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  • Writer's pictureStephen Fodor

House panel debates shipping rate regulations, Chip shortage highlights U.S. supply chain weakness,

Monday Morning Wake Up Call

May 3, 2021

House panel starts debating bills regulating shipping rates

(BusinessWorld) THE HOUSE Transportation Committee started discussing on Friday two proposed measures seeking to regulate the charges imposed by international shipping lines.

Transportation Committee Chairman Edgar Mary S. Sarmiento said it was “urgent” to hear the two bills filed with his committee because of rising shipping costs.

House Bill No. 4316 filed by Bagong Henerasyon Party-list Rep. Bernadette Herrera-Dy seeks to regulate the application of fees charged at origin and destination by shipping companies.

House Bill No. 4462 filed by Ang Probinsyano Party-list Rep. Ronnie L. Ong seeks to empower the Maritime Industry Authority (MARINA) to ensure fairness and transparency in shipping charges levied by forwarders and agents of international shipping lines.

Mr. Sarmiento, citing a report by Enrico L. Basilio, chairman of the Export Development Council’s networking committee on transport and logistics, said the Philippines has the highest shipping cost of $592 per 20-foot container at full container load in Asia. The average for other countries such as Japan, China, Singapore, South Korea, Thailand, Indonesia, Vietnam, Malaysia, and Bangladesh is $202.

“I wonder why the Philippines seems to be topping costs, hindi naman po tayo mayaman (We’re not exactly wealthy) … every time we jack up the price, there is no other way to address it but to pass it to consumers,” Mr. Sarmiento said.

Ms. Herrera-Dy’s bill prohibits origin and destination charges… by international shipping lines to local consignees or importers “without a contractual relationship.”

“Quoted rates shall be transparent and inclusive of all charges; and the Department of Trade (DTI), Bureau of Customs (BoC), Department of Justice (DoJ), and Philippine Competition Commission (PCC) (will) primarily implement the provisions of the law.”

Mr. Ong’s bill wants MARINA to supervise the rate-fixing mechanism of forwarders and agents of international shipping lines.

Association of International Shipping Lines, Inc. (AISL) General Manager Maximino T. Cruz said during the hearing when asked if AISL supports the bills: “There are provisions wherein we have to comment on, specifically on the provisions on the jurisdiction of the Bureau of Customs to regulate the destination charges…”

“They are not in a position to be the regulatory body as far as the imposition of destination charges of shipping lines is concerned. We are more inclined to give this authority to MARINA,” he added.

According to shipping industry officials who requested not to be identified, freight rates are still above pre-pandemic levels of about $2,000 per box for long-haul routes like Europe and the US.

They said there is now a downtrend in freight rates and do not expect freight rates to return to pre-pandemic levels in the foreseeable future “due to trade-related pressure coming from China,” which is still the world’s manufacturing center.

“The growth of the volume from China has been very dramatic. The stores in America and Europe are now restocking and therefore cargo has moved without let up. The Philippines imports a lot from China and (goods from there are) now 60% to 70% of cargo coming to major ports in the country,” one of the officials said.

“Export boxes further decreased due to the recent quarantine classification imposed within and along the country’s trade corridors. Imports, however, posted minimal increases.”

The United Nations Conference on Trade and Development (UNCTAD) released a policy brief on container shipping last week, which noted that containers and container ships are in short supply.

“The increase in demand was stronger than expected and not met with a sufficient supply of shipping capacity,” it said. “The container crisis is also a reflection of a slowdown in and delays across the maritime supply chain due to strains caused by the pandemic.”

UNCTAD said policymakers should therefore focus on trade facilitation and digitalization for resilient supply chains, tracking and tracing, and competition in maritime transport.

Asked to comment on April 28, the PCC said via e-mail that it “has an ongoing investigation of potentially abusive behavior in the industry.”

“The Competition Unit of UNCTAD has been facilitating cooperation and sharing of experiences among national competition authorities, especially benefiting young competition authorities, such as PCC, in developing countries,” it said.

“Logistics, including shipping, is one of PCC’s sector priorities, considering that this sector is vital during the pandemic and to economic recovery. We have been coordinating with DTI on the issue of high freight rates,” the PCC added.

Philippine Exporters Confederation, Inc. (Philexport) Assistant Vice-President Flordeliza C. Leong said via e-mail on April 29 that the increasing freight rates by shipping lines have “long been an issue and considered one of the impediments to export growth.”

“Addressing this will help lessen trade costs and make us more competitive,” she added.

Philexport’s suggestion, she said, is for the PCC “to unbundle the freight cost and check each item if valid.”

“I know there are fees such as cleaning fee, congestion fee, container deposit fee, imbalance fee, etc. Brokers and freight forwarders have long ago been complaining that their container deposit fees have not been refunded or slow to be refunded. They estimate this to be in the billions already,” she explained.

“Maybe the PCC can also look at which agency, if possible at all as benchmarked with other countries, to regulate international shipping lines to avoid or lessen such issues,” she added.

Also sought for comment, Chelsea Logistics and Infrastructure Holdings Corp. President and Chief Executive Officer Chryss Alfonsus V. Damuy said in a phone message April 27 that the three recommendations of UNCTAD “can help.”

However, on the competition item, it is “not much of a concern in the Philippines as there is too much competition already, which also drives the prices low actually,” he noted. — Arjay L. Balinbin

Intel CEO says chip shortage to last ‘couple of years’

(Detroit News) The global semiconductor shortage roiling a wide range of industries likely won’t be resolved for a few more years, according to Intel Corp.’s new Chief Executive Officer Pat Gelsinger.

The company is reworking some of its factories to increase production and address the chip shortage in the auto industry, he said in an interview with CBS News, based on snippets from its “60 Minutes” program that will be aired later Sunday. It may take at least several months for the strain on supply to even begin easing, he added.

“We have a couple of years until we catch up to this surging demand across every aspect of the business,” Gelsinger said.

Demand for semiconductors was boosted in 2020 as consumers scooped up home gadgets during the pandemic. But meeting that increase has been hard, thanks to shuttered plants, among other factors. Companies worldwide say they expect supply-chain constraints due to logistics backlogs and the chip shortage to continue for much of 2021.

The global crunch has catapulted semiconductor firms into the limelight and to the top of political agendas. The Biden administration last month told companies vying with each other for semiconductors that he has bipartisan support for government funding to address the shortages.

Gelsinger said U.S. dominance in the industry had dwindled so much that only 12% of the world’s semiconductor manufacturing is done in the country today, from 37% a quarter of a century ago. Intel is the only manufacturer of high-end, cutting edge chips, he told CBS.

“And anybody who looks at supply chain says, That’s a problem,’” he said. “This is a big, critical industry and we want more of it on American soil: the jobs that we want in America, the control of our long-term technology future.”

He added that his company won’t be “anywhere near as focused” on its share repurchase program as it’s been up to now.

The supply constraints are hitting a wide array of industries, with tech firms and automakers alike flagging production cuts and lost revenue from the fallout.

It has forced the entire auto industry to cut output, with Ford announcing the shortage will likely reduce production by 1.1 million vehicles this year. Jaguar Land Rover Automotive Plc, Volvo Group and Mitsubishi Motors Corp. recently joined the growing list of manufacturers idling factories. Apple Inc. warned supply constraints are crimping sales of iPads and Macs.

Meanwhile, Mark Liu, chairman of Taiwan Semiconductor Manufacturing Co., told CBS his company, having heard about shortages at the end of last year, tried to “squeeze” out as many chips as possible for car companies.

“Today, we think we are two months ahead, that we can catch up (to) the minimum requirement of our customers – by the end of June,” he said.

The supply shortage may only be alleviated by the end of the year or early 2022, CBS said.

“There’s a time lag,” Liu said. “In car chips particularly, the supply chain is long and complex.”

Liu also sought to ease concerns that U.S. companies are relying on Asian suppliers, which account for 75% of manufacturing, according to CBS.

“This is not about Asia or not Asia, because a shortage will happen no matter where the production is located,” he said. “Because it’s due to the Covid.”

No relief: Global container shortage likely to last until 2022

(American Shipper) The world does not have enough containers in the right places to handle cargo demand. It’s a conundrum that has persisted for so long that the mainstream press is finally covering it.

The New York Times reported Friday how the box shortfall is contributing to inflation: “Demand … has outstripped the availability of containers,” while the U.S. pandemic situation has eased to the point where retailers can pass along higher transport costs to consumers without being accused of price gouging — and “the cost of just about everything is rising.”

Many months after the container shortage first emerged, how bad does the problem remain?

Equipment leasing companies are in a good position to answer that. These companies order containers from the very small number of Chinese manufacturers that build them and lease the boxes to shipping lines, which also order from factories directly.

Two of the top public leasing companies — Triton International (NYSE: TRTN) and CAI International (NYSE: CAI) — commented on container availability as they reported Q1 2021 results on Thursday.

Generally speaking, the more profitable the market conditions for container lessors, the tighter box capacity is and the more cargo shippers must pay liners for transport. The bad news for U.S. importers and exporters: Equipment lessors see smooth sailing ahead, likely into 2022.

“There’s no indication from the shipping companies that they expect to see any easing of the tightness of supply that they’re dealing with,” said Tim Page, interim CEO of CAI International, on the call with analysts. “So … the horizon looks pretty good for us, at minimum through the end of this year, and likely well beyond that.”

Still only 2-3 weeks of supply

Three Chinese companies — CIMC, DFIC and CXIC — produce around 80% of the world’s containers. Production is up sharply, with estimates for 6%-8% growth in container capacity this year. But even so, boxes aren’t being built fast enough to ease the capacity crunch.

John O’Callaghan, global head of marketing and operations at Triton, said during his company’s call, “Despite the factories ramping up container production activity at the end of last year and beginning of this year, inventories of new containers remain very low. What’s sitting on the ground roughly represents only two to three weeks’ supply.”

The price of containers is an indication of ongoing scarcity. The price for a new container is now $3,500 per cost equivalent unit (CEU, a measure of the value of a container as a multiple of a 20-foot dry cargo unit) versus $1,800 per CEU in early 2020 and $2,500 per CEU in late 2020. The cost has remained roughly steady at $3,500 per CEU for the past three months.

Recent price gains have been more extreme in the used container market. Container xChange reported that the price of used containers in China has nearly doubled from $1,299 per CEU in November to $2,521 in March.

According to O’Callaghan, “The shortage of available sale containers leads to prices increasing week-on-week as the inventory has been depleted.”

Why new boxes are still falling short

This year’s rise in production comes after a period when orders were below market replacement requirements. According to Triton CEO Brian Sondey, “A lot of the container production that’s happened this year, to some extent, is making up for low production volumes in 2019 and the first part of 2020.” Added O’Callaghan, “We’re still playing catch-up.”

Another reason containers are not more plentiful, according to Page, is that the Chinese factories are not expanding production capacity. “There’s no indication from manufacturers that they’re going to increase container production,” he said.

Asked why a leasing player could not go for market share and push down prices, Page responded, “Absent a complete shift in behavior from the container manufacturers — and no one seems to think that’s likely — it would take them [manufacturers] to be willing to produce containers and go after market share, to produce containers well in excess of the demand, for there to even be the opportunity for somebody [in the leasing space] to have an excess of containers and push the market on price.”

In other words, Chinese factories are keeping production in check to keep their newbuild prices high. This negates the hope on the cargo-shipper side that the market might be flooded with excess new containers, thereby bringing freight rates down.

When could container crunch ease?

Relief from container scarcity is not just about production. Many containers have been held up in port congestion and by issues such as the Ever Given accident in the Suez Canal. When such logjams clear, more containers will become available.

According to Sondey, the slowdown of the “velocity of containers” by disruptions began with COVID lockdowns in early 2020, followed by “the flood of containers overwhelming the ability of the ports to move containers in and out” starting later in 2020, followed by “the icing on the cake: the blockage of the Suez Canal.”

Page reported an unusual situation now occurring at destination ports for Chinese cargo. Ships are in such a hurry to turn around that they’re “being forced to leave empty containers behind when they return to China,” he said.

“Several of our major customers report that virtually every ship leaving China and other export areas is fully loaded but because of the tight sailing schedules and the need to turn ships quickly, they are unable to wait for all the empty containers and they leave with 5%-8% fewer containers on the [backhaul] leg than they were on the [fronthaul] leg.”

Sondey said, “What we hear is that most customers [liners] don’t think these bottlenecks are going to evaporate quickly. But they also don’t think they’re necessarily permanent … [and] no doubt, as bottlenecks ease, that could free up container capacity.

“So, we’re all trying to figure out what this transition process will look like. I haven’t seen any of our customers express confidence that they can, within this current strong period, unbottleneck their operations. Our general view is it likely continues until trade slows. And who knows exactly when that’s going to be. But I think the betting is probably sometime at the end of this year or early next year when maybe the trade world starts to get back to normal.”

Equipment lessors top expectations

The stocks of the three leading public equipment lessors — Triton, Textainer (NYSE: TGH) and CAI — have risen strongly over the past year, although gains topped out in mid- to late-March and have pulled back recently.

On Thursday, Triton reported net income of $129.3 million for Q1 2021 compared to $67.2 million in Q1 2020. Adjusted earnings per share (EPS) of $1.91 topped the consensus estimate for $1.74.

After the results were released, Keefe, Bruyette & Woods (KBW) upped its full-year EPS estimate to $8 from $7.25 and B Riley Securities hiked its full-year EPS estimate to $8.26 from $7.04.

CAI reported net income of $32.47 million for Q1 2021 compared to $10.46 million in Q1 2020. Adjusted net earnings per share of $1.85 beat the consensus forecast for $1.76.

KBW increased its full-year EPS for CAI to $7.75 from $7.30 and B Riley increased its own to $8.02 from $7.21.

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