at bay. More clothing equals more containers which means a higher rate of empty containers staying in the U.S. Globalization is a good thing and free trade could be debated, but the fact of the matter is that the U.S. is importing higher volumes of TEUs than it exports. 2. Containerization: A Brief History In the last 75 years, Globalization has become the norm. 3 Society has turned to outsourcing through inexpensive labor and looking to evade taxes. Along with this, free trade is helping to make it easier to export and import. General cargo, such as foodstuff, finished product and some raw materials account for 60 percent of goods shipped around the globe within containers. What was once a labor intensive and expensive system of trade through cargo liners, containerized cargo came into play.4 It was first in the 1870s that steamship technology made it possible to start creating scheduled services between specific ports. As ships started to offer more frequent and reliable service they started making a larger presence in the world's economy. Ship supply was growing as well as the demand to trade spices from the Far East as well as supplying Europe’s colonies all over the world. By the 1960s cargo liners were not yet fully dedicated to just cargo and trading. Ships were equipped with cranes to load and offload cargo as well as space for passengers. Most trading at this time was Europe to North and South America, Africa, and India.5 In the 1950s as labor became more expensive and ships were spending more time at port than at sea a new way of transportation had to be thought up. Some shipping companies started using a palletized system to make port operations easier but pallets had the downside of not being suitable for staking. What had to be done was to create a global system of standardization that would cut port time and ease transportation costs.6 It was in the 1950s that Malcolm McLean an American road transportation and trucking entrepreneur came up with the idea of standard containerization. After selling his trucking business McLean bought the Pan Atlantic Tanker Company that owned several T2 tankers. On 26 April 1956 he loaded 28, 35-foot containers in New Jersey and sailed for Houston. This was the first seaborne shipment with modern containers. The cost reduction was seen immediately with 16 cents per ton compared with $5.83 per ton for the same shipment from New Jersey to Houston. Later on in 1957 his fist dedicated ship to containers carried 226 TEUs from Newark to Miami.7 At first European shipping companies saw hesitation because of the fact that the whole infrastructure of ports and ships would have to be changed. 3 major components had to be dealt with for a new system to come into force, a costly container system that would change seaborne trade forever. 1. Standardized Units worldwide 3 Stopford, Martin. "General Cargo and Liner Transport Demand." Maritime Economics. 3rd ed. New York: Routledge, 2009. 505-563. Print. 4 Stopford, 506. 5 Stopford, 506. 6 Stopford, 508. 7 Stopford, 509.
- 3. 3 | C o n t a i n i n g t h e C o n t a i n e r N u i s a n c e 2. Invest in equipment and vehicles to handle the standardized containers. 3. Invest in cargo handling facilities, terminals, depots, and stuffing facilities. Once a container system was worked out, a container service infrastructure was necessary. Developing a fleet of container ships, new port terminals and International agreement for container sizes was needed. Between 1940 and 1968 the ISO standards as well as the IMO introduced the specifications that we see today with some varying changes along the way.8 Containerization did not only decrease time of a ship in port but made the commodity being transported be able to reach its destination in a much shorter time. Standardizing containers was a big step that had to be taken, and though at first there was some hesitation many trucking and rail companies signed up to be able to take part in this new endeavor. But as every good thing, containers also had the downside of having to be managed not only in there costs of specialized transportation but there upkeep. 3. Container Costs As ships get larger and carry larger amounts of containers, freight rates tend to go down. What a carrier charges per TEU as freight is split into paying the ship's operational costs, capital costs, bunker costs, port costs and other costs. Containers also have to be supplied, maintained, and handled. 9 Even though freight costs go towards the ship’s operation so do the costs go towards the maintenance of the container. Container “flow” is important when keeping costs down because for every single move that a container makes there is a charge. For example: to grab a container from a stack costs $50, to then move it to the ship another $50, to load it onto the ship $250, totaling a total cost of $350. Imagine how many moves a container has to make from the time of hire, to warehouse, to customs, port, ship, port, customs, and receiving warehouse. Moves such as stacking while waiting for clearance, inspection, then stacking and waiting for it to get picked up add up. Maintenance and repairs are also constant costs.10 UNCTAD estimated that “the number of full containers transported globally by sea in 2014 was estimated at 182 million, and yet the estimated port throughput was more than two and a half times that number, signifying that a lot of repositioning of empty containers occurs”.11 This goes to show how many empty containers are being handled day after day. If 100 TEUs go through a port yet the throughput is of 400 TEUs this means that a full container enters the port yet continues to travel empty, this is where the handling of containers become expensive. While fuel accounts for 60 percent of a containers transportation cost, 40 percent then accounts for its handling and transport.12 8 Van Ham, Hans; Rijsenbrij, Joan (15 December 2012). Development of Containerization. Amsterdam: IOS Press. p. 20. ISBN 978-1614991465. 9 Rodrigue, Jean-Paul. "The Repositioning of Empty Containers." Https://people.hofstra.edu. Routledge, 2013. Web. 8 Jan. 2016. 10 "MSC and Empty Containers." Telephone interview. 9 Dec. 2015. 11 UNCTAD Review of Maritime Transport 2015 p.66. 12 "TSA Eastbound Bunker Fuel Charge." Http://www.tsacarriers.org/. Transpacific Stabilization Agreement. Web.
- 4. 4 | C o n t a i n i n g t h e C o n t a i n e r N u i s a n c e In the past years freight rates have been volatile because of economies of scale. As the TEU carrying capacities increase per ship, the cost per TEU is lowered. During the past years we have also seen a drop in bunker fuel for ships, this has forced freight rates to drop even further in order for carriers to compete. The volatility of the freight market makes it difficult to find a simple solution of container costs and the question of who should be liable for repositioning costs.13 4. Trade Imbalance and Repositioning 4.1 Repositioning Empty Containers Repositioning of containers is the art of finding a way to place an empty container in the right place and at the right time. It means that the container when emptied is ready to move on to its next trade. If this is not done then a container must be stored in a container depot, this implies storage charges as well as positioning charges within the depot. As was mentioned before, each container move is charged. To add to the costs, time is also an important asset that is wasted over time. Valuable time is taken in order to find misplaced containers. With the thousands of containers being moved daily it is no surprise that containers get lost and misplaced. 4.2 Trade Imbalance Trade imbalance takes a toll not only on the how much a country is spending on trade but on the commodities entering the country. As mentioned in the introduction, the United States is seeing a great inflow of products from overseas, especially Asia. The amount of containers being shipped into the west coast is creating an overabundance of containers. It can be estimated that for every 2 containers entering US borders 1 container is exported but with today's strong dollar that ratio could widen.14 This ratio might not be alarming at first but to think that a majority of the containers must be repositioned to other parts of the country is. In an interview with Filippo Schirmo of Mediterranean Shipping Company New York, he stated that they are currently sending empty containers from the West Coast down to the Gulf. While exports in the West Coast of the United States are down, exports out of the US Gulf are rising.15 When estimating repositioning costs it means not only moving the container from point A to B but also storing the container until the time that it is used. When a container is loaded in China and brought to the US through Oakland its final destination might be a Walmart in San Francisco; once that container is empty and returned to the carrier, MSC must keep it moving and working or else it is a dirty asset. MSC is now shipping containers via rail to the Gulf as a plan that with repositioning they will be able to profit of the next harvest season. Carriers are also now 13 Hand, Marcus. "Current Container Market Dynamics Challenging Big Ship Ecomomics: Maersk Line." Http://www.seatrade-maritime.com/. 25 Nov. 2015. Web. 8 Jan. 2016. 14 Bonney, Joseph. "US Containerized Exports Forecast to Drop 2.4 Percent This Year." JOC.com. 1 Sept. 2015. Web. 8 Jan. 2016. 15 "MSC and Empty Containers." Telephone interview. 9 Dec. 2015.
- 5. 5 | C o n t a i n i n g t h e C o n t a i n e r N u i s a n c e starting to invest in the South American market by sending their reefers south for the fruit harvest. 16 MSC stated that the key to low repositioning costs was to move the containers with as less movements as possible. This is also accomplished by keeping track of the assets and making sure to charge demurrage when incurred. Since MSC owns both ships and containers they tend to store empty containers onboard in order not to incur storage charges in local depots. That is why they are very stringent when giving free days for unloading containers. MSC wants to load empties back on the ships in order to have them ready when needed but this is not possible when clients are not returning the containers by the allotted time. It is imperative that companies keep track of their containers in order to better manage them.17 If a ship is in port for a total of 7 days and the carrier wants to have their containers back on the ship before leaving port it is to make sure that storage charges are not incurred when a container is left behind. 5. Container Management Container manufacturing costs has seen a drop in prices in the past years. The fall of container prices has led the shipping industry to buy containers instead of repositioning back overseas. As containers arrive to the United States from China, even though they might be owned by the carrier and get a free ride on the ship, just the movement costs and port costs might be more than just buying a new container in China. Containers manufacturing prices are lower than they have been in the past 10 years. Year18 20DV 40DV 2006 $2000 $3200 2009 $2800 $4000 2015 $1450 $1600 The typical shipping container has a lifespan of about 10 to 15 years.19 Taking into consideration the great recession in 2008 and the high container prices in 2009 many companies have not invested in new containers until now. But who should own the containers and what is the most economical way of transporting these giant metal boxes? Leasing companies and shipper owned containers are two ideas that might help the industry when it comes to repositioning costs.20 MSC NY stated that they are not fans of shipper owned containers because of the massive undertaking it takes on the part of shippers.21 Another reason that they are against the idea is because MSC has containers and they have to be used. A container that is not being used is an asset that is a cost to the company. What MSC also pointed out is that shipper owned containers 16 "MSC and Empty Containers." Telephone interview. 9 Dec. 2015. 17 "MSC and Empty Containers." Telephone interview. 9 Dec. 2015. 18 Stopford, 546. 19 Rodrigue, Jean-Paul. "The Repositioning of Empty Containers." 20 "Shipper Owned Containers." Https://www.csiu.co. Web. 8 Jan. 2016. 21 "MSC and Empty Containers." Telephone interview. 9 Dec. 2015.
- 6. 6 | C o n t a i n i n g t h e C o n t a i n e r N u i s a n c e as a concept is a great idea but no one knows about them. Shippers also have to assume the costs related to the maintenance and transportation of containers and for the short time that they need a container it does not pay out. Many shippers use containers one way to transport goods from point A to point B and then the container is left empty. When a carrier such as MSC owns the container they will plan to have that container used as soon as it is empty, they will lease it out for another transport before the first transport is finished. Shipper owned containers are a good idea for long projects such as the construction of a factory or oil rig and project cargo. The containers are filled and transported and can be used as storage until the project is done, with this in mind the shipper will not be held accountable for demurrage.22 Leasing containers is also a good idea and depending on the contract maintenance will be assessed by the company leasing off the container. Again, leasing containers is not the best idea for one way trips unless the shipper knows that the container will not be emptied in a while. One reason that leasing or owning a container would be a good idea would be that of a company trading let us say olive oil to Florida from Spain, oranges from Florida to Boston and cranberries from Boston back to Spain. The idea that one company is handling the three is very rare, but if a coalition is formed between the three farmers then the containers would work at full potential. 6. Solutions for the Empty TEUs So what to do with empties? In this paper empties mean containers, whether 20’ dry vans or 40’ high cubes, that are being stored and paid for with no future in mind. The concept of container pools is a concept that is taking place in today's market just like the chassis that are used to transport containers.23 The main problem with container pools is that just in the same way that a company is trying to manage and relocate their containers, containers are not staying in place for an effective relocation. Carriers such as MSC and CMA-CGM own less than half of the containers that they use on a daily basis.24 The point of owning less containers is that it helps to keep costs down when it comes to maintenance and when the lease is done the carrier can decided to either keep the container or get rid of it depending on the demand. Container pools and Leasing are two simple ways shipping companies keep costs down. There are other methods that carriers can minimize costs. Maersk Lines is offering clients NORs or Non-Operating Reefers these refrigerated containers that can be used to carry regular commodities without the need of plugging them in. 25 Maersk spends about $1 Billion a year in the repositioning of empty containers and they had to come with a way to lower that cost. Since these containers have to be moved regardless of their position the idea of filling them with anything and get some use out of them became the idea. When shipping scrap metal or empty bottles no one is going to spend the market price on freight to move objects with no value. This is where Maersk 22 "Shipper Owned Containers." Https://www.csiu.co. Web. 8 Jan. 2016. 23 "MSC and Empty Containers." Telephone interview. 9 Dec. 2015. 24 "Alphaliner - TOP 100." 8 Jan. 2016. Web. <http://www.alphaliner.com/top100/>. 25 http://www.maerskline.com/fr-be/shipping-services/your-promise-delivered/your-benefits/further- value/postcards-improving-opportunities/non-operating-reefer
- 7. 7 | C o n t a i n i n g t h e C o n t a i n e r N u i s a n c e thought that if containers had to be repositioned why not just offer a cheaper rate and win some money back. Companies will still be spending the money to reposition but at a lower rate.26 It was stated above that many hours are lost trying to recover shipping containers that have been misplaced, so the question now is whether or not to invest is GPS tracking. Containers are not only a costly asset when managed properly. If every container being used had a tracker, the hours invested in tracking it by paper and plotting it into computers would be of the past. Imagine a fleet of 100 containers are equipped with tackers that cost $1000 including maintenance and software for a year. The upgrade would be a total of $100,000. Take that same 100 container fleet and spend $50 a day in managing their whereabouts for 365 days, the total price would be that of over $1.8 million. Imagine a fleet of containers managed so well that the amount of containers could be reduced. Not only would GPS Tracking improve work flow but a higher return on investment.27 7. Conclusion In the Maritime Industry the last thing that a shipper or 3rd party logistics provider is thinking about is where the containers are coming from. While it may be easy to call a carrier and ask for a container the carrier must worry about its management. The cost of repositioning and managing a container is never as easy as passing it on to the one hiring the container if you want to keep overall costs down. If you want to compete in today’s market you need to assume the hidden costs of container management. Container sharing between carriers are one solution but with the down side that you cannot depend 100 percent that a cargo worthy container will be available. Leasing might save you money in the long run when it comes to repairs and discarding but more money must be invested up front. Non-operating Reefers gives you a solution for refrigerated containers but not for dry vans, and to fully take advantage of GPS tracking a heavy investment must be made today. This research paper presents the difficulty of having to deal with empty containers and though the monetary aspect was not discussed in detail one should imagine that money is a key issue. This paper wants to raise one last question: where is the money raised by tariffs going to? Should the government invest more on container management? Subsidizing container recycling or creating American container depots would increase taxing foreign container carriers and would force a greater interest in container flow and usage. In conclusion one question leads to another. The industry as a whole must wake up and take care of one of the simplest yet most complicated nuisance: the container. 26 "Filling Shipping’s $1 Billion Hole – The Logistical Challenge of Empty Shipping Containers." Gcaptain.com. 15 Mar. 2012. Web. 8 Jan. 2016. 27 "GPS Container Tracking." Http://arknavgps.com.tw/. Web. <http://arknavgps.com.tw/tracking/market/Container_tracking.php>.
- 8. 8 | C o n t a i n i n g t h e C o n t a i n e r N u i s a n c e 8. Works Cited "Alphaliner - TOP 100." 8 Jan. 2016. Web. <http://www.alphaliner.com/top100/>. Bonney, Joseph. "US Containerized Exports Forecast to Drop 2.4 Percent This Year." JOC.com. 1 Sept. 2015. Web. 8 Jan. 2016. Bowman, Sam. "The Five Things You Need to Know about TTIP." Http://www.capx.co/. Adam Smith Institute, 4 Mar. 2015. Web. 8 Jan. 2016. Census Bureau, U.S. "U.S. Census Bureau U.S. Bureau of Economic Analysis NEWS." Http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf. 6 Jan. 2016. Web. 8 Jan. 2016. "Filling Shipping’s $1 Billion Hole – The Logistical Challenge of Empty Shipping Containers." Gcaptain.com. 15 Mar. 2012. Web. 8 Jan. 2016. "GPS Container Tracking." Http://arknavgps.com.tw/. Web. <http://arknavgps.com.tw/tracking/market/Container_tracking.php>. Hand, Marcus. "Current Container Market Dynamics Challenging Big Ship Ecomomics: Maersk Line." Http://www.seatrade-maritime.com/. 25 Nov. 2015. Web. 8 Jan. 2016. Rodrigue, Jean-Paul. "The Repositioning of Empty Containers." Https://people.hofstra.edu. Routledge, 2013. Web. 8 Jan. 2016. "Shipper Owned Containers." Https://www.csiu.co. Web. 8 Jan. 2016. Stopford, Martin. "General Cargo and Liner Transport Demand." Maritime Economics. 3rd ed. New York: Routledge, 2009. 505-563. Print. "TSA Eastbound Bunker Fuel Charge." Http://www.tsacarriers.org/. Transpacific Stabilization Agreement. Web. Van Ham, Hans; Rijsenbrij, Joan (15 December 2012). Development of Containerization. Amsterdam: IOS Press. p. 20. ISBN 978-1614991465.