A notoriously outspoken supply chain critic and port prognosticator, Flexport CEO Ryan Petersen warned of two “unknowable” concerns clouding retail’s outlook this year.
For one, a contract between the International Longshore and Warehouse Union (ILWU) and U.S. West Coast port operators is set to expire on July 1, the logistics platform founder said. The union in November rejected the Pacific Maritime Association’s offer to extend the contract for one year. The group representing West Coast shipping industry employers last extended the union’s contract in 2017.
“They just watched ocean carriers make a lot of money. They want to get paid too,” Petersen told the National Retail Federation’s Big Show 2022 attendees Sunday. “They don’t want more technology, and they don’t want any performance metrics on their work.”
Given the current labor shortage, a negative negotiating outcome would increase the potential for disruption to port terminal productivity.
Speaking with NRF vice president of supply chain Jon Gold, Petersen also pointed to another deadline coming up in less than a year. By Jan. 1, 2023, all international cargo holding ships must reduce their carbon emissions by 13 percent, as part of the International Maritime Organization’s (IMO) mandate to slash industry-wide emissions.
“How do you make a ship more carbon-efficient? There’s only one way, you go a lot slower,” Petersen said. “To achieve a 13 percent reduction in carbon, I’m told you need to go 30 percent slower. Well, a ship going 30 percent slower carries 30 percent less cargo. And you’ve reduced the cargo capacity of that world’s ocean freight network by 30 percent. I don’t predict good things will happen to the economy as a result of that.”
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Retailers and importers must prioritize data visibility to successfully navigate today’s supply chain constraints, Petersen said.
“We’re now seeing that although there’s huge delays in the Port of Long Beach, there are not delays in Oakland and Seattle, or there are shorter delays,” he added. “And yet, companies keep shipping to Long Beach, as a sort of habit and lack of data, leading to these things. Machine learning is quite good at predicting when containers will actually be unloaded and delivered versus historical norms.”
Petersen criticized both the U.S. federal government and the federally owned West Coast ports, namely the former’s rhetoric based a 40 percent decline in backlogged ships that it “fixed” the supply chain problem ahead of Christmas.
“Three weeks prior, they told the ships they couldn’t wait offshore—they have to wait…over the horizon where you can’t see them,” he said. “If you counted the ships that were waiting on the horizon, the number had gone up by 30 to 40 percent.”
Aging infrastructure also exacerbated the Los Angeles-Long Beach port problem as the facility’s 40-year-old crane technology can only unload containers “one at a time,” he said. Unreliable access to truck chassis further compounded the problems at these ports, Petersen said, adding that most California ports beyond Long Beach don’t allow workers to stack containers more than two high in a truck, which quickly fills up capacity.
Over on the East Coast, ports are facing similar supply chain problems.
The Port of New York and New Jersey‘s anchored vessels climbed from an average of three to five to a recent high of 10 to 11. Last year’s average dwell time of 1.5 has now spiked to 4.5, according to Sam Ruda, director, port department for the East Coast’s biggest port complex.
And although the West Coast ports will have a labor union battle on their hands in the months ahead, the N.Y./N.J. ports’ renegotiation is still four years down the pike.
When asked how the longshoremen negotiations would impact how he approached the deal down the line, Ruda said, “I worry about my own kitchen. I like to view from the East Coast.”
Ruda referred to the gateway’s model as a “landlord port” in which it has a convener role for other parties it coordinates with, including stakeholders such as the New York Shipping Association, the trucking industry, terminal operators and freight carriers.
The agency established the Council on Port Performance (CPP) in 2014 so these stakeholders could collaborate whenever there may be a significant impact to the ports and the overall supply chain. Ruda believes the Council has helped further improve the employer-union relationship.
Similar to its West Coast peers, the East Coast port complex found itself with a pile of of empty containers and could take a cue from Georgia and North Carolina in creating an off-premise popup terminal space to return empties, Ruda said.
“We’ve been successful in flexing our capacity,” he said. “But that is not unlimited. There’s a lot of focus on this, because we do not intend to the have the same type of issues, as you know who. I just have to stay engaged on this, but I think some popup empties, even if it’s interim, are likely in our near-term future.”
The future of ocean contracts
Rising ocean freight rates and detention and demurrage fees have cost retailers a pretty penny. But beyond costs, companies must balance the risks and rewards of locking in contracts to secure vessels, as well as sometimes changing terms mid-contract that could end up in a dispute.
And now, with the IMO’s emissions mandate starting in 2023, businesses will have a tougher time inking long-term contracts designed to de-risk importers against pricing volatility.
“The reality is I don’t think most people have considered this in their contract negotiations,” Gordon Downes, CEO of NYSHEX, or New York Shipping Exchange, told NRF attendees Monday. “Quite frankly, right now I think everyone’s focus is just ‘Can I get space, and I have some semblance of a reasonable price?'”
Downes said ocean contract rates fulfilled through NYSHEX stand at 98 percent, far higher than the 60 percent industry average.
The NYSHEX platform strives to simplify and clarify ocean shipping contract terms so that supply chain managers can better manage costs and avoid blank sailings or seeing their freight rolled over to future sailings. Carriers use the platform to would better utilize vessels, generate more predictable revenue streams and sidestep potential disputes.
To protect themselves when they start negotiating, Downes suggests retailers and importers deviate away from traditional “gentleman’s agreement” contracts and their vague, unspecific and often unenforceable terms.
Downes also said retailers should always enter mutual commitments where the carrier is committing to service and price and the shipper is committing to specific volume through specific periods of time.
“We’re seeing the whole industry move in this direction,” he said. “In addition, we’re seeing much longer-term contracts. Historically, most Transpacific contracts were 12 months. …Most of the contracts we’re seeing signed are now two-to-three years. These are all positive trends, and it does de-risk some of the complexity of what will happen with IMO 2023.”