In our last article we discussed the challenges the Prairies face in shifting to direct-export channels -- namely trade-risks, grain-handling, container-supply and buyer-attraction. In our opinion the latter is the most critical challenge that we must pay attention to at this stage, not to diminish the importance of the others but they can be tackled as trade-facilitation efforts bear fruit and contracts start to materialize.
But we acknowledge that first and foremost on producers’ minds is lack of container supply to fulfill direct-sales, making them weary of the prospects of what we are advocating -- containerized exports. Thus, we decided to follow up on this topic to help alleviate their fears; this is a challenge, but it is one that can be overcome if approached rationally with an understanding of how container-flows are managed.
At the outset we want to be upfront that producers are not wrong based on their past experience, or what they observe from the experiences of others. All shippers face formidable difficulties when they need containers in the interior, but we must understand that containers are not motorized-units that can be dispatched to where you need them; their flows are managed by their custodians, the shipping lines.
Exporters across the Prairies see train-loads of containers passing them by or stacked up in rail-yards. The natural inclination is to ask the railways to release one of the many empty containers in transit. But railways do not control container movements; shipping-lines do, as part of their global trade-flow-management patterns. Thus, it is rare that shippers can find empty containers to ship export-loads where they want.
On the bright side, we know that significant volumes of empty containers return empty from both Vancouver and Prince Rupert, mainly because they need to be re-positioned back in Asia to serve the head-haul trades. The only solution for us is to work with the shipping-lines to pull them inland for grain-trades, which is not an insurmountable challenge as long as reliable return arrangements can be made.
At the root of the container shortage problems we face is that these types of shipments, particularly in grain-trades, tend to be sporadic, one off orders to fulfill spot-sales. Shippers expect to find containers at the door-steps of the railways when export-loads are ready to ship. But little effort is made to plan for container supply with the shipping-lines, which insist on steady flows and reliable returns to the coast.
We see this routinely in pulse-trades, but not in the operations of a sophisticated shipper like AGT, which exports large volumes in containers (both east and west) by working closely with both the railways and shipping-lines. Same can be duplicated in other direct-trades, but key success-factors are sustained contract volumes, working relationships with shipping-lines, and reliable service-plans in moving containers.
Empty container capacity on the coast
We have been citing empty containers returning from the West Coast, while that capacity could be put to productive use to carry grain-exports to Asia. There are challenges associated with pulling those containers inland to facilitate door-to-door shipments to end-users, but at least grains can be moved to the coast by truck or rail to transship in containers to end-markets. We will come to these options next, but here let us first quantify the empty container capacity returning from Vancouver.
In 2020 (most recent year that statistics are available for) inbound container traffic to Vancouver was 1.85 million TEU -- 97% loaded, and only 3% empty. The same year outbound container traffic was 1.61 million TEU, 65% loaded and as much as 35% empty. This empty capacity was 570,000 TEU, 88% 40-ft, 7% 20-ft and 5% 45-ft containers -- that could carry 10-15 MT of grain-exports rather than returning empty.
From 2015 to 2020, inbound container capacity increased by 17%, mostly loaded with empty capacity varying in the 2-3% range. Over the same period, outbound capacity increased by only 9%, with more containers being diverted elsewhere (diversions increasing from 7% to 13%). At the same time, the loaded share of outbound capacity declined from 72% to 65%, with 570,000 TEU returning empty in 2020 compared to only 408,000 back in 2015. Thus, more containers are being diverted elsewhere and also a larger share of capacity is leaving Vancouver empty.
In 2020, the loaded share of outbound container capacity was 1 million TEU, carrying 14.5 MT of exports -- 5.5 MT forest-products, 4.8 MT agricultural-products, 4.2 MT other commodities. Among agricultural-products, 3.1 MT were specialty-crops, 0.5 MT feed, 0.8 MT cereals and 0.4 MT wheat. The latter, wheat, was first reported in 2018 and in two years increased by 66%. In total containerized agricultural-exports increased by 40% since 2015, while forest-products shrunk by 20%. Still, there remains more empty capacity to double or triple containerized agricultural exports.
We do not have the same level of statistical granularity on Prince Rupert traffic, but in our last study we had estimated outbound container capacity at about 500,000 TEU, a third of Vancouver. Also about a third of this capacity was returning empty, roughly 165,000 TEU -- capacity for another 3-5 MT of containerized grain exports.
Utilizing that capacity in grain-trades
As we just displayed the rough estimates, there is considerable container capacity returning empty from our West Coast. In the long-run there are ample opportunities to fill all these containers, and even more, with direct grain-exports. But in the short-run the shift to containerized exports can only be managed gradually with more modest volumes. Producers will need time to respond to new trade-channels, while the shipping-lines make adjustments to flow-patterns and container-supply.
Next critical question is how to reposition those empty containers where they are needed for grain-trades. If shippers from Asia knew that certain container-loads were routed to the Prairies, they would ship direct rather than de-stuffing most containers on the coast for further distribution. But this will take time; in any event, Prairie-bound volumes would be small. Thus, our starting assumption is that most if not all containers released to us on the coast would be empty for us to move inland.
Repositioning these empty containers anywhere in the Prairies would be too costly to bear by grain-exporters or their customers, importers. One option is to utilize this capacity to ship domestic traffic from the coast to the interior, what now moves in vans -- cabotage rules allow foreign-containers to handle domestic loads within one year of entry. These re-positioning hauls will not cover their full costs, but at least they will compensate for a good part of what grain-trades would have to absorb.
The other option is to keep the empty containers at or near the coast, and move the grain-loads there by truck or rail to be then stuffed into containers for export. This may pose a challenge to identity-sensitive loads, but in most cases appropriate remedies can be found to protect crop-integrity within IP-regulations. This will also require facilities for grain-handling and container-stuffing, but our logistics partner has a number of facilities to accommodate these functions (at least near Vancouver).
In summary, the best solution, for both us and producers, is to find empty containers near grain-sources, but we can also deal with empty containers released to us on the coast. One option is to draw on other traffic to re-position these containers inland to be then loaded by grains for export. Another option, probably the most practical in the short term, is to move grains to the coast by truck or rail to be containerized.
Enticing shipping-lines to cooperate with us
Trade imbalances across the Pacific, giving rise to empty container returns to Asia, is not a new phenomenon, dating back decades and driven by the export boom from Asia Pacific. Shipping-lines used to make an effort to generate low revenue back-hauls, like paper or other waste, but these trades are in decline. But they benefited from containerization of forest product exports -- pulp, paper, lumber, even logs.
To utilize the capacity still returning empty across the Pacific, shipping-lines would prefer that grain-exports be moved to the coast to be containerized. Their basic fear is that if they start releasing containers inland, they would lose control over port-return times. This is of critical operational importance to them, as they have to reposition containers on scheduled sailings back in Asia to serve eastbound trades.
However, if the inland logistics arrangements could be relied upon for timely returns to the coast, they would obviously prefer to carry loaded containers back across the Pacific, as they will be earning additional back-haul revenues. As long as port-return times are reliable, clearly shipping lines will be open to the proposition of releasing containers inland. But they would have to assign more containers to these routes.
If the return time on a given ocean-route across the Pacific is 2 weeks, and if the inland journeys into the Prairies are going to add another 2 weeks to those journeys, then the shipping-line will have to double the number of containers on that given route. If the inland delivery is going to add yet another 2 weeks to the trip in Asia, then the number of containers assigned to that route will have to be tripled.
From a shipping-line’s perspective, as long as containers are being properly utilized, and circulating efficiently through their routes, adding containers to any particular route will not be a concern. Containers are cheap assets and even modest additional revenues would justify introducing more of them; container-capacity per se is never an issue, but their utilization and circulation are key concerns for the shipping-lines.
Here we focus on direct dealings with the shipping-lines but it is worth keeping in mind that a significant share of their capacity is assigned to freight-forwarders. We are also continuing a low level dialogue with them; some have already contacted us in a promotional capacity. We will intensify these discussions in the coming months.
Next steps in our alliance strategy moving forward
Trans-Pacific trades are served by a number of shipping-lines, majors like Maersk and COSCO as well as many others. Though the market is highly competitive, there are alliances and capacity sharing arrangements between them on different routes. We have to establish close relationships with all the players in this community, but giving priority to the two majors. Since we do not yet have visibility into our flow-patterns, initially we have to cast our net quite widely before consolidating relationships.
We already had preliminary meetings with the major shipping-lines to discuss our trade-facilitation initiatives. There were no surprising responses as we had worked with them in the past on both sides of the Pacific; so we did not get any push-back to our concepts. In fact, they were quite positive and encouraging with a desire to cooperate as long as their principal concerns were taken care off -- necessity to avoid any speculative initiatives, and insistence on reliable container-returns to ports.
As we had expected, shipping-lines are open to releasing empty containers at or near port locations, as long as we can commit to a couple of day turnaround from taking possession. But they will also have to give consideration to our own delivery points in Asia Pacific, as they want those containers to be returned to their next-port (or loading) positions. These discussions gave us impetus to give priority to our own container-loading plans at or near port locations in our strategy moving forward.
There were also encouraging hints that small pools of containers may be becoming available on a regular basis at key Prairie centres. Many of these hints were shared in confidence, thus we cannot reveal any more than these general references; also, they were too vague in nature to be useful for any strategy purposes. However, we will be holding another round of discussions in a couple of months, and will be reporting on the details, as we promised on our portal when we first launched it.
Now we are targeting another update on container supply issues in three months, with a clearer picture of what we have in store -- at or near port loading options, repositioned containers that can be made available for grain-trades in the interior, and any surprise discoveries of empty container pools across the Prairies. Thus, our container-supply initiatives are underway, and we encourage you to stay tuned.