January 20, 2022
Kira Nash caught up with Kelle Horn of Pacific Rim Shipbrokers about her business and the implications of the global shipping crisis on trade.
The company itself started in 1984, and in around 2015, the owner was ready to retire. Two of the other employees, Julie Khan and Jennifer Montgomery, and I had worked together for a decade plus, and we decided that we'd rather continue to work together than to look for other jobs. So, after a lot of negotiation, we purchased the company in 2016. We basically had six months of capital to try and make it fly, and that was five years ago. So we're pretty happy about that.
When we bought the company, I thought about the USAID cargoes — pulses, wheat, corn — things that the USDA sends out through USAID or through the World Food Program. And I thought “Oh, I bet the Federal Government would care that we're a woman-owned, small business.” So I registered, and I discovered that we are the only all-women ship-brokering firm in the United States. There are probably others, but we're the only ones registered, and we haven't come across any others. At Pacific Rim, Jen and I handle the sales and account management, and Julie is the HR controller / CFO part of the company. Thankfully, there are a few more women entering the industry now, but when we go to conferences, out of 100 people, there are still only maybe 15 to 20 women.
We haven’t really been able to do anything with the USAID cargoes but we’ve pursued government opportunities and we won a contract with the US Navy. We charter ships and supply them for when the submarines are doing their sea trials, which helped us diversify our portfolio. However, we are primarily focused on ship brokering with dry bulk. Thank goodness we started winding down the container division of our company last January; our long-term employee who handled the container side was ready to retire and really sick of containers! It was a lot of busy work, and the situation deteriorated over the years, especially with the carriers’ poor customer service and their lack of concern for the rolling bookings and delays, etc. It was very frustrating for us, because we pride ourselves on being customer-centric. We have clients who have trusted us for 30 years. We’re small, but we’re very niche. There are a lot of larger ship brokerage firms out there but customers often get a different person on the phone every time or a junior broker who has just been handed the account. Our customers know they can rely on us.
For some of our clients, we are their freight department. They don’t want to know all the minutiae of ocean freight and they want us to take care of it so they can focus on their core business. Then we have other clients who have their own chartering department but we still go out and negotiate the freight rate and contract terms. One of the things we’re known for is parceling, where we find space on bulk ships: one to two holds versus chartering the entire vessel. We also help people who are selling FOB or purchasing CFR to transition into controlling their own freight, managing that risk and deciding if there's risk or reward.
Some people say “I know I am paying $2 per metric ton by purchasing CFR, but I don't want to deal with the risk.” Whereas we have other clients who say “Let's look at my portfolio and see where we can balance the risk and the potential savings by purchasing a blend of CFR and FOB.” Because of what's happening in the freight market right now, we have been approached by a lot of container players who either want to move their things bulk or put their containers on bulk ships. Parceling used to happen a lot more, but then containers were so inexpensive and a lot easier on the receiving side — sometimes on the loading side as well — that a lot of that smaller parcel/mini bulk business went to the container ships. Now they're coming back after being snapped so hard by what's going on.
Shipping is pretty arcane. There are a lot of really challenging clauses within charter parties, and things that are hard to understand; it’s really easy to get burned on laytime and demurrage if you don't know what you're doing. I worked for 6-7 years with an owner operator and I did the commercial vessel ops. And Jennifer worked in chartering, so we've worked for an owner, we know what those clauses look like in practice, why they want to have them there and how the other side of the negotiating table is contemplating the business. So, often, we can recognize wording that could adversely affect our charterers and negotiate a change in that wording. But sometimes, we have to explain to our charterers that the other side is there to make money, too. They have their own issues, and it can't all rest on one side of the table. We always hope to have both sides be happy even if they’re not getting exactly what they want.
Absolutely. Some of the companies that we support are very big. They're mining copper, they're moving millions of tons of grain because they have mills that are supporting industrial bakeries in Southeast Asia or Latin America, or they’re soda ash clients in the glass industry who ship several hundred-thousand tons of material per year. So we may be small but we're helping that department within a large company be able to manage the logistics. We meet with the ports and agents and we try to stay really close to them. We get a lot of referrals, which always makes us happy and feel good that people trust us. We also work with the carriers. Oftentimes they have to lease each other’s ships; we call this "time charter". So although they booked the cargo for their own vessel, if there are delays or issues with their own tonnage they then need to lease/time charter a ship from one of their competitors in order to perform the voyage they booked. So we also negotiate between competitors, which is probably my least favorite thing to do but it’s part of the job. Overall, though, like in most human interactions, people want to be heard and understood so it is always important to see and understand both sides of the negotiations.
For the last 12 years or so owners, carriers and operators have been operating at break even or a loss. That’s true for container ships, too. Now, they're finally in the money and in the driver's seat because cargo is king, right? But, in terms of what’s happening now, while I'm sure some people are claiming they saw this coming, nobody saw that freight rates were going to explode because they've been really depressed for a long time. So, we had a perfect storm of COVID-related congestion and delays along with low order books to create the high freight rates of 2021.
In the run up to the 2008 recession, shipping was even more expensive than it is now. It just went bonkers with the whole bubble that was created with mortgage-backed securities and everything else that happened in the early 2000s. A lot of owners were sitting on a lot of cash, there were great incentives, and they all ordered a bunch of ships. Then everything collapsed but it takes three to five years for a ship on order to arrive. For the last 10 years, the cargo hasn't been there but those ordered ships kept arriving between 2010 and maybe 2017. Eventually, in 2018-19, carriers stopped ordering vessels, firstly because they could not continue losing money and secondly because of potential changes on the horizon in fuel-consumption regulations, exhaust systems and other technical modifications.
There were multiple governments propping up shipyards because they couldn't let industries that support so many well-paying jobs and domestic manufacturing, etc., collapse. Interest rates have been historically low and that led to cheap money. Coupled with big incentives from the shipyards, that cheap money allowed the industry to keep hobbling itself with oversupply. Then, when IMO 2020 was on the horizon (the IMO 2020 rule restricts the amount of sulfur allowed in the fuel oil used in certain ships) and with further fuel restrictions, and different things being contemplated, everybody held off building. If you’re investing in an asset (ship) worth millions of dollars that you’re going to hold onto for 15 or 20 years, you don’t want to build something and then have to spend $3 million retrofitting it with a scrubber or find it won’t run as efficiently on low-sulfur fuel. This happened to some owners with IMO 2020. So everybody’s held off for the last few years trying to figure out what kind of engineering is going to be required, what technology, and then there was the COVID congestion and in markets that were just improving. So, it was just this perfect storm for freight rates. I don't think it needed to go as high as it did. I think that a lot of that was — especially with the container markets — pretty egregious, where people were used to spending $5000 and $9000 per container, and now it's $25,000 per container.
It’s been unabashed greed. Pretty, pretty horrible. I have customers who used to pay almost nothing, especially in containers because they were coming off of the US West Coast and heading back to Asia (a backhaul direction). In bulk, the US West Coast to the Far East is a front haul, that's where you're going to make your money; you've lost money coming over this way. It's the exact opposite in containers. So that's been another difficult thing. People say “OK, well, we’ll just do bulk.” But the bulk people are expecting to make money going from the US to the Far East. They're not taking empties back to the Far East. It's been very interesting. It's been very dynamic, and it's definitely shaken up the market.
We get position lists of ships; we’ll get emails saying “We have this vessel and it's in this port on these dates, etc.” We get hundreds of those a day, and I see now with our bulk carriers that they're all saying that they can carry, say, 250 40-foot containers. That would have been unheard of 6 months ago. You could maybe ask — “Could we put two containers on as deck cargo for something special? — and the owners would always say “No, we don't need that cargo, we don't want containers on the ships at all.” Since they were not built for deck cargo, bulk carriers have to have special permission from their insurance and their Classification Society to ensure that the trim and stability of the ship can handle containers on-deck. This all takes time but about a dozen bulk carriers have made this investment and are providing an alternative to container ships for specialized clients.
I think that industries have learned that they have to plan for some disruption. They ran for years on Just in Time manufacturing, Just in Time distribution, but that all really imploded with Covid. Before that, it really was like clockwork. Containers were like a milk run. They would specify, to the minute, when they would arrive in port, be there for 12 hours and be back out again. They would discharge hundreds of containers. It’s understandable how people would get used to that, how industries would get used to that. It really was very efficient.
The other problem is that everyone got all excited about these monster vessels. Ports wanted to be the one with the largest container ships; that’s great, but you need the trucks and rail capacity and the dock space to handle those vessels. That’s why there’s such a huge problem in LA Long Beach (California); there are 101 vessels sitting out there (as of late December 2021). There are 40 at anchorage, but they’re also out there just drifting, idling, repositioning. That’s bad for the environment and it’s also expensive; they’re just sitting there burning up fuel. We call fuel “bunkers”; it’s a British term. At the beginning of 2021, bunkers probably cost $250-350 per ton per ship. Now, it’s over $600. A bulk carrier now burns about $15,000 per day in fuel as opposed to $7000 a year ago. The hire rate has also shot up, so a ship would’ve cost maybe $10,000 per day before, $30,000 per day now, and the cost of the fuel has more than doubled. It can cost around $45,000 per day just for a ship to sit there in the water. For months.
I think that everyone is anticipating these market rates and this disruption to go at least through June of 2022. In terms of bulk, rates have come off a bit and that goes for containers too. But there are some other factors — the holidays, Chinese New Year, the Olympics — that will slow shipping down. As much as a lot of people are trying to get rid of coal, coal and iron ore productions are still the basement — up to maybe the 6th floor — of what keeps freight rates low. Coal goes in containers too. It’s still a major commodity that’s pushed around the planet, unfortunately. China has said that they’re not going to burn coal in three gigantic provinces for the three months leading up to the Olympics so that they have clean air, so that really affects the markets. It’ll probably just kind of bounce along where it is right now. The mini commodities or minor bulks — everything besides coal and iron ore — are backfilling everything. Even without the usual number of coal shipments at most ports around the globe, there’s still considerable congestion.
We’re telling people that the freight rates aren’t going to come off dramatically anytime soon. It’s all a crystal ball: maybe there could be a global pandemic! Who would ever have imagined that? Anything could still happen. Maybe it will come off 10% but there’s no incentive for owners right now; there’s still congestion, there’s still high demand. And we’re expecting to see it pop up in March. So really we’re recommending that our clients rely on their service professionals to be as nimble as possible and maybe that they think a little further out than they’re used to.
If you were primarily doing containers, and you have some ability to do bulk, maybe look at that and consider percentages of your business. If you were doing Just in Time, consider having a more holistic approach to freight, to timing. And book cargo and rates in advance if you’re able to do so.
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Kelle Horn / Pacific Rim Shipbroker / shipping / logistics / container / bulk / vessels / freight
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