Reform may lower shipping costs, but force bankruptcies
Deregulation of the ocean shipping industry could lead to lower transportation prices for importers and exporters this year. But it could also spell doom for small shippers who could be forced into bankruptcy by the new market pressures, local industry leaders say.
For years the major ocean carriers such as Sea-Land, Evergreen and Maersk, all members of the National Industrial Transportation (NIT) League, have prodded Congress to deregulate foreign shipping. With compromises to appease the longshoremen unions, Congress salvaged an ocean shipping bill late last year that sends waves toward deregulation. Labeled the Ocean Shipping Reform Act, the bill was signed into law by President Clinton on Oct. 14.
Although the new law retains an independent Federal Maritime Commission and specifies that both vessel-operating and non-vessel-owning common carriers continue to issue public tariffs, pricing agreements will become confidential between carriers and shippers. The elimination of public disclosure of service contract rates has everyone in the industry nervous about what’s going to happen when the new regulations go into effect on May 1.
Tom Donahue, director of Export Services for Circle International, Inc., in San Francisco, one of the largest international freight forwarders, explains how the present rate system works.
“If you’re a small toy manufacturer, you have access to all the contracts and rates that a larger toy manufacturer enjoys. When the big toymaker signs a new contract, the little guy has 30 days to me-too that contract and get the same rate. The new law eliminates me-too contracts.”
Carriers, who own and operate ocean vessels picking up and delivering containers to the same ports, belong to groups known as conferences. Under the Shipping Act of 1984 and the new reform law, those conferences are immune to anti-trust laws. They get together and set rates and regulations for transporting ocean freight in their bailiwick. The practice would be price-fixing in any other industry; but for as long as most people in the business can remember, ocean-going carriers have enjoyed anti-trust immunity.
Under the new law, conference members can make maverick, confidential pricing arrangements with a large shipper as long as they notify the conference within five days of signing the contract. Moreover, all such agreements have to be filed with the Federal Maritime Commission.
Del Brahm, president of both the Transportation Association of Milwaukee and Brahm and Krenz International, Inc., a local freight forwarder and customs broker with offices in Milwaukee and Chicago, thinks there are reasons for concern with the new law.
“Almost every article I’ve read says the small shippers are going to get it in the neck,” Brahm says. “The big shippers will make sweetheart deals with the big carriers, who will make up their profits on the small shippers. The conferences still maintain their anti-trust immunity. Any carrier in a conference can make a confidential rate deal with a shipper the size of Wal-Mart, independent of rates agreed upon by their conference.”
Hellmann International Forwarders, Inc., with headquarters in Miami, has offices in 20 different countries. Jean Albers, a certified ocean forwarder who manages its Oak Creek terminal, sees the change leading to lower prices and to industry consolidation.
“Like the deregulation of the air freight industry, there will be a lot of consolidations and bankruptcies among carriers,” says Albers. “Deregulation will drop prices. Ocean prices are already the lowest they’ve ever been. But we won’t see the loopholes in the law until after May 1, when the law goes into effect.”
Hellman handles about 400 sea freight exports a month and about 100 import transactions and an equal number of air freight shipments each month, according to Albers.
Marge O’Connell, Global Transportation manager for Mercury Marine, sees deregulation as a benefit. “It’s going to be interesting,” O’Connell says. “We’re considered a mid-sized shipper. Most of our exports go to Europe. In preparation for the impending new law our corporate people, Brunswick International, are soliciting ocean carriers for package deals that will pool all corporate exports.”
At Trek Corp., in Waterloo, Joyce Keehn, director of worldwide sales for the bicycle manufacturer, views the deregulation part of the reform act as a “wait-‘n’-see situation.” She and Linda Bourdo, import- export manager, find that some of the firm’s biggest problems originate with the surcharges made to reposition containers. Last year 1.5 million empty containers were returned to Asian ports.
“That (surcharge) adds three to five dollars to each bike we produce,” Keehn explains. “We wrestle with currency rates, selling in 70 different countries. Forty percent of our business is export, and we ship about 200 containers a year.”
With its new plant in Ireland, Keehn looks forward to reduced shipping costs to European distributors.
The new law defines both freight forwarders and non-vessel-owning common carriers (NVOCC) as ocean transportation intermediaries. However, there is a difference. The freight forwarder works on commission as a travel agent does; commissions are commonly 1.25%.
The NVOCC , which combines goods into container loads, takes title to the goods while aboard ship. Its income is the difference between the carrier’s rate and what it charges the shipper. Most large international firms the size of Hellmann or Circle will function as either forwarders or NVOCCs.
To cope with the new law, small to medium-sized shippers are advised to work with their freight forwarders, who will be competing to combine shipments for the best possible freight rates. In the month of March the National Association of Brokers and Forwarders has its annual meeting. Brahm anticipates that 500 to 600 small to medium-sized forwarders will form a group to negotiate their own confidential rate contracts with carriers.
“Face it,” Brahm concedes. “It’s a way of life in this country. The little guys drown first. As for what’s going to happen after May 1? Only time will tell.”
