Scrap exporters must navigate among carrier bankruptcies, new regulations, and increasing shipping costs to stay afloat.
By Megan Quinn
Ocean shipping is an intricate and turbulent business, and changes in ocean carrier supply and demand can deeply affect recyclers’ bottom lines. This past year, shipping line bankruptcies, sluggish demand for scrap, the strong dollar, and other economic factors were top of mind for scrap exporters. “The business is always changing,” says the president of a West Coast metals processor and broker. “You have to look at this not as a problem but as a challenge.”
U.S. scrap companies seem up to the challenge: In 2015, the United States exported over 37 million mt of scrap commodities valued at $17.5 billion, with recovered paper and ferrous scrap making up the bulk of the exports by volume, according to U.S. International Trade Commission data. China reigns as the major export destination, but slower economic growth, lower demand for scrap imports, and lower commodity prices have affected export volumes to China and other major destinations, such as India, Taiwan, Turkey, and South Korea.
Exporters like the West Coast recycler, who ships metals to some of those destinations, see these global forces in action. Recent gloomy market conditions and rising costs at West Coast ports have made exporting scrap more difficult lately, the company president says. Yet West Coast scrapyards rely more and more on exports because manufacturers are leaving the region due to “burdensome and high regulatory costs” and other issues, he says. As of early 2017, just one ferrous scrap consumer, a rebar mill, remains in California, for example.
Scrap exporters rely heavily on ocean shipping lines to get their cargo from scrapyards to customers in far-flung locales. Regardless of the commodity, they know they must comply with a host of regulations and logistical matters throughout the supply chain to make sure their shipment makes it to their buyer quickly and efficiently, all while paying as little as possible for shipping costs.
The highs and lows of shipping prices
Recyclers looking to save money on overseas shipping got a big break around 2015, when ocean shipping prices started to take a nose dive. Sluggish demand and excess hauling capacity drove carriers to offer very low rates, which were as good for recyclers’ budgets as they were bad for the carriers’ bottom lines. These low prices lasted through most of 2016, the West Coast recycler says. At the lowest point last summer, it cost about $10 a ton to ship metal scrap to Taiwan from the Port of Los Angeles—about half of what it normally costs, he says.
Low shipping costs were especially welcome to paper exporters, says Joe Pickard, ISRI’s chief economist and director of commodities. Because paper is a lower per-unit cost commodity than metal, paper exporters “really live and die by freight rates,” he says. George Chen, president of G&T Trading International Corp. (Clifton, N.J.), agrees. High ocean freight rates really hurt his business, especially because exports are 85 percent of his business each month. He sends OCC, ONP, and sorted paper to places like Taiwan, Indonesia, and Thailand. Yet recyclers realized the cheap freight rates were both a blessing and a curse, the West Coast recycler adds. “In the past two years … the freight costs were so low, it was becoming unsustainable” for carriers, he says.
These economic conditions caused the 20 largest container lines to lose a combined $5 billion in 2016, the Wall Street Journal reported in March. The most high-profile casualty of this economic downturn was South Korea’s Hanjin Shipping Co., at one time the world’s seventh-largest container-shipping line. It went bankrupt in August 2016, causing major disruptions to global trade. Scrap exporters with containers aboard Hanjin ships were left wondering where their containers would go and what would happen to their cargo, says Billy Johnson, ISRI’s chief lobbyist. Some Hanjin ships stopped short of their port of call to avoid seizure, meaning cargo wasn’t offloaded and remained at sea for weeks. And when the ships did come into ports, many terminals, truckers, suppliers, and other companies refused to unload and move the cargo unless Hanjin could guarantee payment for their workers’ services.
In addition to causing major cargo delays, Hanjin’s bankruptcy meant other carriers rushed to fill in the holes in the routes where Hanjin’s shipping lines used to be, especially between South Korea and the United States and some Chinese ports to the U.S., Johnson says. Many took advantage of the situation by substantially raising the rates for shipping containers, he says.
The spike didn’t last. Prices started dropping again and continued to stay low throughout 2015 and 2016. The shipping industry has since moved back toward a more even keel now that the effects of the Hanjin bankruptcy are smoothing out. Some of the largest carriers have created three main alliances to share resources and container space on their ships as a cost-saving measure. These alliances are thought to move about 90 percent of all cargo across major trade routes, Johnson says. Carriers also have been able to raise prices since last year by idling ships.
Now, analysts say, ocean freight rates have started to recover from the trough, and shipping prices have been rising steadily so far in 2017. As of early April, metal scrap cost between $20 and $25 a ton to ship to Taiwan, the West Coast recycler says. Prices to ship to other destinations seem to be going back up, too, he says. Shippers should expect those prices to continue to rise, says Matthew Samsonovitch, director of sales and operations for Destination Logistics (Montreal). “Slowly, as Hanjin is out of the picture, ocean carriers are going to increase their freight [prices] and shippers will have no choice but to adapt,” he predicts.
Though Hanjin isn’t the first ocean carrier to go out of business, its bankruptcy left shippers feeling unsettled and wondering how to manage their financial risk in the future, says Mark Malloy, vice president of logistics administration for Metal Exchange Corp. (St. Louis). Malloy says the new THE Alliance, which comprises NYK Line, Hapag-Lloyd, “K” Line America, MOL, and Yang Ming Marine Transport Corp., has promised to offer an emergency assurance fund, which would help protect shippers if one of the alliance’s members goes out of business. “If one partner falls flat, [the others] share the costs to resolve the situation,” he says. “This has been a really popular offering and something shippers should pay attention to.” Yet Malloy says the other two major shipping alliances, the 2M Alliance and the Ocean Alliance, “scoffed” at the idea of providing something similar. He hopes the Federal Maritime Commission can help convince the other carriers to follow suit. “The bottom line is, the structure of global container shipping is not favorable to the shipper or the cargo owner,” he says. Without emergency assurance funds or other offerings that help insulate shippers from the fallout of ocean carrier bankruptcy, shippers are left with little leverage, he says.
Samsonovitch suggests that shippers diversify their carriers to avoid delivery problems associated with “the next Hanjin.” And if shippers tend to use just one carrier, they should be especially aware of that carrier’s financial situation, he says. In fact, in the days just before Hanjin filed for bankruptcy, some customers called Samsonovitch and asked him not to book their cargo with Hanjin, he says. “They’d heard bad things.” The Hanjin bankruptcy, as well as recent “rumblings” that other carriers might follow suit, should be a wake-up call for shippers to “take a little bit more ownership” and more closely follow the broader economics of global ocean shipping, he says. If a deal seems too good to be true, it probably is. “I’ve tried to say, ‘The lowest, cheapest freight [might not be the best], because if that company goes belly up, it costs you thousands to get your containers back,’” he says.
Yet some recyclers say it’s impossible for them to keep tabs on every nuance of the shipping lines’ financial trials and tribulations. Even when they’re well-informed, they’re still at the mercy of the shipping lines—and the prices they offer. The recyclers’ priority, the West Coast recycler says, is to get their material shipped to the right location for the right price. “All we need to know is where the metal should go, where the demand is, so we can get a leg up and get ahead of the shipping costs.”
New fees become the norm
Even if recyclers can actively manage the ocean freight costs, increasingly they face other charges before their container arrives safely at its final port of call. Chassis costs are one example, says Jennifer Chao of Uni-All Group (Atlanta). The chassis, used to transport the container out of the port to its end destination, used to be included in the cost of the container, but now Uni-All has to rent the chassis for about $50 or $100, she says. “It’s not a huge cost when you first look at it, but it adds up” once you have more and more containers to ship, she says. Sometimes there’s also a mounting fee of $25 to $35. “It’s like the airlines,” she says. “You used to not have baggage fees. This is the [ocean shipping lines’] way of making money. We have limited choices of who we ship with, and once one company decided to do it, they all followed.” Chen agrees these costs are becoming more common. “Many shipping lines put the chassis as a surcharge, then increase the cost also,” he says.
The West Coast recycler says chassis costs are even steeper for his business. He needs a specific kind of three-axle chassis to transport 20-foot containers destined for places in Asia that cannot handle 40-foot containers because of bad roads or other infrastructure challenges. Competition for these chassis is steep, meaning he sometimes pays two and a half times the normal cost for one when he needs it right away, he says.
Some state and regional authorities have proposed or implemented additional container charges. In April, ISRI and other organizations wrote to the South Coast Air Quality Management District to oppose two container taxes that would hit businesses that export products through California’s ports. One tax would cost shippers $35 per container; the other would cost $100 per container. The two taxes could raise an estimated $385 million and $1.1 billion each year, respectively, according to SCAQMD draft funding proposals. In the past, in states that have imposed this type of tax, “the rationale is to pay for replacing older, more polluting trucks,” Johnson says. “In this most recent case, it is probably to help balance the [California] state budget.” In the letter to SCAQMD, ISRI and 98 other organizations argued that the proposals did not specify how the funds would be collected or what programs they would support, and the plans were made “without any consideration as to the impact that the tax would have on jobs or port competitiveness” or local businesses. These measures must pass the California Assembly and Senate and be signed by the governor before being implemented, Johnson says.
Coping with Chinese regulatory changes
In addition to monitoring shipping line health and changing fees and rates, scrap exporters must stay on top of local and international shipping regulations. Many shippers that do business with China are carefully tracking the rules outlined in China’s National Sword 2017 initiative. Launched in February, National Sword is meant to crack down on illegal imports of “foreign waste” such as industrial, electronic, plastic, and household waste. Under the yearlong campaign, authorities have introduced more stringent inspections and have begun opening all containers at Chinese ports. Shipments that don’t meet regulations are being sent back, says Adina Renee Adler, senior director of government relations and international affairs for ISRI.
It could take a few months to see the true impact National Sword has on trade, Adler says, but since the crackdown went into effect, the most noticeable impact is that exporters of all types of scrap commodities are experiencing delays at Chinese ports. “Customs authorities are inspecting 100 percent of the containers. … They feel they need to check everything against the paperwork to make sure what’s being claimed
is actually in there,” she says. To carry out these
in-depth inspections, Chinese ports need resources and staff. Some ports have closed because they don’t have the infrastructure for that extra checking, she says. To speed up the movement of material, some exporters are considering rerouting their shipments to different ports, but several recyclers have told Adler they are worried about paying extra transportation costs associated with such measures.
Exporters also worry about the possibility of other, unforeseen charges related to National Sword inspections, she says. One recycler that has experienced slowdowns at Chinese ports told her it had been shipping under terms that required payment before the material arrived in China. Some of its Chinese customers anticipated the port slowdowns and are fine with absorbing the inspection-related costs, but some are not. This recycler now worries that Chinese customers in the future might not want to pay for the material until it clears customs, which raises questions about who will be liable for port charges or storage costs. “If [the recycler] is liable for these costs, and the shipment is rejected, they might not get paid,” Adler says.
Indeed, some companies have stopped shipping certain scrap commodities to China for fear that their loads might be rejected and returned to their point of origin at the shipper’s expense.Adler says rejected loads are a big fear of exporters, which should be no surprise considering their experiences during the 2008 recession and Green Fence, an earlier Chinese crackdown on illicit imports. Compounding that worry, Adler says, was an announcement from the Chinese government in April that it planned to expand the list of materials subject to its import ban, but it did not name the items that it would add. Some wonder if they should consider shipping to countries other than China instead. “That creates uncertainty, too,” she says. “They might incur extra transportation costs, and those countries might not be willing to pay the same [price] China is for the same material.”
Adler cautions that National Sword has not been in place long enough to determine if these fears are well-founded, but she is collecting information and feedback from ISRI members about their shipping experiences to China to monitor the situation. “We definitely understand that China would want to crack down on illegal trade. We just want to make sure that [National Sword] is not impacting legitimate trade, too.” (Members with information or concerns about National Sword’s impact on their business can e-mail her at firstname.lastname@example.org.)
New regulations don’t always result in major business changes for scrap exporters. In July 2016, the International Maritime Organization began enforcing the International Convention for the Safety of Life at Sea, or SOLAS, which requires all shippers to provide the verified gross mass of each packed container. If the shipper doesn’t provide the VGM to the ocean carrier and port terminal, the container doesn’t go on the ship. Knowing the accurate gross mass of a packed container is critical to make sure cargo is stowed and stacked properly to keep container stacks from collapsing or falling overboard, IMO says. SOLAS has always required shippers to declare the gross mass of cargo and containers; the change requires verification of the mass.
Though scrap shippers originally were wary of how SOLAS enforcement might affect their business, Chao and others say most recyclers already know the weight of their materials before they ship them, so compliance has not been a problem. “For us, it’s just an extra thing you have to do,” Chao says. “Like any new regulation, you learn to comply with it.” The West Coast recycler adds that the scrap recycling industry wasn’t the “intended target” of the regulation. The agricultural sector and other shippers that don’t routinely record their material weights likely faced bigger compliance challenges. Recyclers “don’t ship loose boxes [or agricultural materials]. We know our weights. It’s just a matter of having the right paperwork.”
Shippers say there is always a degree of uncertainty related to ocean shipping, whether it’s the day-to-day costs, future regulations, or the financial health of the carriers they rely on. Staying on top of the news is one way to anticipate changes, even if shippers are unclear on how they might be affected down the road.
Shippers are watching the three new alliances to see how they affect their business. “There’s the promise of better, faster service, but we have to be practical and know they’re doing this to save themselves and save their costs, too,” Malloy says.
Uni-All’s Chao says past alliances haven’t helped her business much, and she isn’t sure if these alliances will be much better. One benefit for the carriers is that they can share space on a single vessel, which saves the companies money. Yet it’s a logistical headache for shippers, Chao says. For example, she recently tried to book shipping with Yang Ming, which told her it only had room for a few of her containers. Yang Ming was sharing its vessel with another company, CMA GCM, which was able to book her instead. Ultimately, the cargo left on the same ship, even though Chao booked it through a different company. Because companies only have a certain number of container spaces allocated to them on a single ship, it’s likely that the ship left port without all companies filling up their container allocations. “The vessel is not full. The [companies] should be able to talk to each other and say, ‘Hey, we need [space for] 20 more containers, do you have any we can use?’ They don’t do that. It loses the meaning of the word ‘alliance.’”
Samsonovitch agrees it will take time to see the full scope of how the new shipping alliances affect shippers. Ultimately, he hopes the alliances signal a more stable time for ocean carriers, which means scrap exporters won’t be left high and dry without a reliable carrier to move their scrap. He doesn’t see some of the logistical problems going away, however. “Having to constantly wait and depend on the ocean carriers is frustrating” for shippers, he says. Yet it keeps him in business—his company, which handles shipments and exports specifically for the scrap metal industry, tackles such logistical needs so recyclers don’t have to, he says. Even so, “we are constantly looking for ways to work more efficiently,” he says.
Shippers want stability, but they also want more competition for their shipping dollar, Johnson says. For some East Coast ports, the recent Panama Canal expansion might help. The expansion, which was completed in June 2016, doubled the waterway’s cargo capacity and created a new lane of traffic by constructing a new set of locks. Previously, the canal’s locks could fit vessels that carry up to 5,000 20-foot-equivalent units. After the expansion, vessels carrying 13,000 to 14,000 TEUs can go through, according to the Panama Canal Authority.
The canal’s expansion should make East Coast ports more competitive, says Pickard, especially on routes to and from Asia. Yet many of those ports are not yet equipped to handle the larger ships coming through the canal. Right now, only four East Coast ports are deep enough for the larger vessels: the Port of Virginia, the Port of Baltimore, the Port of Miami, and the Port of New York and New Jersey. Savannah and Charleston are currently dredging their ports, with work scheduled to be complete in 2019 and 2020, according to the Georgia Ports Authority and the South Carolina Ports Authority.
Even if these “mega vessels” can get into the deeper ports, Malloy says, the ships cause crowding at terminals. “These vessels with 18,000 TEUs are pulling into terminals in ports that have been accustomed to under 12,000 TEUs,” he says. That means more containers are coming [and going] at once, causing congestion and leaving the shippers responsible for additional costs when space runs out, he says. He also sees an impact on truckers, who sometimes wait in long lines to get into and out of terminals. When they spend more time waiting than driving, “they may pass along those extra costs” to shippers, he says. This congestion will cause further strain on port infrastructure, which is slow to catch up to the demands of modern global container shipping, Malloy says.
Yet ports also are starting to think of creative approaches to manage recent changes, some of which might benefit shippers in the future, he adds. As the new alliances take hold, shippers anticipate that the carriers will share vessels, which could limit the number of port calls carriers make and reduce the number of ports that get to handle large shipments of cargo. To stay competitive, state port authorities in Georgia and Virginia recently created their own alliance. The deal divvies up the work mega-ships and new alliances create and could give both ports a boost in business by allowing them to jointly acquire operating systems and equipment, share information on operations and infrastructure, and jointly draft agreements with carriers and shippers, the Journal of Commerce reported. The FMC, which approved the port alliance, says the agreement does not permit the two port authorities to jointly negotiate, set, and approve terminal rates or charges. Other ports might consider similar alliances in the future, Malloy says. “It’s definitely something we’re watching.”
Megan Quinn is reporter/writer for Scrap.