Shipping Paradox

It looks like fair seas and following winds for U.S. recyclers sending container ships to Asian markets."I would describe exports of recyclables in containers as a growing business," says Paul Bingham, principal in the global trade and transport practice at Global Insight Inc., Waltham, Mass. "Demand out of China and all of Asia is particularly strong."

Not that long ago, it might run a U.S. recycler $1,800 to send a loaded container from the West Coast to China. Today, that same container can be had for a few hundred bucks.

"It’s like a K-mart Blue Light special," says Mike McInerney, president of Celtic Logistics, Greer, S.C. "There are some huge bargains, but only 10 minutes to make the purchase."

BACKING UP. With McInerney’s help, as part of our story we can follow a typical shipment of scrap paper from the Eastern United States to Shanghai:

"Backhaul rates are very cheap," notes Bingham. "America is buying so many finished goods on the import side that carriers can’t fill up the empties for the trip back to Asia. Big piles of containers are sitting empty."

The steamship lines prefer any revenue to sending a box back empty. Even if they make only a little money, it is better than nothing.

The ships make their money on the trip from Asia to North America. The same container that ships baled paper to Asia, when filled with finished goods destined for Target or Wal-Mart, will fetch $3,500 to go to the United States. Even with a product like finished paper, it will command $2,400 for the trip to North America. "It’s crazy," McInerney says. How long will it last?

"If anything, the risk is that prices will drop further in 2007," Bingham says. While Global Insight economists predict more growth in containerized shipping, it will be at a slower rate.

Meanwhile, capacity will grow. Steamship lines are betting business will increase. Super-sized ships are on order from Korean and Japanese shipyards. "We expect a 12 percent increase in bottom capacity, but we do not expect trade to increase," Bingham says. Orders for those ships extend to 2009. Plus, old ships (with smaller capacity) are not going offline.

"That translates to downward pressure on ocean shipping rates," Bingham says.

And that downward pressure is regardless of fuel rates. Even with bunker fuel adjustments, if fuel prices are less than $80 per barrel, costs will drop.

Container port throughput in the Americas expanded by 121 percent between 1995 and 2005, according to a report by Ocean Shipping Consultants Ltd. (OSC), Surrey, U.K. That number stands at 71.2m TEU (20-foot equivalent units).

OSC says that the U.S. Pacific South range of ports increased its dominance in North American market share during the 1990s, but the growth has leveled off. The share of shipments has remained in the 39 percent range since 2003. The other U.S. and Canadian port ranges all lost market share after 1995. However, the booming trans-Pacific traffic helped to boost the amount of material being handled on the West Coast—from Canada to Mexico.

RAIL AND TRUCK. The one sticking point in the export business is here at home. Competition for both trucks and rail is strong. In fact, with increased diesel fuel costs, changes in the allowable hours of service and a recent inability for the trucking industry to attract new drivers, the pressure is on.

Most truckers do not haul only recyclables, either. "Forget about the ocean portion—getting your box to port will be the most expensive part of the trip," Bingham says.

A Midwestern recycling company will pay a lot more for domestic hauling than it will to move scrap across the Pacific. It can cost $800 to move that container from Chicago to Los Angeles. Even drayage for a West Coast shipper can be as much as for the ocean trip. In fact, it is the low cost of the ocean part of the trip that makes exporting cost-effective.

Indeed, the long ocean voyage will cost about $12 per ton to China. But going from Chicago to Los Angeles costs $30 per ton.

It takes a couple of days to get material to the port and get it loaded. Some new, very large vessels take more than a day to load.

TRANSIT TIME. Our container of scrap paper will have a lot of company. Booming imports from Asia and steady economic growth in the western United States has put particular pressure on ports on the Pacific seaboard, OSC says.

Once a container of scrap is on a ship, sailing time depends on port-of-call sequence. Few ships make one-stop trips from Puget Sound to Shanghai or Los Angeles to Hong Kong.

"Two to three weeks on the water is a good rule of thumb," Bingham says.

Material moving from the Atlantic Seaboard and transiting the Panama Canal will likely spend 22 days on the water. So, the total shipping time could be more than 45 days, door to door.

In 2004, recovered paper was by far the leading commodity filling up containers shipped from the United States to China at some 524,000 containers. Next came mixed scrap metals at 172,000 containers. Then came cotton with 94,000 containers.

BACK TO THE USA. As soon as the container is emptied at any Asian city, it typically takes a day or two to refill it and have it on its way back to the United States or Europe, usually with high-value finished goods.

Container is reloaded with finished goods headed back to the United States and is delivered to Port of Shanghai. The same container our scrap paper dealer paid $400 for now costs Wal-Mart $3,400 for the voyage to North America. That scrap paper, shipped from the eastern United States, is delivered to the paper mill to be converted into finished product.