Global Logistics-March 2008

China’s rapid economic growth and recurring spikes in consumer prices could give U.S. manufacturers and retailers more reason to consider alternate sourcing locations. Inflation rose to its highest level in more than 11 years in January after devastating snowstorms exacerbated food shortages throughout the country.

Consumer prices climbed 7.1 percent from the same month last year, driven by an 18.2-percent rise in costs, reports the National Bureau of Statistics. Despite efforts to ease shortages, economists warn that China faces pressure to raise prices across the board due to higher wages and costs for coal, iron ore, and other industrial materials.

February inflation “is likely to be much higher than seven percent, and might even get close to double-digit levels,” say Goldman Sachs economists Yu Song and Hong Liang in a recent report.

High inflation could impact government efforts to keep the fast-growing economy from overheating and perhaps let the yuan’s exchange rate rise faster. China’s economy grew by 11.4 percent in 2007 and is expected to expand by at least nine percent this year.

Surging food costs are a political concern for Chinese leaders as well because they hit the poor majority hard—especially in a society where families spend up to half their income on food. Bouts of high inflation in the 1980s and 1990s sparked protests, which the government hopes to avoid repeating.

Economists expect only modest interest rate hikes this year because the key factor driving inflation is a shortage of pork and other food, rather than too much credit.

Beijing has nudged up interest rates over the past two years to cool a lending boom. But raising rates further at a time when U.S. rates are falling could attract money from abroad, adding fuel to the boom.

More importantly for U.S. businesses sourcing in China, if consumer prices continue on this upward bend, it could spark a broader inflationary trend that places even greater premium on finding new low-cost labor markets.

Asia-U.S. container shipping lines report progress in negotiations with shippers to more equitably share rising fuel costs. At the same time, the lines are operating at higher utilization levels, reports the Transpacific Stabilization Agreement (TSA), a research and discussion forum of major ocean container shipping lines that carry cargo from Asia to U.S. ports.

Vessel utilization among TSA members averaged 94 percent via the West Coast and 91 percent via East Coast all-water service, according to internal TSA reporting for September through December.

Many efficiencies can be attributed to liners redeploying vessels in trade lanes experiencing stronger growth, undertaking maintenance and repairs during slow periods, and mitigating exposure to escalating operating costs such as fuel, observes Ronald D. Widdows, TSA chairman and APL chief executive.

“It can be a costly proposition for lines to shift vessel assets, or to modify routes and schedules,” Widdows says. “Asia-U.S. carriers have no option but to fine-tune or even scale back services absent significant economic improvements and fuel prices topping $500 per ton.”

Despite petroleum prices softening, the oil market is highly volatile, with prices over the coming months impossible to predict.

“With many transpacific lines already operating at a loss and facing rising intermodal, equipment, environmental, and other costs in addition to fuel, it is imperative that carriers achieve full-floating bunker charges in their contracts going forward,” notes J.S. Lee, senior executive vice president, Hanjin Shipping Co. and TSA executive committee member.

Profitability concerns in light of rising fuel and other operating costs will likely diminish the importance of the supply-demand balance as a key driver of price this year, according to Widdows.

TSA lines have outlined a revenue and cost recovery program for the 2008-2009 contract season that includes:

• Freight rate increases of US $400 per 40-foot container (FEU) for U.S. West Coast port-to-port and port-to-door cargo, and US $600 per FEU for all other traffic.
• Restoration of a floating bunker fuel surcharge in all contracts that have had bunker surcharges mitigated, capped, or folded into base rates.
• A US $400 per FEU peak season surcharge in effect from June 1 through Oct. 31, 2008.

The 1960s were pretty far out by most estimations—but are even farther removed compared with today’s $12 trillion global import and export valuation. Despite this disparity, many companies still look at trading contract terms and structures through rose-tinged lenses.

Many importers fail to take advantage of a little-known aspect of Incoterms 2000, the internationally accepted standard definitions of trade terms, says Simon Kaye, founder and CEO of Jaguar Freight Services, a London-based freight forwarder.

“Even major global trading companies do not realize how much flexibility they have to determine how and when the title to goods they import will transfer,” he observes.

Incoterms (International Commercial Terms) specify the exporting seller’s and importing buyer’s obligations regarding carriage, risks, and costs, and establish basic terms of transport and delivery. They do not, however, define contractual rights other than for delivery.

Less experienced importers often specify Group C Incoterms, where the seller arranges and pays for the main carriage without assuming risk. The importer then has to deal with a freight company that the vendor chooses and might not represent its best interests, says Kaye.

More sophisticated importers prefer to use Group F terms (such as FOB, or Free on Board) which give them greater control over their shipments, as risk and cost transfer from seller to buyer.

Aggregating control over inbound transportation and terms increases supply chain visibility and oversight of import shipments.

“By taking control as cargo crosses the ship’s rail at the port of origin,” Kaye says, “importers are better able to obtain accurate and timely shipment information through working with the 3PL of their choice.

“Moreover, Incoterms do not deal with the transfer of ownership, when transfer of title in goods takes place, or other considerations necessary for a complete contract of sale,” he adds. “The issue of the title transfer remains subject to what has been separately agreed upon between the parties in the relevant contract of sale and applicable law.”

Diligent importers can specify in their contract that a title to goods only transfers when they take possession at the port of entry. By deferring ownership until this later date, importers can delay accounting for costly shipments as inventory on their financials, thus reducing spend and boosting income.

Polish and Ukrainian transportation and economic development authorities have plenty to cheer about as preparations for hosting the UEFA (Union of European Football Associations) Euro 2012 “football” championship pick up pace.

The value of construction investments in sports, hotel, and particularly transportation infrastructure—including roads, railways, and airports—is expected to reach US $57 billion, according to two recent publications by PMR Research.

Even though it is one of the most prestigious global sports competitions, costs related to stadium construction and modernization will account for less than 10 percent of the total value of planned investments, reports the Cracow, Poland-based market research company.

Euro 2012 presents an opportunity for Poland and the Ukraine to take a major step forward and make up for decades of underinvestment in transport development.

Capital invested in road projects is expected to reach $18 billion in Poland and $7.5 billion in the Ukraine as efforts are directed at linking up host cities. Similar outlay for railroad expansion plans will complement $2 billion set aside for airport-related projects.

A New African Star: Global logistics service provider Agility is set to acquire Nairobi, Kenya-based Starfreight Logistics. A customs clearance and freight-forwarding specialist, Starfreight concentrates on procuring and clearing goods and machinery into Africa.

Russian Routings Underutilized: Russia is losing billions of dollars each year due to a lack of convenient cargo transportation routes across the country, Russia’s First Deputy Prime Minister Sergey Ivanov said recently during a meeting of the government’s commission for industry, technologies, and transportation. The transport of one million containers via the Trans-Siberian Railway could translate to $2.3 billion in additional revenue and the railroad has the potential to accommodate 14 million containers annually, he stated. Also, container transit from South Korea to Finland via the Suez Canal takes 40 to 45 days, compared to 14 to 16 days via the Trans-Siberian Railway.

K+N Sells Samsung on CEE: Samsung has awarded global logistics provider Kuehne + Nagel a three-year contract to manage warehousing and distribution across Lithuania, Latvia, and Estonia. The agreement applies to Samsung’s core products, including consumer electronics, telecom devices, and household appliances.