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6 Things to Consider as You Plan Your 2016 Budget

2016 Budgeting

The start of a new year means budget planning is likely back on your agenda. You probably have questions about what the 2016-2017 ocean contract season will bring. Let’s look at six key topics to watch in the coming year that could impact your budget planning now.

Consolidations

Since 2009, ocean carriers have faced many uncertainties—and they’re expected to continue for the foreseeable future. Those uncertainties are considered the root of many consolidations. For example, the China-owned COSCO and China Shipping Container Lines (CSCL) have confirmed their merger. Pending regulatory approvals, CMA CGM is positioned to acquire APL’s parent company, NOL. And rumors are swirling that Korea carriers Hanjin and Hyundai will possibly consolidate. What would prevent from the Japan carriers NYK, “K” Line, and MOL to make the next move?

There are many questions, but one thing seems certain: Consolidation will continue, which will further reshape alliances. While ocean carriers are consolidating, a few rail lines are also making the news with possible mergers and acquisitions. That’s why it is extremely critical to understand how all of this might impact your business, and—perhaps more importantly—understand how to leverage it.

Bunker Cost

The bunker has been trending on the low side and is expected to continue this way through 2016—good news for ocean carriers, as bunker fuel is by far one of their largest operational costs. Driven by U.S. oil production and lack of cohesion from the Organization of the Petroleum Exporting Countries (OPEC), the trend allows carriers with scale to compete based on price more effectively than when bunker is trading higher. This is part of the reason we continue to see a select handful of ocean carriers posting positive revenues through a very challenging time, while some carriers that do not have scale continue to post negative revenues. While the dynamics differ, would you invest and work with a company that is not well-suited for the future?

Safety of Life at Sea (SOLAS) Weight Requirements

SOLAS requirements and processes remain unclear to many carriers in various discussion groups. Without a doubt, our industry needs to make sure containers are sailing on the vessel and moving through the ports, and that roads are accurately represented when it comes to weight. The July 1, 2016, mandate is clear, but it is critical that it is followed through a streamlined process; importers and shippers could face some financial implications if not properly executed. It is also critical that service providers walk hand-in-hand to mitigate impact on customers.

Panama Canal Expansion

The Panama Canal expansion, slated for completion this spring, will impact logistics in a big way. Some carriers are already reviewing their rail contracts to possibly price routing via the United States East Coast (USEC) to the battleground region on which U.S. ports will compete for customers, especially in 2018 and 2019 when the International Longshoremen’s Association (ILA) and International Longshore and Warehouse Union (ILWU) contracts will be renegotiated. While we hope they don’t occur, historically there have been some undue disruptions. You can read more on the topic in our recent white paper, Wide Open: How the Panama Canal Expansion Is Redrawing the Logistics Map, which was written collaboratively with Boston Consulting Group.

Free Time and Chassis

In the near future, I think that more ocean carriers will become hesitant to offer elaborate free times. Historically, this was easily done with most carriers, but I sense that a fundamental shift in policies may be coming—one that is primarily driven by desire for efficiencies. Ocean carriers divesting from the chassis ownership also have roles to play. In the past, free time would apply to the ocean container and chassis; with the divesture, the equation becomes more complex. Additionally, it ties up the chassis from being effectively utilized. Like many asset-heavy industries, the answer is not to simply flood the market with chassis to compensate the imbalance, as it could be more detrimental given the cycles and seasonality in U.S. imports and exports. It becomes very critical to understand this to better plan for the future.

Container Matchback

As the U.S. dollar rises against foreign currencies, U.S. exports tend to slowdown and become very inconsistent. This leads to surplus of containers at specific points in the United States. This dynamic is not something ocean carriers like, as they always end up repositioning these empty containers to the ports. It becomes imperative that your service provider has the ability to effectively load every import container with domestic freight or exports to help ensure efficiencies, reduce carbon footprint, and create collaborative value to the ocean carriers.

In my opinion, there will be more than one way to procure capacity, rates, and services for the 2016-2017 season. Moving and planning inventories on both fixed and spot—or even pegging rates to an index—are options. But it all starts with truly understanding your business, budgeting, and creating a solution that is in line with your purchasing strategies.

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