Steep Worldwide Ocean Shipping Slowdown Forces Truckers to Alter Handling of Boxes

This story appears in the Dec. 14 print edition of Transport Topics.

Early in 2008, when forecasts called for a continued, long-term rise in ocean shipping activity, many maritime companies accelerated the building of new vessels and leased as many containers as they could obtain.

As shippers geared up to move more containers through U.S. ports, trucking companies likewise en-joyed increased activity as a result of the spike in container movement.

But the forecasts for ocean shipping could not have been more wrong. Since the collapse of the global economy last year, ocean shippers who signed container leases have been shedding them as quickly as they can. Not only is that creating a massive oversupply in the face of shrinking demand, it is necessitating a dramatic reversal in strategies for the trucking and equipment manufacturing industries.

“Consider a big container terminal like Chicago,” said Lee Robinson, president of OHC Intermodal — a division of OHC Inc., an import company that brings containers into the Port of Mobile, Ala. “When there are fewer full revenue boxes going into one area . . . they cut service to that area. They cut it to where supply equals demand.

“There are fewer containers to be dispersed on the highway locally or regionally from those container yards,” he said.

Robinson added that the resulting reduction in rail and trucking activity spreads not only to other regions, but also affects other manufacturers.

Like containers, trailer makers are also struggling as fewer shipments leave fleets with too many empty trailers on their lots, and little interest in purchasing new equipment.

“Trailer manufacturers have produced less than half the trailers than have been typical,” Robinson said. “We just got the forecast for next year, and they’re forecasting even less. This is horrifying.”

Trailer makers’ reports bear out Robinson’s observation. For example, trailer maker Wabash National reported that it sold only 3,200 units in the third quarter, compared with 9,700 units during the third quarter of 2008 — which also was the last quarter Wabash reported a profit.

Although Wabash, Lafayette, Ind., has slowed the bleeding from its first-quarter loss of more than $21 million, it still lost more than $4 million in the most recent quarter.

“We are encouraged by these results despite the challenging demand environment,” said Wabash CEO Dick Giromini.

Although Robinson said OHC’s intermodal business is good at the moment, he attributed that mainly to the fact that Mobile has been underserved in that sector until recently. Overall, he predicted excess container capacity and a shortage of container movement for several years to come.

Dave Manning, president of Tennessee Express and chairman of American Trucking Associations’ Intermodal Motor Carriers Conference, said continued price pressure is greatly affecting intermodal carriers.

“We continue to have big customer after big customer leveraging their capacity,” Manning said. “Our revenue continues to fall, even though volume hasn’t changed, so there’s a battle over price.”

Until the pressure subsides, Manning said, many intermodal carriers can do little more than cover their costs.

Tennessee Express began operating in survival mode earlier this year when it became clear what was ahead.

“We had to take a look in the March time frame at how we are going to survive this,” Manning said. “We looked at all of our costs, and we put a plan together that involved a number of changes in terms of equipment capacity and even wages. It got us to a break-even point.”

That is an acceptable objective for now, Manning said, if it maintains operations.

“We are content, when we have to be aggressive in pricing to keep our drivers busy and to keep our equipment busy, to do it on a break-even basis,” Manning said. “It’s scary, because once rates get to that point, getting them back up is going to be a monumental challenge, especially if business is coming back slow. It’s going to be a battle. No one is in business to trade dollars long term.”

Jeff Joachim, president of World Trade Distribution Inc., Houston, said that trucking also is likely to suffer from continued federal weak dollar policies, which will result in rising exports and falling imports — meaning fewer containers entering the United States.

For trucking, that means less of a chance to obtain a profitable backhaul load after hauling goods to port for export.

But if there is a silver lining for trucking, Joachim believes it is the necessary impetus to improve efficiency to take advantage of some opportunities.

“During a time of [container] oversupply, you’ve got outlying ports like Dallas and Oklahoma City, which are far away from the ocean, and you’ve got steamship lines that are trying to do business in these outlying areas,” Joachim said. “So you’ve got to do round-trip drays. He’s got to take the load up there and bring the empty back. You see the trucking industry being forced to become more efficient.”

That market dynamic, according to Joachim, creates opportunities for trucking companies with terminals and lines in locations that allow them to put together one-way service — provided a trucking company can create and maintain the efficiencies that would allow them to serve one-way lines profitably.

“It does stimulate business for the truck line that is able to be competitive on one-way rates,” Joachim said.

Before the economic downturn, industry observers also reported a shortage of chassis, without which containers cannot be moved by truck.

And yet, ironically, there is little prospect for the production of new chassis to ease the shortage, precisely because there is little use for the ones currently in circulation. Joachim said that it’s common to see large quantities of chassis sitting unused in shipping yards.

The same is true for containers. Trucking companies have a hard time finding containers coming in to port because imports are down, but globally there is a glut.

The oversupply of containers is so severe that it is taking a major bite out of container producers’ profits and forcing them to virtually halt production.

CAI International and Textainer Group Holdings, two major container manufacturers that originally predicted 2009 profits, have posted losses since the fourth quarter of 2008.

Globally, other container shippers suffered similar fates. Nippon Yusen, a huge Japan-based holding company for bulk shipping fleets, reported its first full-year loss in 23 years, citing lower demand for container shipping. Competitor Mitsui OSK Lines Ltd. cut its profit projection by 25%, while competitor China Cosco Holdings Co. also reported a loss.

Industry analysts do not predict a near-term turnaround.

“It’s a challenging market,” said Steve Blust of the Institute of International Container Lessors. “I know that the leasing industry essentially stopped acquiring new containers the middle of last year. So with normal attrition, at the end of 2009, their inventories should actually be down a bit from last year.”

In its most recent report to shareholders, Textainer notes that 2009 has seen virtually no new factory production of containers, a situation with the potential to shrink the world’s overall container fleet by as much as 5% — with the leasing industry’s container volume declining 10%. That situation would help balance supply and demand leading into any economic turnaround.

The container glut among shippers also is exerting major downward pressure on container leasing rates.

“The ocean carriers have got boxes stacked to the skies,” said Ted Prince, principal with T. Prince & Associates and a former chairman of the Intermodal Association of North America. “So there have been better times. The stronger leasing companies are doing well, and you still see investment — not so much in dry bins but in special types of equipment. Some of the domestic container players are investing just to maintain the same level of inventory capacity. For years, all investment was growth.”

Paul Bingham, an analyst at IHS Global Insight, said that the leasing companies are watching the troubles of container manufacturers nervously.

“The lessors are in a situation that’s ultimately desperate, because all their suppliers are in a state of distress,” Bingham said.

The flip side of sinking leasing rates is that anyone looking to lease containers generally can do so for a phenomenally low rate. But for trucking, that does little to boost activity.

Joachim warned against attributing too much of trucking’s woes to ocean shipping or container overcapacity.

“It’s hard to point to one thing like containers and say, ‘This is how it’s affecting the industry,’ because the industry has been hit by a nuclear bomb,” Joachim said. “I wouldn’t say the lack of container activity or abundance of containers has impacted the industry very much at all, compared with the impact of the vessels that have been taken out of circulation.”