Building on the idea that maritime and rail generate less carbon than trucks, the blueprint for decarbonization suggests shifting transport to those means.
That’s easier said than done. The EU has been working hard for some years on a modal shift to river and rail transport for cargo inside Europe. They have actually had some success— a few percent improvement.
But the geography of the EU is a lot more conducive to waterborne transport of cargoes. There there are quite a few navigable rivers going inland from the coast where the ports are. Many EU ports have set up ‘inland ports’, large distribution areas inland that often can be reached by barge, to offload container cargoes and get them ready for distribution. This foresighted policy offers many advantages, both from an ESG standpoint, and for reducing congestion at the ocean ports. But the US has only one large river, the Mississippi, navigable for a long distance into the heartland, in a land mass much larger. Smaller rivers on the East Coast don’t go as far.
However, particularly on the Mississippi, there is a lot of potential for more barge traffic. I also suspect that maritime transport could be used along the coasts for some kinds of moves, particularly movements of products like refinery outputs, that might travel by truck otherwise.
So there is rail. The EU has a problem with rail; most rail is state-owned, and is oriented around passenger travel, not freight. And rail lines in Europe are not all compatible; not only are their practices disparate, but the physical equipment isn’t even compatible at some borders. That adds transfer delays as well as simple handling delays to transport. The EU will have a much harder and more costly time increasing rail cargo percentages.
In the US, we have seven Class I rail firms, all private, that crisscross the country and offer cargo service. Rail can provide the backbone of distribution from ports to the hinterland. But will it? Rail firms are all private, not public; they are currently focused on their most profitable segments, and have engaged in rampant cost-cutting. Sometimes, it’s referred to as PSR (precision scheduled railroading), but quite often it is more closely allied with old-fashioned cuts driven by short-term accounting. The recent reductions in staffing are claimed to result from PSR, but in fact, simply serve to reduce operating costs and improve operating ratios. They may result in reduced safety, as some of the claims in front of the STB put forward. And the popular step of running really long trains to save labor costs reduces flexibility and adjustability of rail traffic to support less predictable loads. These moves by private firms greatly increase the complexity of carrying out the proposed modal shift in the US.
But certainly a modal shift will reduce carbon output. And there is actually a lot that a government push could accomplish. Some of these things are:
Infrastructure improvements for inland maritime operations;
Streamlining projects for on-dock rail at ports large and small;
Inducing rail lines to improve their rail yards and lines to support a more flexible cargo mix and customer set;
Driving rail common carrier rules that will induce or force rail lines to accommodate cargoes from a broader set of customers, even though the traffic will not be as profitable as long steady coal or grain trains.
Keeping pressure on the rail lines to serve a broad base of customers, particularly intermodal (container on flat car or trailer on flat car). A move to transport this type of cargo long distances to inland container terminals would help with emissions and get trucks off the major interstates.
Supporting inland terminals and distribution points that are rail connected.
There are probably more, and Pete Buttigieg and the President’s commission on supply chain probably are thinking of them.
The biggest problem is how to get private industry and investors on board to finance and support the projects.
The STB, struggling since inception in 1995 to develop a fast, affordable, and reasonable method that provides relief to rail shippers challenging unfair rates in “small” zero-sum disputes in which a single railroad dominates the market, will shortly employ Final Offer arbitration to make a binary choice between competing final proposals from railroad and shipper that make the case for what each considers the highest reasonable shipping rate.
Previous efforts by the STB to provide tools for addressing smaller disputes were rarely used by shippers.
The STB’s Final Offer rule is designed as a backup in the case of the failure of a companion STB rule that provides for speedy voluntary, affordable arbitration to resolve rate challenges by stakeholders of any size where the dispute is less than $4M within a two year period—if all Class I railroads agree to use it.
Final Offer theory, developed in the 1940s in the United States, has notably been used by Major League Baseball to resolve disputes as well as state and local governments dealing with unions that are not legally permitted to strike.
In a Final Offer situation, stakeholders do not know what maximum reasonable rate the other side will propose and are thus incentivized to submit proposals that are more rather than less reasonable, and, thus, more likely to be chosen by the arbitration entity. This is markedly different from traditional reasonableness disputes, in which arbitrators would typically split the difference between rate proposals, encouraging participants in the dispute—who knew how the system worked—not only not to be reasonable from the git-go, but specifically to start by proposing unreasonable rates, figuring that whatever they proposed—reasonable or not—was likely to be averaged away.
If—and only if—all seven Class One railroads agree to STB-specified voluntary arbitration proposed in the new rules, the STB’s voluntary arbitration rule will be implemented and the railroads will be exempt from the Final Offer Rate Resolution (FORR) rule for five years.
The FORR rule has been in the works since 2019, when the STB issued a notice of proposed FORR rulemaking and solicited public comment. Five of the Class One railroads filed a petition promising to submit to binding arbitration—a methodology they had refused to participate in for many years—in return for exemption from Final Offer procedures. In response, the STB explored the viability of voluntary arbitration as a practical alternative for smaller rate disputes, and in November 2021 advanced rulemakings for both FORR and voluntary arbitrations, and issued the rules in December 2022 for implementation in early 2023.
Under the voluntary arbitration rule procedure, Class I rail carriers must all commit to five years of arbitration under an expedited schedule. Under the FORR rule procedure, if the STB finds a rate being challenged is unreasonable, both sides submit their case in an “expedited procedural schedule that adheres to firm deadlines.” The voluntary arbitration rule becomes effective 30 days after being published in the Federal Register, the FORR rule after 60 days.
According to STB Chair Martin Oberman, most of the shipper community has expressed a preference for FORR and most of the railroads for voluntary arbitration, but, according to Oberman, both have much in common, including timeframes, flexibility, and monetary limits, and provide shippers with access to more meaningful rate relief than was previously available to them.
“I am optimistic,” Oberman states, “that this time the Board’s efforts will achieve this long-desired goal. I encourage the Class I railroads to accept the opportunity afforded by the new rule and sign up for the arbitration program they clearly prefer. However, if they do not, in my view, FORR also provides a strong rate relief mechanism, and its availability would also streamline rate review processes in small rate cases. To be clear, regardless of some differences of opinion about the most preferable way forward, all Board Members are committed to ensuring review of rate challenges are practical and affordable.”
Why did Maersk and IBM cancel the TradeLens program?
Recall, when it was introduced 4 years ago many folks saw it as a step in the right direction for logistics, especially global ocean shipping. A single source of information in the cloud where you could go to verify all kinds of shipping information about your cargo. That’s if it worked.
And all of this built on the newly famous blockchain design, which burns tremendous amounts of energy and creates multiple copies of the data just so big brother cannot be controlling everything.
But who is controlling TradeLens? None other than IBM, the devil brought to life in the legendary 1968 science fiction movie 2001, in which a computer named HAL, who could converse with you, set out to destroy the astronauts on their voyage to Mars and take over the spaceship from them. HAL was just one step away from IBM.
Recall that the raison d’etre for blockchain was to eliminate any central control point, so that your money and transactions were free of any control or attempt to change them. That was fiction anyway; it turns out that in every implementation there is a set of controllers. For Bitcoin, it’s the miners, who have the computing power to make changes even in the code; three or four big miners handle most of the blocks of transactions, and that is who’s consulted when code changes are in the offing; they have the votes. Ethereum has a different structure, and is now moving to a new method of determining whether a block is valid, called Proof of Stake. It’s supposedly a lot faster and less energy-intensive; we will see; but it’s an oligarchy all the same, with miners needing to put up a stake they forfeit if they make a mistake and post an invalid transaction. Again the ones who put up the largest stakes are the ones consulted when a code change is desired.
The IBM/Maersk platform for TradeLens didn’t hide who was controlling it; it was those two. From the start there was a lot of suspicion that Maersk was trying to use it to lock in business from shippers who would normally use a freight broker or 3PL. Was Maersk really trying to lure smaller shippers by providing a platform for them to look at the progress of their shipments safely from end to end?
The reason given by Maersk and IBM for halting TradeLens is that there isn’t enough business after four years to continue supporting it. In the four years, according to the site (second article below) there have been 70 million containers and 35 million documents processed. That’s a lot of traffic. Over 20 port terminals are also participants, including in Singapore, Hong Kong, and Rotterdam.
Another major question is who owns the transactions processed through TradeLens? Should the firms need to pay to get their transactions suppressed from view? If IBM and Maersk own them, that could be seen as anticompetitive.
Perhaps the real reason is that Maersk and the other participating liner companies, Hapag-Lloyd, ONE, CMA CGM, and MSC, all majors, are growing afraid that they will lose their blanket exemption from antitrust to operate the container shipping alliances. Both the US and the EU are looking hard at whether the alliances should have their powers revoked, due to anticompetitive activity. If new regulations come about, the alliances will go down, and the liner companies will no longer be able to share their ships on the alliance routes.
Instead if they want to offer weekly service they will need to each provide enough ships. This would represent a tremendous amount of extra capital requirement. Rich as they have become from the recent high prices during COVID, none of them can afford that much capital.
I think any regulations that come about will tinker with the alliance structure but won’t do away with sharing capacity. Regular service is what shippers want. The target is excessive blanked sailings by these companies.
Blanked sailings are like ‘bait-and-switch’ selling. You offer a sailing on the 15th, and people sign up their cargo. But then closer to the 15th, you realize there isn’t a full load, and you can’t pay for the voyage. So you blank, or cancel the sailing, and move all the cargo shipments to later voyages. The customer is not getting the time frame for delivery of the cargo that he wanted, though technically he is still getting his trip. But the time element in modern business is what is important.
Many shippers are saying that signing up a cargo for a voyage is like Russian Roulette. You don’t know if you’ll get it.
I’m not sure what a regulation would look like that would reduce the frequency of blanked sailings but still allow the carriers to share capacity on the routes. Perhaps specified service levels on the routes would be enough; designating a route for sharing in an alliance would require also specifying guaranteed sailings at least every n days, a specification of a service level for the route.
Suppose the route cycle time is N days, the average time required to complete an entire trip around the closed circuit, including delays at stops, and return to the origin port ready to load. Clearly if N=n, only one ship is needed, but n could be pretty large, say 30 or 40 days, not soon enough for big shippers. For a service level of n = N/2, two ships would be needed, and so on. The number of ships is given by algebra as N/n. Since fractional ships are not allowed, the proper expression is CEILING(N/n) ships required, to steal from an Excel function; effectively rounding up to the next larger integer.
So a commitment to a given guaranteed service level, no blanking allowed, could force the carriers to be more aggressive in filling up the ships. Knowing they had to sail every so often they would work harder to fill the ships.
So consider a route from Tianjin to Rotterdam, including Shanghai, with stops in between. The latest Hapag-Lloyd route sheet shows that this trip called FE2 takes from 16 Nov to 7 Jan, a time of 52 days, on the ONE Triumph ship. The route sheet is difficult to interpret, so I’ve extracted the stops and timings in a table.
That does not allow for the return trip. But we can assume they have another ship ready when they want to go again.
To gurantee service every other week (14 days) on this route they need CEILING(52/14) or 4 ships available. That leaves an excess capacity of about 28% (four days out of 14) for issues that may occur.
Now factor in schedule reliability. According to their Global Performance Webpage, Hapag-Lloyd’s schedule reliability is 39% on 12/4/2022. This places them 8th among container shipping companies in the Sea Intelligence GLP rankings. We’ll give them 40% to make the calculations easier
If they are only on time 40% of the time, that means that on 2 of every 5 runs on this route there is no ship available to replenish the stock of ships to serve this route. This measure does not show us how late they are– it might be just a day, or it could be several or many days. Weather at sea and delays loading and unloading at ports are some of the major factors in being late. These are mostly outside control of the line, though in some cases, such as errors in advance notice of arrival, could trigger the delays. So this measure is not really sufficient to help us figure how many ships they need to service the route biweekly. We need the distribution of lateness times to be totally accurate.
So we’ll guess. We’ll assume half of these are over 4 days. Remember that 4 days out of 14 is the excess capacity on the route. So half of the time the delay is too long to be absorbed by the excess capacity. So based on these figures they would need to blank a sailing 1 out of every 5 times, for lack of capacity.
Based on this distribution of lateness, a big fat assumption, a possible rule of thumb might then be to punish blankings in excess of 1 out of every 5 scheduled trips. Thus if there were two blankings in any five-trip period, the carrier would be penalized for excess blankings.
It’s not known how the reliability measure would perform if such a rule were instituted, except that it would probably improve. In general, carriers need to improve their schedule reliability a lot to become more consistent with customer goals for reliability of receiving shipments. They can’t plan inventory well if there is so much lead time uncertainty.
Some enterprising scholar of maritime affairs could conjure up a simulation that would act as a ‘digital twin’ of this route. That’s the new term of art. With the simulation we could observe how the schedule reliability and the blankings and performance on the route in terms of number of ships required would work. We could throw at the model odd states of affairs, like China closing ports for extended periods, or major storms taking out ports or affecting the route for several days, or congestion like earlier this year at the US ports in Los Angeles and Long Beach, where waiting lines grew to over 100 ships.
Would the penalties need to be more frequent?
Would they need to be larger?
Would the blankings go up or down?
How would the schedule reliability be affected?
One thing we could not model, though, would be the amount of screaming from the liner carriers. And we also can’t model the politics, or the legality in the different jurisdictions, of such a scheme as a way of increasing competition. the penalties might actually reduce competition; alliances might have a harder time forming, preventing sharing of ships and raising the cost of running regular service. Those in favor of reshoring commerce would think that’s good. But most of the world has benefited greatly by global trade, and it has raised the economies of many countries, though labor dislocations have been created, making special noise in some developed countries.
I leave it to the international trade experts to design rules that would improve customer service for international container cargo and smooth out the lead time variations which cause inventory shocks, while maintaining the flow of international goods.
These below are thoughtfuil articles and make us think hard about competition in international trade.
Supply Chain and Logistics 