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Carriers Abusing the Free-Time Rules – Another Contribution to Port Congestion

Port operations managers agree that container dwell time is a major contributor to marine terminal congestion, yet ocean carriers continue to allow some of their customers, particularly large retailers, to compound the congestion problem by exceeding cargo storage time limits.

“Shippers want to store containers as long as possible. This behavior has to change,” Kerry Cartwright, director of goods movement at the Port of Los Angeles, Wednesday told the Metrans International Urban Freight Conference Wednesday in Long Beach, California.

The issues surrounding container storage on marine terminals, free time for storage, demurrage charges for exceeding the free time and who is going to pay the demurrage charges is a perfect example of why the shipping industry remains siloed, with each participant doing what it perceives is best for itself, even if the entire supply chain suffers in the process.

As owners of the costly marine terminal assets, most port authorities want containers to dwell on their facilities for the least amount of time possible. Container dwell time not only takes up valuable space in the yard, but the congestion that results, especially during high-volume periods, causes labor costs at the terminals to skyrocket.

Ports therefore have tariffs that specify for how long a container can rest at the terminal before the importer or exporter is subject to demurrage charges. In Los Angeles and Long Beach, for example, the tariffs list free time for imported containers in foreign commerce as four days. If the container is still sitting idle at a terminal in Los Angeles after free time expires, the tariff specifies a demurrage charge of $43.66 per day for the first five days after free time expires. After that, the charge jumps to $87.32 per day.

Although the demurrage charges are listed in the port’s tariff, the money is collected by the individual terminal operator. The terminal operator retains a portion of the demurrage fee and pays a portion of the money to the port authority per its individual lease with the port.

While demurrage requirements are clearly intended to discourage importers and exporters from using marine terminals as storage facilities and gumming up terminal operations, two other members of the supply chain — the beneficial cargo owner and the ocean carrier — enter the picture, each with its own interests.

Ocean carrier sales staff are paid to fill up their vessels, so they will cut deals, especially with their so-called “champion” accounts, to absorb demurrage charges. The large retailers may have full warehouses, or simply may not want to pay for storage anywhere if they don’t have to, so they gladly accept the carrier’s offer to pick up the demurrage charges at no cost to the retailer. In some cases, the large importers will demand extensive free time as a condition for signing the service contract with the carrier.

Such deals used to be considered acceptable when each marine terminal, especially on the West Coast, was affiliated with an ocean carrier, so the funds in effect could be moved around internally within the corporation. That relationship between carrier and terminal operator is beginning to break down as some carriers are getting out of the terminal business. Also, with the spread of carrier vessel-sharing alliances, ships owned by one carrier are often rotated throughout the year to call at terminals operated by the other VSA partners.

Even if those monetary considerations are pushed aside, though, the issue of container dwell time and extended free time at marine terminals is being singled out as unacceptable at terminals that are struggling to handle vessels with capacities of as much as 14,000 twenty-foot-equivalent units. Terminals in Los Angeles-Long Beach are regularly experiencing cargo surges in excess of 10,000 container moves in the three to four days the vessels are in port, filling up each container yard with very little time left to clear the facility before the next big ship calls in the weekly rotation.

Furthermore, waterfront land is dreadfully expensive. John McLaurin, president of the Pacific Merchant Shipping Association, told West Coast freight forwarders and customs brokers meeting in Palm Springs over the weekend: “In Southern California, we have marine terminals that are paying upwards of $15,000 to $20,000 per hour for their lease agreements. As such, marine terminals should function as high-velocity transit points in which cargo flows through the facility rather than, either due to intent and business practices, or as a consequence of congestion, as storage facilities.”

Port representatives told the Metrans conference that they are indeed struggling with the free-time issue, given the different players involved in the game and the highly-competitive environment in which the ports operate. Cartwright said some larger shippers would possibly shift their business to other gateways if the ports would raise their demurrage charges so high that carriers would no longer be able to absorb those costs on behalf of the large shippers.

Mike Christensen, senior executive leader for supply chain optimization at the Port of Long  Beach, said ports are looking at free time and its impact on terminal congestion in their optimization efforts, and the first step is to understand why larger shippers believe they need the extra storage time. Once all of the stakeholders understand the needs of each sector of the supply chain, the ports will be in a better position to address the issue, he said.

In his address to the forwarders and brokers in Palm Springs, McLaurin, whose organization represents shipping lines and terminal operators at West Coast ports, said the congestion the ports continue to grapple with, even now that the labor issues of the past year have been resolved, indicates that the old way of doing business isn’t working. One forward-looking idea the  ports must at least consider is the “reduction or elimination of free time,” McLaurin  said.

Source: JOC.com
Bill Mongelluzzo at bill.mongelluzzo@ihs.com
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