Canadian Shipper

Feature

2019 Supply Chain Outlook


Shippers and carriers discuss the future of the transportation supply chain

 

Capacity Crunch: Shipper-carrier cooperation is key to navigating rising rates

Canada’s long-awaited electronic logging device (ELD) mandate should differ from the U.S. rule to avoid some of the pitfalls that befell the rollout of similar legislation there.

That was the opinion of a panel that discussed the issue at the recent Surface Transportation Summit. Steven Laskowski, head of the Ontario Trucking Association (OTA) and Canadian Trucking Alliance (CTA), pointed out one deficiency in the U.S. rules—the fact vendors can self-certify their own devices.

“What we have seen and found is the ability for people to rewrite their hours-of-service,” Laskowski said. “With [some of] these devices it’s a push of a button.”

He said the Canadian industry is lobbying for third-party certification of devices to prevent this problem, but he noted the vast majority of suppliers do meet the technical requirements.

Canada’s ELD regulation has been held up by bureaucratic red tape. Unlike in the U.S., where the federal government mandates interstate carriers, in Canada all provinces must handle enforcement.

“You’re not dealing at the table one-on-one with the feds, you’re dealing with seven, 10 other jurisdictions,” Laskowski said. “There was political foot-dragging on this.”

Mark Seymour, chairman of Kriska Group, who is a fan of the technology, shared his company’s experience when rolling out ELDs voluntarily between 2011 and 2014.

“The old paper-based log system is ludicrous,” he said. “And for those we’ll be introducing to our business in years to come, to teach them a system like that would frankly likely be enough to turn people away from our industry.”

He encouraged carriers that haven’t yet made the transition to give themselves ample time and to implement them methodically.

“To wait and rush is just a recipe for disaster,” he said.

Carriers giving capacity to best customers

Shippers want more capacity and truckers want to give it to them. But new trucks don’t come from the factory with a driver installed, so both shippers and carriers are having to work together to make do with what they have.

“Cost reduction is always an ongoing opportunity for everyone,” said Charles Daharry, transportation manager, Lowe’s Canada during the Surface Transportation Summit’s shipper-carrier roundtable. “We can’t do that alone. We work very closely with our carrier partners to look at how to optimize the supply chain and find opportunities to increase efficiencies together.”

Carriers represented on the panel admitted they’re having to be selective as to which customers they award their limited capacity to.

“All participants in the supply chain need to work together to improve efficiencies,” said Jim Peeples, president, Challenger Group of Companies. “I’ll provide all the capacity [customers] need if they include me in their business processes. Too often, he added, inefficiencies in the supply chain simply get kicked down the road instead of being resolved.

Fleets aren’t adding new capacity because, while it’s easy to buy more equipment, it’s proving difficult to find qualified drivers.

“The spend on recruitment and retention is higher than it’s ever been, and the retention piece is going to be a really big aspect going forward,” said Doug Sutherland, vice-president, Sutco Transportation Specialists. He said his company is avoiding the temptation to bring on new business and is focusing on serving its existing customers.

“You have a strong spot market, don’t go chase that,” he advised. “Stay with the customers that have been with you a long time and build that relationship.”

These comments are the culmination of several years of warnings from carriers during this annual roundtable discussion. Carriers on the panel repeatedly implored shippers to work with them. There’d be a day of reckoning, they warned, and that day has clearly arrived.

Martin Pede, manager of zinc sales and service with Hudson Bay Mining, acknowledged shippers have a role to play in eliminating inefficiencies and understanding that carriers’ operating costs are continuously rising while rates are not keeping pace, and must work more closely with their carriers.

“The RFP (Request for Proposal) has become more fluid and it needs to be more collaborative to ensure shippers’ needs are going to be met,” he said. “Shippers need to provide consistent volumes and information and can’t just draw a line in the sand. The RFP model is probably never going to go away…but the relationship aspect with carriers—especially truck carriers—has to become more ingrained in how the shippers approach the truck carrier market in this environment.”

Even when all the obvious inefficiencies have been eliminated from the system, there is still a need for rate increases.

Daharry admitted shippers don’t like discussing rate increases, “however it is a reality.

-James Menzies

 

Capital ideas: Mainlines investing heavily in infrastructure as Bill C-49 takes affect

Canada’s mainlines spend billions every year on capital expenditure (capex) projects, but this past year CN has been breaking records with a whirlwind of coast-to-coast announcements about details of its $3.4 billion capital program. CP plans to spend over $1.55 billion.

The mainlines’ capex programs include a flurry of equipment purchase announcements, such as several hundred locomotives, box cars and lumber cars. And inspired by changes to the Maximum Revenue Entitlement (MRE), CN and CP are buying a total of 6,900 of grain hoppers.

The MRE is a limit on the overall revenue that CN and CP can earn for shipping regulated grain. The limit was changed in the amendments to the Canadian Transportation Act (CTA) that came into force this May 23, in the Transportation Modernization Act (Bill C-49).

“There is a change in C-49 to how this is calculated. Railways like it. After the announcement, CN and CP announced large capital purchases of grain cars. I think the revenue caps will go up,” says Robert Ballantyne, president of the Freight Management Association of Canada.

Explaining its order for 5,900 grain hopper cars over the next four years, CP stated, “The investment is made possible by changes to the Maximum Revenue Entitlement formula …” CP plans to put more than 500 into service by the end of 2018.

In May CN announced it would acquire 1,000 grain hopper cars over the next two years. The mainline explained the purchase partly as a phase out of older grain cars, partly so it can keep up with higher crop yields and partly because of “positive conditions” brought in by Bill C-59. Last March president and CEO JJ Ruest said, “We apologize for not meeting the expectations of our grain customers, nor our own high standards. The entire CN team has a sense of urgency and is fully focused on getting it right for farmers and our grain customers …”

Two other amendments to the CTA with the potential to positively affect freight rail, include long-haul interswitching and reciprocal penalties in a level of service arbitration, according to Ballantyne.

According to the CTA “The new Long-Haul Interswitching provisions enable certain shippers to make an application to the CTA requesting it to set a rate and the terms under which a local carrier must move the traffic to a connecting carrier that will perform the remainder of the movement. The nearest interchange can be up to 1,200 kilometres away, or 50 per cent of the total haul distance in Canada, whichever is greater. The CTA will render a decision within 30 business days.”

In plain English, long-haul interswitching gives a shipper with only one railway available for the first leg of a journey the option, with protection against an unfair charge by the initiating railway, to change to a second railway further down the track.

Citing some complexities and costs associated with it, Ballantyne says, “This is supposed to help shippers who are captive to one railway, but we are not sure how effective it will be, as it is not automatic, but requires application to the Canadian Transportation Agency.”

Looking to history for guidance, Ballantyne notes, “Long-haul interswitching replaces Competitive Line Rates, which were implemented in the 1980s and were completely ineffective. Long-haul interswitching, if it is used, will be most useful to big shippers with the deep pockets to pursue it. There are a lot of things in this that will make it very difficult to use. Some traffic is prohibited; for example, some chemical products and intermodal and automotive. In addition, any traffic originating in the Quebec-Windsor or Kamloops-Vancouver corridors is also prohibited.”

C-49 also permits reciprocal penalties in a level of service arbitration. When a railway is in violation of its service obligations under a service level agreement, a shipper may be able to get compensation. Of this provision, Ballantyne says, “It may work, but it is a bit bureaucratic and requires a service level agreement between shipper and carrier. If the shipper says the railway is in violation, the penalty is not automatic the way the demurrage penalty is for the railways. The Agency-appointed arbitrator would have to determine that the railway is in violation, and set the penalty.”

Cross-border risks

Another big-ticket item, some effects of which could be felt next year, is the new United States-Mexico-Canada Agreement (USMCA) reached this fall, which replaces the North American Free Trade Agreement. How might the USMCA affect Canada’s rail industry in 2019?

“In terms of specifics of the deal, there are no major direct implications for cross-border goods trade. Apart from some expanded dairy sector imports from the United States, cross-border tariffs will stay where they are, including those on steel and aluminum,” says Dan Ciuriak, director and principal with Ciuriak Consulting Inc.

In the longer term though, says Ciuriak, “The main thrust of the Trump administration is to repatriate its supply chain to within its borders. North America in 10 years will likely be a less integrated space, and this may have more significant impacts on cross-border traffic. As market access becomes less certain, many firms will decide not to pursue cross-border opportunities.”

The trade war that the United States has begun with China also will have implications in Canada, Ciuriak predicts. “You will see companies restructuring their supply chains, to reduce their exposure to U.S. tariffs.” Down the road, the USMCA clause that requires Canada to clear non-U.S. trade deals with the U.S. could also affect rail traffic. “What will happen to trans-Pacific trade? There are implications for the rail industry in what is landing in Vancouver; for example—fewer shipments coming into B.C.”

In short

The struggle continues to loosen government purses and make life easier for the country’s 50-some short line railways. This May, for example, the Railway Association of Canada “… expressed its profound discontent at the lack of capital funding programs dedicated to helping short line railways …” This was in response to the news that Genesee & Wyoming Inc. would close the 278-kilometre Huron Central Railway, which runs from Sudbury to Sault Ste. Marie, if it could not secure $46 million in assistance. Despite having big-ticket clients like the Eacom sawmill in Nairn, government hearts remain cold. Without help, word is that the line will close by the end of 2018.

The residents of Churchill, Manitoba, on the other hand, got good news this September about the washed-out Hudson Bay Railway, which has been closed since spring 2017: The federal government announced it would hand over $74 million to help new owners—a consortium called Arctic Gateway Group—purchase and repair the line, which runs from The Pas to Churchill. An additional $43 million will subsidize the line for the next 10 years.

Crude-by-rail

In crude-by-rail news, National Energy Board figures show a steady increase in Canadian crude exports by rail this year. Month-over-month increases from 2017 to 2018 have marched ever higher from the beginning of this year, to a more than doubling of shipped volume this July compared to July 2017, to 1,017,874 cubic metres.

The website Real Agriculture reports that the crude-by-rail export forecasts are bullish, citing a prediction from the International Energy Agency that shipments will rise from 250,000 bbl/day in 2018 to 390,000 bbl/day in 2019. Speaking to concerns about whether this will affect rail capacity to move agricultural commodities, Real Agriculture quotes CN and CP as giving priority to transporting grain.

-Carroll McCormick

 

Bull Market: Imports and e-commerce driving a robust industry

Tim Strauss, vice-president, cargo at Air Canada, has reason to be bullish. Revenues are up about 15 per cent this year, but actual growth has been closer to 21 per cent, factoring in the absence of freighters that had served several international markets in 2017.

Cargojet, which was operating those freighters, has enjoyed double-digit growth in its core overnight business, reports vice-president Jamie Porteous.

Forwarders have also been going strong. “This is probably the best year in our corporate history,” says Jeff Cullen, CEO of Rodair International.

The robust momentum stems chiefly from imports, which have increased faster than lift, pushing up yields as a result. During the 2017 peak season this led to capacity shortages and bottlenecks at some gateways. This year the impact is widely expected to be less severe, as growth has slowed down and the industry is better prepared.

The picture is less buoyant on the outbound side, particularly on the North Atlantic, rising volumes notwithstanding. While demand has gone up, capacity has outpaced the market. “There’s been good momentum in the uptick in volume, but not the same sentiment with yield. There’s too much capacity in the market eastbound,” remarks Joe Lawrence, president of Airline Services International, which represents a string of carriers.

Some had expected the trade agreement with the European Union to trigger off a surge in traffic, but this has been less pronounced than hoped. “Both in and out CETA has not grown as fast as we’d anticipated,” says Andre Goguen, president of AGO Transportation. “We’ll try to work more closely with our partners in Europe.”

In response to the relatively weak yields to Europe, European airlines have concentrated their sales efforts on traffic going further afield.

“Even today there is no direct service to Africa, but every European carrier that comes here flies to Africa. With European yields so low, they go for longer haul markets,” says Lawrence.

“It’s the same with Latin America,” he continues. “It’s cheaper via Europe than over Miami or on direct flights.”

His company has been feeding Canadian exports to a Latin American airline client’s southbound flights out of Miami, but the high trucking costs are undermining this model.

Trucking south of the border has been further affected by the ELD mandate, which has pushed rates even higher and prompted truckers to steer clear of routes that may incur an extra day in transit. This constrains the viability of routing traffic over U.S. airports, which may be the only option when shipments have to be carried on freighter aircraft.

“With the trucking situation, the use of U.S. gateways is challenging,” says Gary Vince, head of air freight, Canada at DHL Global Forwarding.

Lawrence hopes that the rise of e-commerce will hoover up surplus capacity and help boost yields. Without a doubt this sector has been a huge driver of the growth in airfreight volumes, and it looks set to continue. Strauss points to projections of around 19 percent growth in e-commerce over the next three to five years.

AGO Transportation handles a rising volume of e-commerce from China as well as in both directions between Canada and the U.S. “We do a lot of distribution. We break down consolidations and perform distribution,” says vice-president Sandra Faraj.

Kuehne + Nagel ramped up its focus on e-commerce this year with a new global warehouse management system that serves as a digital platform for e-fulfillment centres.

“We’re in discussions with a number of e-commerce providers and trying to develop solutions for them. The technology behind it needs to be spot on. Reliability behind it is a must,” says Alex Strohmeier, vice-president, airfreight.

The pharmaceuticals and healthcare sector has been another driver of growth. Both Kuehne + Nagel and DHL Global Forwarding are well entrenched there and plan further developments. “We continue to enhance our product line with temperature control monitoring capability and technology,” says Vince.

His company broadened its portfolio this year with a push into the perishables sector, drawn by the rapid increase in exports, particularly to China. Consumers there have shown a strong appetite for Canadian lobster and other seafood as well as for fruit and vegetables, notably cherries.

Strohmeier expects further growth of perishables exports in 2019. Lobster shipments to China stand to keep their upward momentum, especially as long as the trade dispute between China and the U.S. continues.

Airline Services International is broadening its portfolio through a partnership with a global on-board courier service, which it now represents across Canada. This segment has shown strong growth in recent years thanks to the rise of time-critical shipments such as medial samples and urgently needed replacement parts for stranded ships and aircraft.

Overall operators are planning for continued growth, albeit with a note of wariness.

“The economy is remaining strong, but there is some hesitation and concern where we’re headed,” reflects Cullen. “We continue to ride the crest of the wave and look to plug into some of the things that promise growth.”

Cargojet is looking to add to its freighter fleet to keep up with growth in the core parcel sector, but also for more contract flying and ad hoc charter work, says Porteous.

Adds Strauss: “We’re bullish. We’re adding more people.”

-Ian Putzger

 

Track and Trace: Technology is pushing the envelope when it comes to delivery

The all-consuming surge in online shopping is inexorably turning parcel carriers into 24/7 operators. Purolator Courier, Canada’s leading player, stepped firmly out of the nine-to-five, Monday-to-Friday pattern this year with the launch of pilot projects for evening and weekend deliveries, a move that looks set to continue in 2019.

Purolator has been running trials in Toronto, Vancouver, Montreal and Ottawa with a small number of clients, and the results are encouraging management to take this to the next level in 2019, reveals Jeff Green, senior vice-president of sales and customer experience. Early in the new year the company will extend to scheme to more clients and new markets, and the set-up should be fully established by mid-year, if everything goes to plan.

Greg Merz, senior analyst, transportation solutions consulting at enVista, a global consulting and software solutions firm, sees a steady shift beyond the Monday-to-Friday regime. Increasingly courier firms south of the border have been using the U.S. Postal Service for Saturday deliveries, he notes. In September FedEx Ground announced that its U.S. operations are now running six days a week on a permanent basis. Previously the integrator had only added a sixth day during peak times.

Merz does not expect the trend to stop on Saturdays. Eventually, the industry will move to a daily mode, he predicts, and this will put pressure on small operators that lack the strength and network and operate on tighter margins.

The extension of the working week has repercussions beyond drivers performing weekend deliveries. In May Cargojet, which provides the linehaul on trans-Canada trunk routes for the express parcel industry, added a Sunday flight to its schedule.

Operators are in expansion mode to cope with the rapid increase in traffic. In March UPS announced plans to invest $500 million in Canada. One quarter of this goes to the expansion of the firm’s Montreal hub to become its first automated sorting facility in Canada. Other projects include facility expansion in Ottawa, London and in the West and the recruitment of over 1,000 additional staff.

More such moves may happen in 2019, says Christoph Atz, president of UPS Canada.

“Probably the biggest focus for us now is accommodating growth,” says Green. Purolator is hiring over 1,500 employees and has invested in 300 vehicles and 40 new tractor trailers.

Adding more pick-up and delivery points is another priority. Some of this is covered through the deployment of trucks near customer locations to act as mobile points.

It is a race to provide customers with more options. Purolator has added a noon delivery slot to its roster.

Another key element is technology to allow consumers to track their shipments and play with delivery options. “The consumer wants more visibility and more control,” says Atz. “Consumers want to be able to set and change delivery options, default shipping locations and redirects. We’ve seen an uptick in redirects.”

Three years ago UPS had 300,000 customers using its MyChoice offering, which allows them to track their shipments and control the timing and location of the delivery. Atz predicts that this will climb to 1.5 million over the next years.

Canada Worldwide, which offers shippers online access to capacity of all large parcel carriers in Canada through its eShipper platform, has partnered with an omni-channel provider to allow its clients to utilize multiple shopping carts.

“Our customers sell on multiple platforms—not only on their own websites. They don’t want to integrate with each one individually. They can integrate with us and channel the delivery on eShipper,” says Mo Datoo, director of strategy and planning.

The lines between B2B and B2C traffic are blurring. This allows UPS to leverage the breadth of its spectrum and take on a more consultative role for clients, says Atz.

“There’s a convergence of B2B and B2C. Customers want the experience they have as a consumer for their business as well,” remarks Green.

For Purolator B2B is still the lion’s share of the business, but B2C is catching up. While the former has grown in the single-digit range this year, B2C is charging forward at a double-digit clip.

Operators see much promise on the international side. “E-commerce is starting to become an export game,” says Imtiaz Kermali, vice-president of sales and business development at Canada Worlwide. The company has been working with the Export Development Canada to help SME shippers venture into overseas markets.

This is also a major focus for UPS, which has been working with organizations like Startup Canada to support SME firms. “Cross-border e-commerce will continue to grow over the next few years,” predicts Atz. We anticipate that export will be a major driver.”

He adds that emerging markets like India, the Middle East and Africa are a major focus for UPS.

Canadian consumers’ growing interest in goods from online merchants outside the country should generate further growth in inbound e-commerce volume and bring more opportunities for distribution and fulfillment. Additional momentum will come from the newly signed USMA agreement, which will push up the de minimis threshold for duty-free personal imports from $20 a day to $150.

For Green relief is the paramount reaction. “We are already moving significant volumes from the U.S.,” he says. “I’m glad that the trade negotiations ended well.”

-Ian Putzger

 

Compliance Complications: Global trade, regulatory and economic issues challenge marine sector

Challenging times persist for the world’s shipping industry. But there have been significant new factors at play beyond fleet over-capacity, volatile freight rates and struggles to build respectable profit margins. Most prominent among these are global trade conflicts provoked by the Trump administration, a cooling global economy, and the early manoeuvres by carriers to recover costs from the introduction of low sulfur bunker fuel under a new regulation by the International Maritime Organization (IMO) taking effect on Jan. 1, 2020.

The stricter IMO emissions regulation, meant to foster a greener environment lowers the cap for compliant fuel oil from 3.5 to 0.5 per cent. Analysts estimate the spike in fuel costs will initially amount to US$60 billion for the world maritime industry.

Thus, major container carriers argue that the higher costs will need to be passed onto shippers because the regulation could add $184 to $264 per twenty-foot equivalent container unit (TEU). This is hardly welcome news for cargo owners, but Bruce Barnard, a U.K.-based veteran analyst of global shipping trends affirms “there’s no guarantee they will be able to pass on the entire cost.”

In this regard, SeaIntel, a Danish maritime consulting firm, recently suggested that shippers preparing budgets for 2019 should “take into account the likelihood of freight rate increases of up to 13 to 20 per cent seen from a global average perspective.”

On the assumption that the spread between high sulfur and low sulfur oil will be $250 per tonne by 2020, Hapag-Lloyd has placed the price tag of compliance to the IMO 2020 regulation at “around $1 billion in the first years.” Maersk, the world’s largest carrier, says its bunker costs would climb by more than $2 billion annually, adding 35 per cent  to its total fuel bill and eight per cent to total costs. France’s CMA CGM expects its bunker costs to rise by $1.5 billion, adding the equivalent of nearly 60 per cent to its total fuel bill, while MSC sees its extra costs at more than $2 billion a year. OOCL calculates the extra cost of compliance at more than “half a billion dollars.”

Some shipping lines, including Maersk, have begun to adopt scrubber technology on container vessels. Fitting scrubbers to clean up exhaust emissions costs up to $3 million per ship. For its part, CMA CGM plans to burn low sulfur fuel and power nine of their mega-ships on order via liquefied natural gas.

However, shippers have hardly been enthused by low-sulfur fuel adjustments announced in September and October by five global carriers for implementation, in some cases, as of Jan. 1, 2019. Hapag-Lloyd indicated that a so-called Marine Fuel Recovery mechanism will replace all existing fuel-related charges.

Shippers slam surcharges

Taking strong issue with specific reference to Maersk Line was the Global Shippers Forum (GSF), of which the Freight Management Association of Canada is a member. As well as objecting to bunker surcharges being levied 12 months before the IMO rules kick in, the GSF noted that “the greater number of revenue-earning boxes sailing west will collectively pay far more than they need to in order to compensate for the same boxes returning east when empty.”

GSF secretary general James Hookham bluntly stated: “GSF will be taking this piece of financial engineering apart piece by piece as we suspect this has more to do with (freight) rate restoration than environmental conservation.”

Meanwhile, the International Monetary Fund this fall downgraded its forecast for global growth to 3.7 per cent in 2018 and 2019 from 3.9 per cent last July.

The gloomier world outlook plus escalating trade tensions prompted U.K.-based Drewry shipping consultancy to lower its forecast for container demand over the next five years in its latest report. The industry faces being stuck with the present over-supplied situation for several more years.

“The anticipated re-balancing of the container market looks to have been postponed,” Drewry opined. “That’s more bad news for carriers that are facing substantial cost increases as a result of stricter ship fuel standards from 2020.”

After world seaborne trade grew by a healthy four per cent in 2017, similar growth, led by container and dry bulk shipments, was forecast for 2018 by the United Nations Conference on Trade and Development (UNCTAD).

But the UNCTAD annual review of maritime transport also contained a cautionary message that obviously alluded to the trade wars initiated by President Trump against China, Canada, Mexico and the European Union.

“While the prospects for seaborne trade are positive, these are threatened by the outbreak of trade wars and increased inward-looking policies,” the UN agency said, adding: “Escalating protectionism and tit-for-tat battles will potentially disrupt the global trading system which underpins demand for maritime transport.”

U.S. tariffs on Chinese imports are expected to hit the trans-pacific trade in the near future. “But right now,” reports Barnard, “the trade is on a roll, with spot rates almost double the level a year ago at around $2,500 per forty-foot container (FEU) as U.S. importers rush to boost their stocks ahead of the hike of U.S. tariffs in Chinese goods from 10 to 25 per cent in January 2019.”

On the other hand, freight rates from China to North Europe have tumbled by more than a quarter since the peak season high in August. And carriers cancelled eleven round trips in October, removing around 200,000 TEUs in response to weakening demand.

Business as usual

As far as the USMCA trade agreement is concerned, the impact on the marine shipping and ports sectors in Canada is still being measured at this early stage prior to ratification.

“Since our member vessels trade between Canadian and overseas ports, the revised NAFTA has little effect on their operations,” remarked Michael Broad, president of the Shipping Federation of Canada. “There may be some fallout from the agreement with respect to products such as auto parts which may be imported into Canada from, say, Asia or Europe. Of more concern would be tariffs applied against goods originating from countries outside North America and bound to the U.S.”

Paul Pathy, president and CEO of Fednav Limited, points to some silver linings amidst the tariff-filled scenario.

“First of all, “ he said in an interview with Canadian Shipper, “the new NAFTA deal has no impact on anything we do, to my knowledge, as a shipping company. Initially too, the Trump tariffs have had no effect. We are bringing in a lot of steel in from Europe for the United States. The U.S. economy is booming and people are buying steel even though prices are very high. We are also bringing in steel slabs from Brazil to Hamilton.”

-Leo Ryan