Port congestion is now a thing of the past and terminal operators face both a decline in imports and a substantial loss in revenue from ongoing container detention and demurrage charges they became used to collecting during the service crisis.
Before you start searching for the world’s smallest violin to help accompany the news, consider that terminal operators must deal with serious financial constraints resulting from no longer being able to collect these fees.
AlixPartners’ Luiz Gosling, Marc Iampieri and Brian Nemeth, recently wrote, “As COVID-related restrictions began to expire, we have observed softer cargo volumes across several marine trade lanes, as the National Retail Federation forecasts declining United States imports at least for the next several months as the current inflationary market has slowed down overall consumer discretionary spending.”
In addition, the amount of imports from Asia have plunged in recent months, and experts believe this decline will continue from the peaks of earlier record-setting and near-record levels. Ocean imports have dried up just as the economy has declined as well in the face of economic headwinds.
Port traffic is likely to continue to slow to a stop if the International Longshore and Warehouse Union and West Coast terminal operators fail to reach a multi-year contract collective bargaining agreement before March is over, following eight months of
negotiations. Participants in the talks have been characteristically tight-lipped about what issues are being discussed, but if the past is prologue, the negotiations most likely revolve around the union’s opposition to port automation and its reluctance to see crew sizes diminished in any way.
U.S. port traffic, as well as domestic freight traffic numbers are usually depressed in the early months of the new year. However, in this case the numbers have been nothing less than abysmal.
At recent industry meetings, ocean freight customers revealed just how difficult the current situation is and how it is creating a complicated immediate future for the industry, said the AlixPartners executives. This sentiment appears to be anchored on the continuing downward pressure on global seaborne trade volumes coupled with push back on accessorial costs.
The firm recently surveyed a sample of its clients to look at this side of the value chain, seeking to understand how these companies managed their container volumes and accessorial costs, delving into the inner workings of terminal financial processes.
They also point out that Container Storage Time – a key metric for demurrage and detention revenue – has shown sequential erosion between 2021 and 2022. In fact, 38% of the firm’s clients revealed that containers spent shorter times at the port in 2022 compared to the previous year, and 56% indicated that they spent shorter time spent outside the ports as well.
The amount of spend with Container Demurrage and Detention Cost decreased between 2021 and 2022 for 63% of the survey respondents, with expectations of an accelerated decline of ocean traffic to the U.S. as measured by 2023 National Retail Federation Port Tracker monthly reports.
Terminal Operators Stymied
While many factors drive the terminal operators to rely on demurrage and accessorial fees as revenue generators, the reasons for the decline identified in the AlixPartners survey commentary can be categorized in three areas, according to Gosling, Iampieri and Nemeth:
- Efforts to renegotiate base freight rates and accessorial rates and terms (i.e., free days) with container operators, third-party logistics providers, multimodal providers and freight forwarders,
- Improving operational efficiency through better load consolidation, better freight planning (thus mitigating the effect of expedited shipments and urgent loads), or change in trade lanes and lane mix, ultimately resulting in less overall volume in the network.
- Improved operational agility coming from enhancing internal processes. These efforts include leveraging data to improve visibility and implementing stronger diligence to take containers out of the ports faster and – upon reaching its destination – unloading and reverting the container as quickly as possible, thus potentially avoiding unnecessary detention and demurrage fees.
They believe that terminal operators can adopt several basic strategies to help insulate their financials from these ongoing trends. One way is to improve operational efficiency after leaving behind the overwhelming congestion observed at North American ports, which did not operate as efficiently under an unexpected volume surge.
They observed, “Terminals in the West Coast were particularly affected by low yard and gate productivity in face of extreme utilization (i.e., above 85%), which either generated or catalyzed crew overtime, low equipment availability, limited planning visibility, longer wait times, and even operational issues such as shrinkage and maintenance overload.”
Of course, the terminal operators’ current and past collective bargaining agreements with the ILWU workers are believed to be major contributors to depressing the terminals’ operational productivity, and at this point there are no indications that any new agreement will produce any significant improvement in this area.
“Moreover, while container yards and gates effectively act as lungs to the operational body, we also see opportunity for container terminals to invest time and effort on marine, rail and maintenance operations, ensuring they are well planned and as productive as possible since those are large drivers of labor cost,” they added.
They also point out that while the expected decrease in volume might have an impact in the overall operation of terminals and 3PLs, these companies must use this opportunity as a window to boost operating metrics back up to pre-Covid levels and unlock cost opportunities, which should mitigate some of the earnings erosion in the horizon.
Certain kinds of financial legerdemain also could alleviate some of this, the AlixPartners executives argue. A potential hedge against rate fluctuation and ancillary revenue erosion might lie in service specialization, as these operations tend to be more reliant on additional charges such as transloading, demurrage and detention, they suggest.
“However, as evidenced by our survey, large shippers might have ongoing initiatives to mitigate such operational constraints through their own internal decisions and process improvements, which makes this not a long-term solution.
“All in all, developing value-added services such as express gate lanes and improved yard visibility for pick-ups can be profitable avenues for operators looking to differentiate themselves from peers on the same coast or region in 2023.”
AlixPartners also stressed that it is crucial for terminal investors and owners “to know specifically where their competitive strength lies, and to determine whether their challenge is to begin making initial efforts and investments or to double down on previous moves so they can fully exploit the opportunity to improve the business.”