Universal Cargo Management

Steamship Industry - "Supply and Demand" Article - March, 2006

GDP link with cargoes bodes well for 2006, writes Janet Porter- Tuesday March 28 2006

CONTAINER lines' confidence that cargo volumes will achieve double-digit growth on two of the main trade lanes this year are not based on wishful thinking but detailed analysis.

One senior executive who has studied past trade patterns and the link between economic and cargo growth believes there is a clear correlation that bodes well for 2006.

NYK's executive vice-president Tadamasa Ishida has found a consistent relationship between gross domestic product growth and the expansion of containerised cargoes
on the eastbound transpacific routes and the Asia to

Europe

trades.

Assuming that correlation continues, Mr Ishida is forecasting growth of 12% to 15% on major trade lanes in 2006.

That level would be sufficient to absorb the extra capacity now being delivered from the shipyards and should settle nerves about the risk of supply and demand moving way out of balance, he says.

The world's major container lines are now in a head- to-head confrontation with industry analysts who are presenting a gloomy picture of market prospects for this year, convincing shippers that they should expect a drop on freight rates.

While rates have undoubtedly slipped considerably on the Asia to

Europe

route, lines are hoping they can reverse the situation by the time annual contracts for the eastbound transpacific trades are finalised at the end of next month.

"Some research papers have presented pessimistic outlook as regards the supply/demand position, based on the forecast of 15 % capacity growth this year. However we remain optimistic, expecting cargo movement to grow by double digits, close to 15 %, in 2006," Mr Ishida told Lloyd's List.

Forecasts should also take into account reduced efficiency of ships because of port, rail, and inland congestion, slow steaming to save bunker costs, and realignment of alliance fleets, he said in an interview.
Mr Ishida's projections are based on the fact that the growth rate for the container cargo volume has remained fairly constant at around 3.5 times the GDP growth rate on the transpacific trades and 7.1 times in the Asia-Europe trades, over the past 10 years.

That gap reflects factors such as the shift in cargo sourcing to China, deflation of prices, appreciation of the euro and US dollar, the increase of population in the US, and European Union expansion to eastern Europe.

Based on those figures, Mr Ishida correctly forecast at the start of each year trade growth for 2004 and 2005.
"If we apply the same logic to this year, we will see 12% to 15% cargo growth in the major trades in 2006, based on the released US GDP growth forecast of 3.5% and EU's forecast of 2.1%," said Mr Ishida.

But should a glut of tonnage arise, ship operators will cancel the renewals of costly charter contracts, he anticipates.

That could push some chartered ships into temporary layup, or "layby", so removing them from the actual trades.

"Therefore, operators should not be worried about the gap of supply and demand," Mr Ishida contends. Shipowners have more reason to be concerned, though, "bearing in mind that a large number of chartered ships would play the role of a buffer".

In the immediate future, however, Mr Ishida expects supply and demand to be in broad equilibrium, but notes that tonnage supply could become tight in the peak season this year.

CBP Considering Third-Party C-TPAT Validations

U.S. Customs and Border Protection (CBP) is evaluating the possibility of allowing private companies to conduct validations under the Customs-Trade Partnership Against Terrorism (C-TPAT). Jay Ahern, CBP’s assistant commissioner for field operations, indicated recently that CBP may consider the concept of third-party validations, largely because the agency is currently short on the resources needed to do the job itself. CBP has only validated 27% of certified C-TPAT members and has come under fire from lawmakers for providing benefits under the program to companies whose supply chain security practices have not yet been verified.

At a March 16 hearing before a House Homeland Security Committee panel, Ahern noted that CBP currently has 88 supply chain security specialists to evaluate the security procedures in place for the almost 6,000 certified C-TPAT members. He said that while another 40 specialists are expected to come on board over the next 45 days, the current workload may justify seeking outside help.

“We have to this point resisted the notion of third-party validators. We think it is, again, a responsibility that we should be doing in the government, and not necessarily contracting it out,” Ahern said. “However, given the current situation and the expansion of C-TPAT, which has been a good thing, we want to have more parties involved with a trusted program. We want to have the largest corporations in the industry, the importers reaching back to their suppliers, vendors, manufacturers, putting levels of security in place throughout the supply chain.

“Our challenge has been getting to all those locations to do the validations, so we are reconsidering whether we should be looking at third-party validators with controls…[P]perhaps we are coming to a point in time where in certain environments with certain countries that may not be of a significant risk, maybe the third-party validator has a fit for us. So we are going to be evaluating that with new eyes, but to this point we have been opposed to it.”

The Bush Administration has now had over four years of experience developing and implementing various cargo and maritime security programs. In the wake of the 9/11 terrorist attacks, the Administration launched efforts like the 24-hour rule, C-TPAT, and the Container Security Initiative (CSI), which are now more or less reflected in the World Customs Organization’s (WCO) Framework of Standards to Secure and Facilitate Global Trade. The Administration also worked with Congress to enact legislation like the Maritime Transportation Security Act (MTSA), many of whose provisions were incorporated in the International Ship and Port Facility Security (ISPS) Code. In each case, the government took upon itself most if not all of the responsibility for gathering information and enforcing requirements.

Increasingly, however, the Administration has come under pressure to improve the effectiveness of these programs. Private sector companies that have made significant investments in tightening supply chain security are growing louder in their calls for CBP to provide more and better benefits. The Government Accountability Office (GAO) has issued reports identifying various weaknesses in the implementation of initiatives like C-TPAT and CSI. Lawmakers, prompted by the GAO reports and especially the public outcry over maritime security issues that accompanied the proposed Dubai Ports World (DPW) deal, have introduced a raft of security-related legislation that could codify existing measures and impose new ones.

The Administration’s response, given funding and personnel constraints in the affected agencies, has been to seek more help from the private sector. Ahern’s remarks about third-party C-TPAT validations was the latest indication of what appears to be an increasingly consistent approach. Last fall, Deputy Homeland Security Secretary Michael Jackson said that CBP is seriously considering transferring responsibility for gathering cargo shipment information to data collection companies. Jackson indicated that a system in which a number of competing “data fusion centers” gather supply chain information from point of stuffing to final destination and provide access to that information to government and private sector entities would be more capable than a government-run and –managed system of responding quickly to commercial and security developments. Sam Banks, senior vice president of the US Customs Modernization Project at Sandler & Travis Trade Advisory Services (STTAS), has pointed out that developing a third-party system may not be that difficult because it could be based on the comprehensive cargo data networks already in use by transportation and logistics companies.

The Coast Guard, another agency charged with ensuring maritime security, is also cooperating more with the private sector. The agency signed an agreement with the World Shipping Council (WSC) on March 21 that will allow the WSC’s ocean carrier members to voluntarily and confidentially submit reports on how well foreign ports are enforcing standards under the ISPS Code. The Coast Guard is responsible for verifying ISPS compliance but has only 20 inspectors to do the work. As a result, a WSC press release stated, “This reporting system is a way that the agency can obtain additional information from the industry’s experiences at different ports in the U.S. and around the world, and can help the agency prioritize where its efforts would be most valuable.” Commandant Thomas Collins said the Coast Guard would like to see other trade associations adopt this kind of system as well.

However, some observers are already arguing that reliance on private sector cooperation amounts to an outsourcing of security. This was the argument made by critics of the plan by DPW, a Dubai government-owned firm, to take over marine terminal operations at some U.S. ports. And with homeland security issues likely to be a major topic in this fall’s congressional elections, concerns such as this could play a significant role in the months to come.

DPW Says it Will Divest U.S. Operations Within Six Months

Dubai Ports World (DPW) issued a written statement on March 15 saying it believes it can sell all of its U.S. operations to a U.S.-owned company within four to six months. According to the statement, preparation of the financial, corporate and legal information required for the sale has commenced, and an expedited sale process is underway with the cooperation of port authorities and DPW’s joint venture partners. Until the sale is completed, P&O Ports North America will be operated independently from DPW in accordance with the Hold Separate Commitment the company announced on February 26.

This latest move by DPW follows continued congressional skepticism about what steps the company planned to take to divest its U.S. holdings. In part due to that uncertainty, but also because many lawmakers wanted to be on record as opposing the deal, the House of Representatives voted on March 15 to keep a provision in the emergency supplemental appropriations bill blocking DPW’s purchase of P&O’s operations in the U.S.

In related news, U.S. Trade Representative (USTR) Rob Portman plans to meet with United Arab Emirates (UAE) Economy Minister Sheikba Lubna al-Qassimi on March 20 to discuss the bilateral free trade agreement (FTA) now under negotiation. The next formal talks had been scheduled for the week of March 13, but the two sides recently agreed to put them on hold and have not yet set a new date. The USTR has said that the delay was because the two sides “need additional time to prepare” and denied speculation that the uproar over the DPW deal had anything to do with the postponement.

According to Reuters, Portman said that, despite the controversy, he hoped to conclude FTA negotiations within the next few months. “The people I’ve talked to in the UAE understand that this (the ports controversy) is a security issue,” the article quoted him as saying. “It’s not a trade issue. And I think they understand the politics of it.”

Dubai Firm Moves to End Port Dispute, FTA Talks Postponed

On March 9, Dubai Ports World (DPW) moved to end the dispute over its planned takeover of terminal operations at six major US ports. Edward Bilkey, the company’s chief operating officer, released a statement announcing that in order to preserve “the strong relationship between the United Arab Emirates and the United States,” DPW “will transfer fully the U.S. operations of P&O Ports North America, Inc. [POPNA] to a United States entity.” Bilkey added that this decision “is based on an understanding that DP World will have time to effect the transfer in an orderly fashion and that DP World will not suffer economic loss.”

No details of the divestiture were provided, and a number of congressional critics of the deal said they would go forward with efforts to kill it legislatively “just to be sure.” President Bush had threatened to veto any such measure, but that now appears unlikely.

It is less certain what effect DPW’s withdrawal will have on the broader response measures circulating through Congress, which range from revising the way foreign investment is reviewed to prohibiting foreign government-owned companies from buying US infrastructure altogether. Lawmakers have said that the deal became such a hot-button issue in Washington largely because of the unusually vocal opposition of their constituencies. If the public is satisfied by the terms of the transfer, the pressure on Congress to take action could lessen considerably. Pending more details on when and how the transfer will take place, however, lawmakers say they are not giving up any of their options just yet.

In apparently related news, the Office of the US Trade Representative (USTR) announced Friday that the next round of talks on a free trade agreement (FTA) between the US and the United Arab Emirates (UAE) has been postponed. A USTR spokeswoman said the two sides “need additional time to prepare” and did not indicate when the negotiations, which had been scheduled to resume on March 13, will take place.

Antitrust Cases Pose Another Challenge for Importers of Chinese Goods

Importers of goods from China, who often have to contend with prohibitive antidumping (AD) duties, are increasingly facing another challenge – antitrust cases against their Chinese suppliers. News reports indicate that there have been a growing number of civil antitrust suits filed in the United States alleging that competing Chinese producers cooperated to fix the prices of goods exported to the US. In some instances, these efforts are designed to raise prices enough to avoid charges of dumping in the US market. However, warns Tom Vakerics, an ST&R attorney with substantial experience in both antitrust and AD matters, Chinese companies accused of antitrust violations should be aware that their defense against such charges could increase their liability for AD duties.

Antitrust penalties in the US can be severe, and both private companies and the federal government have had success pursuing alleged violators. US antitrust laws prohibit price fixing agreements entered into in a foreign country that have a direct and reasonably foreseeable impact on the price of exports to the United States, and US courts typically give little weight to any defense of such an agreement. Damages are tripled in civil antitrust cases, meaning that foreign companies on the losing end of a civil suit can find themselves subject to penalties of tens or even hundreds of millions of dollars. Criminal cases are possible as well – the Department of Justice’s Antitrust Division has brought a large number of cases over the years against both foreign and domestic price-fixing cartels, resulting in hundreds of millions of dollars in criminal penalties and prison sentences for industry executives.

There are some possible safe harbors from antitrust lawsuits against foreign-based companies and executives, but they should be pursued cautiously. For example, US antitrust laws incorporate the concept that US courts and federal agencies will not take action against conduct of a foreign sovereign government that would otherwise constitute a violation. As a result, companies who assert that they were acting pursuant to Chinese government instructions when they entered into a pricing agreement with their competitors could make a viable argument that they are immune to antitrust prosecution.

Nevertheless, the use of such a defense by companies who are also involved in AD proceedings can have severe consequences on the amount of AD duties they pay. Specifically, a Chinese company making this argument faces a substantial risk of losing any separate AD duty rate it may have been granted and instead becoming subject to the China-wide rate, which is almost always high enough to effectively exclude that company from the US market. In other words, if the Department of Commerce (DOC) receives evidence offered in an antitrust case that the Chinese government, not the exporter, controls export prices, it will assign the China-wide dumping margin to that company. Chinese exporters/producers facing both antitrust and AD investigations are therefore well-advised to seek the counsel of US attorneys who are experienced in the laws covering both of these issues.