Business Beyond the Reef

Business readers in Hawaii are reacting to my posts last week about the Jones Act (here and here), providing even more examples about how the Act hurts their profits.  A good friend, Tom Matthews, who owns Trade West/Nani Makana, a producer, importer and exporter of aloha party supplies, provided considerable detail about his company’s shipping costs.  Tom is also the current president of the Hawaii Tourism Wholesalers Association.  You have seen his products if you have ever entered one of the ubiquitous ABC Stores in Waikiki.  His are the top quality artificial lei.  His company also makes cosmetics, fragrances and plush toys, all with a Hawaii theme.

Ocean-going barge

Tom has shared with me actual recent quotes from his freight forwarder for shipping 8 cubic meters of goods from Shanghai to Honolulu.  The most direct route is to ship by sea from Shanghai to Long Beach, and then bring the shipment back west to Honolulu on a barge that is subject to the Jones Act.  The first and longest leg of the trip costs $440 on international carriers.  The back-haul from California to Hawaii costs nearly four times as much – $1660!  The total for the Shanghai-Long Beach-Honolulu shipment is $2100.  To be fair, we can’t charge all of the cost from Long Beach to Honolulu to the Jones Act.  That is a much thinner route than Shanghai to Long Beach, so you are not going to see the same economies of scale.  Still, a price nearly four times higher does seem a little strange.

Tom’s alternate route is to truck the shipment from Shanghai to Hong Kong ($728) and then ship it directly to Honolulu on NYK Lines ($1552), for a total shipping charge of $2280.  Needless to say, he takes the first route, Jones Act notwithstanding.  But it chafes that the price from Long Beach to Honolulu appears to be egregiously jacked up.

Tom also points out that he can ship a 40′ container from China to Colorado Springs for less than it costs him to ship a 20′ container from Honolulu to China, since the latter generally has to go to California (via Jones Act carrier) before beginning its journey to China.  Again, this isn’t conclusive evidence of the cost of the Jones Act, but it may be indicative.

A second company, an exporter of a Hawaii processed food product, exhibited at the huge ANUGA food show in Cologne, exciting interest from a potential large-scale distributor in Germany.  The Jones Act already hurts the firm’s bottom line by raising the cost of the glass bottles they have to bring to Hawaii from the mainland United States.  And to ship their products from Honolulu to Germany, the first leg of the voyage – from Hawaii to California – must be on Jones Act carriers.  The German customer took one look at the landed price in Germany and killed the deal.  Now the Hawaii company is looking into contract manufacturing on the U.S. East Coast to create products that are affordable to European customers – costing Hawaii jobs.

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On Monday, the Honolulu Star-Advertiser carried an op-ed piece in favor of the Jones Act, useful reading for either side of this issue.  The author is Robert G. Frame, an admiralty and maritime lawyer in Honolulu.  The one surprising thing I saw in his piece was mention of a 2003 study by the Maritime Cabotage Task Force that concluded that the Jones Act costs Hawaii residents only $5.52 each annually – or less than two cents day.  This is, of course, far below any estimates that I have seen by reputable economists, who tend to conclude the cost is upwards of $2,000 per person per year.  It turns out that the Task Force is hardly unbiased, founded by and composed of all the major players in the U.S. maritime industry, including both Horizon and Matson.  Their mission statement is clear enough:

“The Maritime Cabotage Task Force (MCTF) is dedicated to educating America on the economic, national security, environmental and safety benefits of the Jones Act and other U.S. cabotage laws so that domestic waterborne commerce remains a pillar of our national existence.”

Oh, and Mr. Frame’s law firm, Frame & Nakano, proudly lists Hawaii’s Jones Act carriers, Matson and Horizon, among its clients.  The Star-Advertiser apparently did not consider it important to mention that.

The Jones Act often comes up in conversations with businesspeople in Hawaii.  See yesterday’s post for some of the history and economics, but let’s focus on pragmatic business consequences today.

I asked a cattle-rancher on the Big island what his biggest business headache was, expecting him to say something about getting loans or meeting sanitary requirements.  But, no, he said it was the Jones Act.  Hawaii has a surprisingly large and robust cattle industry (some parts of the Big Island look more like Texas than Hawaii) that produces far more than can be consumed in the local market – which isn’t big enough to support an industrial-scale slaughterhouse and meat-packing industry.  So, the ranchers are faced with exporting live cattle to either the U.S. Mainland or to foreign markets.  They tried exporting to Japan many years ago, but that was at a time when Tokyo was saying that Japanese stomachs couldn’t tolerate non-Japanese beef.  Then mad cow disease came along, and shipments of Hawaii cattle and beef were cut off because of one Canadian cow that had been brought south of the border.  The world didn’t notice the long swim required for contact between Hawaiian and Mainland herds.  But I digress.

Hawaii’s cattle industry today requires transport of live cattle to U.S. West Coast slaughterhouses, which brings the Jones Act into play.  It’s not a huge trade, but when ships are available to carry the cattle, the prices, says the rancher, are prohibitive.  It’s cheaper for the cattle ranchers to charter vessels to carry their cattle to Vancouver, Canada and either slaughter them in Canada or have them trucked down into the Lower 48.  This, of course, subjects them to an additional layer of health and safety requirements, which only adds to their costs and cuts their margins.  Getting rid of the Jones Act may or may not make direct transport to the West Coast feasible, but the ranchers would sure like to give it a try.

Better deal in Switzerland than New Jersey

My friend Dana Gray owns Oils of Aloha, a small company on Oahu’s North Shore that produces cooking oils and cosmetics based on macadamia nut oil or kukui oil.  (Try Haleiwa Heat, a mac nut cooking oil infused with garlic and chilies.  Oh yeah.)  Oils of Aloha has developed an international clientele and routinely does bulk shipments to European and Asian customers, as well as the U.S. Mainland.  Dana was fulminating about the Jones Act one day last fall, so I asked him for examples of how the Act impacts his company.  Dana told me that he had recently sent a full container of his products from Hawaii to Switzerland for $4600.  The same day he got a quote to send another container – under Jones Act rules – from Hawaii to New Jersey for an exorbitant $5940.  He figures that the Jones Act costs his company $1340 per container load!

These are anecdotes, but they are indicative of the cost Hawaii pays for the Jones Act.  Getting rid of the Jones Act, however, will not necessarily solve the problem.  If one looks at trans-Pacific shipping, much of it is eastbound only – Asian exports bound for North America.  There is going to be little space available on those vessels even if they were allowed to pick up cargo in Hawaii.  There’s a ton of space available westbound across the Pacific, many ships filled to the brim with empty containers being returned for more Asian exports.  So there may be some scope for increasing Hawaii’s shipments to Asia.  Many such shipments now have to backtrack to California ports before they can head out again westbound, incurring Jones Act costs on the eastbound leg.  And westbound foreign-flag vessels could substantially reduce the cost of products shipped to Hawaii from the U.S. West Coast.

But there is a problem.  Container ships have grown so large that much of the world’s container fleet can’t fit into Hawaii’s small shallow ports.  Honolulu can handle many of the big ones, but not all, and the trend in container ships is to bigger and bigger.  Still, Hawaii’s companies would like to give life without the Jones Act a try.

Not allowed under the Jones Act

The Jones Act becomes a focal point for crisis in Hawaii every few years – and its that time again.  Formally known as the Merchant Marine Act of 1920, the Jones Act is America’s cabotage law – requiring that goods carried between American ports be carried in U.S.-flagged ships.  These ships must be crewed largely by American seamen, owned by U.S. owners, and built in American shipyards.  As such, the Jones Act is about as protectionist as legislation can get.  That said, many maritime countries have similar laws to promote and protect their own shipping and shipbuilding industries, as well as the heritage of their seamen.  (And the same can often be said for the aviation industry, which has similar but not identical protections in the United States and elsewhere.)

The purpose of the Jones Act depends on who you talk to, so let’s go to the source.  The preamble of the Act itself says “It is necessary for the national defense and for the proper growth of its foreign and domestic commerce that the United States shall have a merchant marine …”.  The basic idea in 1920 was that a proper merchant marine was necessary for national defense (how could you rely on other countries’ ships during a war?) and for international trade (how can you rely on foreign-owned, foreign-flagged vessels to carry your goods?).  The second notion has largely disappeared; non-U.S.-flag vessels are ubiquitous in U.S. ports and our imports and exports have not suffered.  It is harder to dispose of the national security argument.

My first job out of college was as an economist with the U.S. Maritime Administration.  There was concern at the time about the “loyalty” of American-owned ships plying the seas under “flags of convenience”, mainly Panamanian or Liberian.  I was tasked to explore whether or not these ships would bolt for safety in wartime, rather than move desperately needed cargoes for their owner’s country.  The question can’t be answered in absolute terms, but my overall conclusion was that, if times are desperate enough, any country will seize whatever ships happen to be in their ports at the time they are needed.  Beyond that, we could assume that some unknown but large proportion of shipowners would be patriotic enough to make their foreign-flagged ships available.  And there would always be the “spot” market for hiring ships of any flag.  In other words, we didn’t really need to have a quantity of American-flagged vessels ready for military transport needs.  That wasn’t the answer my political masters were looking for.

The current Jones Act dispute in Hawaii arises from both politics and economics.  On the political surface, Hawaii has a new Republican Congressman, Charles Djou, who is challenging local Democratic orthodoxy by calling for a repeal of the Jones Act as it applies to Hawaii.  This guarantees headlines for Djou because the godfathers of Hawaii’s Democratic establishment, especially Senator Daniel Inouye, are staunch supporters of the Jones Act.  As an island state, Hawaii gets the vast majority of its goods by sea from the U.S. West Coast.  Since those cargoes move between U.S. ports, the Jones Act applies and U.S. carriers must be used, creating an oligopoly for Matson and Horizon, the two main carriers on the Hawaii-West Coast routes.

The older Hawaii Democrats vividly remember the longshoremen’s strikes of the 1950s and are quite content that the Jones Act provides for some stability in the Hawaii-West Coast trade.  Their usually younger opponents (Djou, former Democratic Congressman Ed Case and many Hawaii consumers) object to the economic burden of the high shipping rates that the oligopoly can charge.  Some estimate that the Jones Act costs Hawaii more than $3000/household every year.  They see foreign flag vessels moving between the West Coast and Asia and wonder why we can’t use them.  (In a similar vein, a U.S. International Trade Commission study in 2002 concluded that the Jones Act costs somewhere between $119 million and $9.8 billion annually (now there’s a range!) because it prevents use of low-cost non-U.S. ships.

I once tried to arrange a live debate about the Jones Act when Business Beyond the Reef was still a radio talk show.  Opponents were eager to come on the air, but Inouye’s office, Matson and Horizon refused to participate.  Their tactic is simply to discuss the Jones Act as little as possible.  The public discussion has begun, and we’ll continue with some insights tomorrow.

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I didn’t report on my outrigger paddling adventures last week as there was nothing good to say.  We stank.  This Sunday’s races were substantially better.  Windward Kai raced at Oahu’s Ke’ehi Lagoon and we actually had a victory.  I race with our old guys (the men’s 60s crew, sometimes the mixed 60′s or other crews).  In the men’s 60 race Sunday, we had a rocket start and a good turn, coming out of the turn in 3rd place with a quarter mile to go.  Halfway back, we had built a three-length lead over the 4th place boat, when it suddenly felt like someone had turned the ignition off.  We had no power left and were overtaken on the line, finishing about ten seconds out of 3rd and less than a second from 4th place.  Disappointing.

Two races later, our mixed 60s (mixed means three men and three women) went to work.  They had been finishing 3rd or 4th all season, but they nailed it this time.  Good start and they came out of the 1/4 mile turn all even with two other boats.  Then they put the hammer down to gradually eke out a lead, taking 1st place by about a boat length.  Magnificent!

Don’t know how I missed this one, but I finally glanced at the World Bank’s 2010 Logistics Performance Index.  Realizing that bad logistics can bring trade and development to a standstill, the World Bank ranks countries according to customs efficiency (including any border controls, not just official customs clearance), trade and transportation infrastructure (e.g., port facilities, automation, etc.), and quality of trade and transport services (e.g., trucking to inland destinations).  I know you are in suspense, so here are the Top Ten for 2010:

1. Germany
2. Singapore
3. Sweden
4. Netherlands
5. Luxembourg
6. Switzerland
7. Japan
8. United Kingdom
9. Belgium
10. Norway

There are a few notables missing.  The United States comes in 15th, preceded by Hong Kong and Canada.  Taiwan finishes 20th and China follows at a creditable 27th, just ahead of South Africa and Malaysia.

How quickly can you get it there? (photo: Wmeinhart)

As an American, I need to look at the U.S. scores more deeply.  On customs processes (efficiency of the clearance process), we rank 15th, well behind the leaders Luxembourg and Singapore.  They have the advantage of much smaller operations, plus they don’t have Homeland Security to cope with.  The United States came out better than I would have expected on infrastructure, finishing 7th – behind Germany, Netherlands, Norway, Singapore, Japan and Switzerland.  In a category called logistics quality and competence (efficiency of logistics services), the U.S. came in 11th; Switzerland was the clear winner.  Our best showing was in tracking and tracing, 5th behind Switzerland, Belgium, Sweden and Germany.  The United States was 16th in timeliness (do shipments reach consignees within expected delivery times?), which I assume reflects congested, fairly shallow ports and the time needed for security.

The United States falls down on the ease of arranging competitively-priced international shipments.  We come in a dismal 36th, trailing the leaders Singapore, Sweden and Australia – and sandwiched between Poland and Italy.  I’m not sure what to make of this one.  Is this a consequence of the Jones Act, which eliminates foreign competition on ocean shipments or air freight between U.S. ports and cities?  That’s a huge issue for us in Hawaii because it jacks up the price of anything shipped to us from the U.S. mainland.  Proponents of the Jones Act argue that the Act is needed to secure reliable shipping.  Hmmm … at least 35 countries seem to have reliable and lower cost shipping without a Jones Act.

For the record, and because I know you are dying to find out, the world’s Bottom Ten for logistics are:

146. Sudan
147. Nepal
148. Iraq
149. Guinea-Bissau
150. Cuba
151. Rwanda
152. Namibia
153. Sierra Leone
154. Eritrea
155. Somalia

I think the recession really is ending – and not for the reasons that most of the pundits tout.  Certainly not for the reasons that most politicians use, since they all want to claim credit for ending it.  No, it’s all about containers.

Filling up? (photo: steve gibson)

Boxes.  When a recession ends, business picks up and boxes begin to move.  First, last week, came Federal Express’ most recent quarterly report.  The stock market focused on the financial numbers going forward (which missed “expectations”, by the way), but what caught my eye were the positive comments by FedEx execs on what seems a worldwide pick-up in volume.  That tells you something positive is happening out there.

Then came an article in the South China Morning Post about a surge in demand for ocean-going containers.  This time a year ago, says the article, millions of 20′ and 40′ containers were stacked up in Chinese ports because there were no cargoes to be moved.  Now, not only have those containers been pressed into service, thousands of new containers are being built and empty containers in North America and Europe are being brought back to Asia to meet demand.  Clearly, this take-off in demand begins in Asia, but those newly filled containers are being shipped out everywhere – which means economies are healthy enough that buying has started again.

The spot leasing rate for containers has risen about a third in Hong Kong since the first of the year.  Cosco Pacific, one of the world’s largest container leasing companies (you don’t think Matson and Maersk own all those boxes, do you?), has taken delivery of 40,000 new containers since January 1 and expects to receive another 60,000 containers in the next three months.  The first 40,000 cost about $2,200 a box, so that’s a sizable bet that economies are turning up. And the bet gets bigger: demand has driven the sales price of a new 20′ container to $2,800 per container.

It takes a bit longer to put whole container ships back into action, but that is happening, too.  A Cosco spokesman commented that, while 10% of the world’s container ships were laid up a year ago, only 4% are laid up now – a significant increase in carrying capacity in a short time.

This doesn’t mean that the danger of a double-dip recession is definitely behind us, but the surging demand for containers does tell us the probability for a double-dip is dropping.

• The mind boggles.  Club Med has invested in a ski resort in China.  Way up in the northeast, in Heilongjiang Province, Club Med has bought into a financially-strapped ski resort.  This may be an intriguing clash of cultures.
• President Obama’s approval of loan guarantees for two nuclear reactors in Georgia has split the unions.  Construction unions love it, but the approval is drawing fire from the United Steelworkers because some 20% of the package will buy critical components from steelmakers in China or South Korea.  The union is trying to create doubts about the safety of Chinese steel, but we are not talking about consumer goods here.  China has been successfully manufacturing reactors, while our own industry has been moribund for thirty years.  Why should we expect to be competitive on something with which we have little experience?
• We had the pasta war, several chicken wars, even the turkey ball war.  But the toilet paper war is just beginning.  Unions in Australia are challenging imports of cheap toilet paper from China and Indonesia, saying the product is being dumped (I’m not going to touch that pun).  Having had personal experience with cheap toilet paper in both Indonesia and China, this dispute is self-limiting.  Australian consumers are only going to buy it once.
• Brazil now exports more to China than it does to the United States, a reflection, of course, of the recession.  The problem is that China buys a vastly different group of products than Brazil sells to U.S. customers.  Brazil’s trade with the United States is mainly in industrial goods, but China is mostly buying commodities such as soybeans and iron ore.  This destroys the value-added business of Brazilian product companies and sends Brazil back to the days of simply being a commodity supplier.  This will presumably end when the U.S. economy moves into recovery.  In the meantime, not everybody is dancing in Brazilian streets.  For more, see the article in Asia Times.
• The recession also hurts the Cuban cigar trade.  Sales were down by 8% in 2009, reflecting reduced international travel (which, of course, cuts sales at duty-free airport shops) and Spain’s economic downturn.  Spain has historically been Cuba’s largest cigar market, but … up in smoke.
• A suit brought by Totes-Isotoner alleging gender discrimination in customs classifications was tossed out by a Federal appeals court this week.  The company argued that having different duty rates for men’s and women’s clothing (a time-honored practice around the world) discriminated against whichever gender got the higher rate on a particular item of clothing.  I would guess this is about gloves.  The court in New York disagreed.  Totes-Isotoner says they will appeal to the Supreme Court.  (note: these classifications are set, at the 4-digit level, by international agreement – not by any one country.)
• Shipping lines complain loudly about all the empty containers they have to move westbound across the Pacific.  So what do they do about it?  They raise their westbound rates. What a novel idea – raise prices to attract business.  Gotta think about that.

Where are they now?

Ocean shipping is what delivers the goods in world trade.  So I was concerned to read in the New York Times last Friday that a huge number of ships are lying idle, waiting for future cargoes to materialize.

It’s not as bad as it appears.  The idleness mostly reflects a surge in the number of new vessels coming out of shipyards.  Recessions can be a good time to build your fleet, because you can get better prices from shipyards than during a boom.  And some of the big shipping companies have  overextended themselves (just like banks), initiating too much new construction in the boom times now past.

But some of the idleness is the sad legacy of several ocean shipping firms shutting their doors last year.  The major carriers lost $20 billion in 2009, and at least seven smaller lines sank from sight.  Their ships are now lying idle somewhere.

This is a huge, huge business – one that most of us take for granted unless we are using them, or live and work near a major port.  One researcher guesses that the liner industry (the ships that carry containers on regularly scheduled routes) accounts for 13.5 million jobs in shipping, ports, shipbuilding and related industries.

Traffic is improving as the world withdraws from recession, but it is uneven.  The greatest pickup is in the bulk trade, meaning employment for tankers and bulk carriers carrying oil or minerals.  The container trade has not responded, another indication that recoveries are still a few months away from hitting their stride.  Ten percent of the world’s container ships lie idle and another 371 new container ships are expected to slide down the ways this year.  Not a good time to look for profits in the container ship business, but – for the rest of us – this might help keep shipping rates reasonable as demand for goods rises.

Vũng Tàu.  I picked Vũng Tàu.  I was a young economist at the U.S. Maritime Administration, right out of college.  My bosses had me study Vietnamese ports to help decide which one to develop as a container port – assuming the U.S. won the war.  I looked at potential markets, water depths, that sort of stuff – and chose Vũng Tàu.  Many years later I was on business in Ho Chi Minh City, had a free day, and visited Vũng Tàu, which I had never seen.  My choice, consigned to the dustbin of history, was apparently sound, because the Vietnamese were expanding the port.  Maybe they used an upstart economist, too.

An article in Asia Times last week looked at the current state of Vietnam’s ports and plans for expansion.  Vietnam has forty ports, but most would not be considered modern and cargo throughput is small.  The country’s ports handled a bit more than five million 20-foot container equivalents (TEUs) during 2008.  Compare that to the 24 million TEUs that passed through Hong Kong.  One Malaysian port, Tanjung Pelepas, moves more containers annually than all of Vietnam’s ports, despite a far smaller population.

Vietnam’s ports are stunting the country’s growth, making new port infrastructure imperative.  There is a lack of waterfront, container cranes or even deep water to allow modern container ships to bring their cargoes to port.  Cargo bound to or from Vietnam must first transit, say, Singapore, Kaoshiung or Hong Kong where it can be shifted to the smaller vessels that most Vietnamese ports can handle.

When Will The Cranes Arrive?

Vietnam has plans to fix this, if only they can find $56 billion.  A large chunk of change would go to Nha Trang, where a new transit port is planned to handle up to two million TEUs a year beginning in 2015.  Plans envisage moving more than four million TEUs in and out of Nha Trang eventually.  Other ports will be developed, according to the Ports Master Plan, to offer berths for container ships of up to 15,000 TEU capacity (currently, the world’s largest), as well as to handle 400,000 DWT tankers and coal and ore carriers up to 300,000 DWT.  Big plans.

But where to find $56 billion?  The Vietnamese Government says it can only pay for perhaps 15% of the total.  Just like in America, government officials mutter generalities about public-private partnerships for the rest.  Given a dismal history of corruption and sheer wastage, I don’t think the ports of Hong Kong or Singapore have much to worry about.

So, How Do You Pack it?

The U.K. Government has put up a site that is well worth a visit by exporters or wanna-be exporters anywhere.  Business Link carries an excellent guide to preparing your products for international shipment, taking you from packaging and labeling through selecting a shipper and getting your cargo out the door.  Links on the site address insurance, food labeling, temporary storage, wooden packaging, paperwork and more.  I used to teach a short course on preparing goods for international shipment; this is pretty good stuff.

Short post while I’m traveling, but this might be of use.

Container volume in Chinese ports isn’t down as much as I had feared.  I once worked for the U.S. Maritime Administration, so I pay attention to such arcane things.  What it is telling me is that, while most of the world is still in the doldrums, China is riding out this recession pretty well.  I don’t listen much to the touts for China stocks and funds, but container volume doesn’t lie and tells you what is happening now.

Container Barge

The South China Morning Post ran an article yesterday about container traffic in China’s big ports.  The ports that handle mostly ocean cargo are facing headwinds.  Preliminary reports for this October show Shanghai’s traffic languishing 9.7% below October 2008.  Similarly, Shenzhen saw a 10% year-on-year decline.  Both ports are expected to show double-digit declines in container traffic for the full year, reflecting the worldwide reduction in international trade.

China’s mainly domestic ports are looking a whole lot better, indicating that domestic consumption is fairly healthy.  The port of Guangzhou saw a 27.7% rise in traffic in September, bringing that port’s annual downturn to a more bearable 4.2% loss so far.  Guangzhou’s performance is overshadowed by Yingkou, which boasts a 29.2% increase thus far in 2009, goosed by a 57.5% surge in containers in September.

Non-containerized cargo is also growing, fueled by a still-insatiable demand for commodities.  Coal and iron ore imports are up tremendously.