By Land and By Sea
By Land and By Sea
S4.E2 - Guest Speaker: Dr. Sal Mercogliano, maritime historian and host of What's Going on With Shipping? // ILA and USMX Negotiation // Red Sea // dangers in maritime // global alliances in maritime
**prerecorded on 3 Oct**
Topic of the Week (10/4/24):
We're joined by a special guest: Dr. Salvatore Mercogliano, Ph.D., host of What is Going on With Shipping? and maritime historian. Together we break down everything going on in the world of maritime, including the port strike. We dive into our take on what's really going on in the ILA/USMX discussions and then meander through maritime issues including global ocean alliances (and how they're actually not a bad thing), the Federal Maritime Commission's playbook on port congestion from 2015, and the importance of merchant mariners to the world. Listen in, it's a good conversation.
The Maritime Professorᵀᴹ presents By Land and By Sea - an attorney breaking down the week in supply chain
with Lauren Beagen (Founder of The Maritime Professorᵀᴹ and Squall Strategiesᵀᴹ)
Let's dive in... [discussion links]
INTERNATIONAL LONGSHOREMENS ASSOCIATION (ILA) and UNITED STATES MARITIME ALLIANCE LIMITED (USMX) Joint Statement:
https://lnkd.in/gX-bA-X2
FMC Report "U.S. Container Port Congestion & Related International Supply Chain Issues: Causes, Consequences & Challenges" (July 2015):
https://lnkd.in/gr68QUC5
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** As always the guidance here is general and for educational purposes only, it should not be construed to be legal advice and there is no attorney-client privilege created by this video or podcast. If you need an attorney, contact an attorney. **
#ByLandAndBySea
the US Maritime Alliance negotiation. A little qualifier we are pre-recording today. We have a special guest on this week, so this is being recorded on a Thursday afternoon. This is a very fluid situation, so in case this comes out after a potential agreement, who knows right, anything can happen at any time. The things that we're talking about today are still going to be relevant. So today we have a very special guest on. We've had him on before and we're making an effort to have more guests on, but today we're going to be having Dr Sal Mercogliano join us. He is the host of what's Going On With Shipping. He's a maritime historian and he is probably the most popular guy in all of maritime these days. Certainly, he knows the most on the most amount of topics. So we got a great show for you today. Stick around, hi.
Lauren Beagen:Welcome to, by Land and by Sea, an attorney breaking down the weakened supply chain presented by the maritime professor me. I'm Lauren Began, founder of Maritime Professor and Small Strategies. I'm your favorite maritime attorney, join me every week as we walk through both ocean transport and surface transport topics in the wild world of supply chain. As always, the guidance here is general and for educational purposes only. It should not be construed to be legal advice and there's no attorney client privilege created by this video or this podcast. If you need an attorney, contact an attorney. So usually we go through our top three stories of the week, but we have a special guest today. Let's jump right into it. Dr Sal Mercogliano is joining us. Hi, sal, welcome to the show.
Dr. Sal Mercogliano:Lauren, it's so good to be with you. I always think when we do these together, we should change this from the maritime professor to the maritime professors Thators.
Lauren Beagen:That should be us. Yeah, the Maritime Academy.
Dr. Sal Mercogliano:There you go. We're all set to go. Lauren, I don't know why you brought me on. There's nothing going on. It's the quietest week ever in Maritime. I mean. There's nothing going on with shipping it Holy cow, lauren. I mean, even if everything gets resolved today, there's so many other things going on that you and I can talk forever. Everyone who's watching you should have seen the talk before the video where we were just talking about everything.
Lauren Beagen:And we always nerd out on FMC, right. That's a special passion of mine, it's a special interest of yours. I think that we could probably, and we will be talking a lot about the Federal Maritime Commission during this time today, but I mean your video coming out that you had of the Houthis that we were talking before the show what a wild glimpse into pre-attack and then attack, and that's one of the things that I really appreciate that you bring to your channel. Is this attention to the mariners, right? The mariners that are out there that are just getting caught in the crossfires. They have nothing to do with this and your point on.
Lauren Beagen:These are innocent workers out there risking their lives. Maritime mariners are one. It's one of the most risky jobs in all the world, and certainly during COVID it was such a difficult time too, because to be at the same spot for the two dose vaccine for a mariner is almost impossible, right, and so there's unique challenges to merchant mariners and mariners across the board, across the world, and so I appreciate your mentioning of that during your videos.
Dr. Sal Mercogliano:I appreciate that In that video I did on that attack.
Dr. Sal Mercogliano:It was an attack on a ship called the Cordelia Moon was the part that gets me most about that attack isn't so much. You know it's a very dramatic attack. You see the boat coming in, there's an explosion, but it's the fear in their voices are running the moment before the attack comes and they're just you know. They're running for their lives. And then they're dealing with the damage of the ship and just you know the horror that they experience on a daily day. You know, and even when we talk about the strike going on, I've gotten notes from ILA workers, you know, and it's like. It's like, yeah, you can show Harold Daggett and his house and it's beautiful, he goes.
Dr. Sal Mercogliano:But I'm an ILA worker, he goes. It takes me six years to get up to be a full-time ILA worker, he goes. It's 10 years till I qualify for full benefits he goes, he goes. I'm working through the system now but I'm doing DoorDash to make things work. So when they talk about six figures, yeah, I'll eventually be able to make that, but I'm nowhere near that. And, by the way, I'm going to have to work an extra 20 to 30 hours a week to get that money. So you know, it's just putting a little bit of context in there, I think is really important. I've been spending a little bit of time talking about who the ILA is, who the US Maritime.
Lauren Beagen:Alliance is, you know. So you know, whatever I can do, I try to do and I appreciate you're very kind to say those things. No, well, you know, when we had the ILWU, the West Coast Union negotiations, I think at that time actually one of the comments on one of your YouTube videos on what's going on with shipping came down and talked about, there was a report saying all these overly inflated salaries, you know one, they're not salary, they're hourly right, and so there's certain benefits that are otherwise usually associated with salary that aren't necessarily there and it is incredibly dangerous work. I mean, let's not forget that it is. You don't survive. I keep saying you don't survive from a container falling on you, right? So I mean, just having that alone is significant from a container falling on you, right?
Dr. Sal Mercogliano:So I mean, just having that alone is significant. No, you know, one of the things that you know we kind of talked about is I think the ILA's messaging strategy is a very weird one, but you know, in some ways it's effective because you know you get Harold Daggett and Harold Daggett is central casting for a union boss. If I told Hollywood, get me a union boss for this, it's Harold Daggett. He's great. He's great, he gets the attention. But in his quote, unquote, candid conversation he did a few weeks ago, there was really good information in there and I thought it was really important. And one of the things he talked about was port safety and the safety of the personnel in there and he talked about that automation issue.
Dr. Sal Mercogliano:Ilwu and the PMA dealt with this issue of automation. We've got three yards out on the West Coast. You've got LBCT, you've got TRAPAC and then you have APM, which is the Maersk Terminal, came in and they lost jobs. I mean, there was 500 to 800 jobs that were lost in those areas. And again, it's not that you get more efficiency out of the port, it's not. Like you know, lbct does move more containers but they also are a much more expanded container terminal than they want. It just removes the workers from it.
Dr. Sal Mercogliano:It's not like it saves you money. It doesn't save you money because the automation is expensive. Everything you need is expensive, but you can work 24 seven. What changes those terminals is they're pitch black at night and they're working. But even if you work, you can't even work 24 seven in the US port because you can't get a trucker to come get the container because the warehouses are closed. That was the thing we talked about back when we had the West Coast going on. It's like we'll go 24-7. It's like that doesn't work. It's like you've got to be 24-7 everywhere and that's not going to work.
Lauren Beagen:Exactly, it's a supply chain ecosystem, and I think that's of all the bad things that happened during COVID I think that's the silver lining is that it really started to break down the silos between that otherwise barrier of a port gate. Right, you had the surface transportation not understanding the ocean side and the ocean side not understanding the surface, and all of a sudden you had shippers and BCOs who wanted to know what happened on the other side of the gate, and so 24-hour gate access, like you said, doesn't matter if you don't have the rest of the ecosystem prepared for that, and so that's certainly part of the problem there.
Dr. Sal Mercogliano:So, before I talk about this for a long time, it's like I owe Craig Fuller money for, like, my PhD in trucking and rail, because you know, I knew shipping. But you know, in truth, I didn't quite understand that aspect and it is so essential and that's why what you do is so important, because you talk about that.
Lauren Beagen:Agreed and same thing, right, I come from the ocean side of things, you know, having worked at the Federal Maritime Commission, that's where I know, and so I called this by land and by sea so that I could bring in that surface transportation and try to break down that otherwise barrier of the port gate. But before we get too far into it, I know that my followers, your followers, know what's going on, but let's make sure I always try to do that make sure that everybody knows what's going on as we dive into the topics. So let's kind of set the stage here, right. What are we talking about? What's the larger issue that we're talking about? Well, if you haven't watched the news all week, I mean, maybe there's one person who doesn't totally know but what are we talking about?
Lauren Beagen:We have the International Longshoremen's Association, the ILA, representing the dock workers at ports all along the East Coast and Gulf Coast, and that's important to designate between the ILWU, the International Longshore and Warehouse Union, which is the West Coast. That's what we talked about last year. This year we're talking about the ILA. They have a long history of advocating for fair wages, safe working conditions and better benefits for its members and they are, in their well now expired, otherwise six-year contract of a master contract with the United States Maritime Alliance, or the USMX. That alliance represents the port operators, the terminal companies and the ocean carriers who use these vital ports for shipping goods. And so, without the contract in place, it was long known at least certainly, I think, into the spring or early summer that the ILA would not continue to work past an expiration of the contract. And so, while this actual strike happening was a surprise, the only surprise is that it actually happened. It was not a surprise, that it was a possibility, and I think that's what makes this situation much different than COVID is. We were able to prepare as a supply chain by moving out those yards, by clearing out those terminals and making sure that we were able to be in the best position possible for when the ships come back.
Lauren Beagen:Right, covid shut down, you couldn't organize, and then the ships come back, and I think that's where we have our next critical point. Here is what happens when those ships come back. But before we get to that, let's talk a little bit more about these key issues behind the strike. We're already starting to talk about automation. What else are we talking about here? We start talking about the salaries, the wage gaps. Part of the messaging and I think this is what you've talked about in your show, I've certainly talked about mine is the messaging that's coming out is a little bit unreliable, because you can almost see the negotiations taking place on the media. Stand Right and so you're hearing I don't want to call them overinflated, but perhaps a little bit higher than what you don't really know what's going on in the really intricate small group that is having those conversations.
Dr. Sal Mercogliano:I think there's a couple of elements there, I think. Number one both sides benefit from a strike and I think I think most people don't understand that. I think the ILA and I've been, I was hearing in June and June was, you know ILA were having meetings with their members telling them to store up, get ready. You know, don't buy anything, don't get yourself in a position Come October we're going to be in a precarious position because get ready, because this is coming. And you know ILA, harold Daggett, again, right out of Central Casting, but he knew he wanted to make this point. And I think the Maritime Alliance, which is a really interesting entity, again, let's talk about that. It's the port, it is the stevedoring companies and it's the big shipping companies. And you look at that board of directors 13 members on that board of directors, eight of them represent foreign companies.
Dr. Sal Mercogliano:The irony of the strike always is that you have the international longshoremen, who represent American workers, and you have the US Maritime Alliance, which largely represents foreign corporations represent American workers, and you have the US Maritime Alliance, which largely represents foreign corporations. They both are first of all benefiting. We're going to talk about the shipping lines and the surcharges we're getting ready to see be charged, you know, but it's higher freight rates. It's going to be a lot of things that they're going to be able to get in this. You know they have that dogging issue of overcapacity. We've seen this spike back up in their profits because of the Red Sea diversion and now we have a potential to see that here the ILA is arguing. You know, the two issues is wages and automation. They're obviously concerned about that. They don't want to see their wages, you know. And you know the argument has been well, you know, the Maritime Alliance was at the table. The ILA walked away. Well, the agreement that was on the table was two years ago. I mean again, this is the most white swan, white swan event we can have. It's not a black swan. We knew this was happening. You know we knew in 2018, it's like, okay, september 30th, 2024, this ends. We need to be ready for this. And you know, the ILA said two years ago it's like we're not going to accept 22%. Because if you're back in 2022, let's be clear you're looking at the shipping companies making record profits. I mean, I understand, in 2018.
Dr. Sal Mercogliano:And if you look at when they negotiated in 2018, 2018 was a dark year. I mean, it was, you know, half, you know half in the red, half in the black. You'd had up and down years, know, going back to 2008. And then you know 2015. You had a whole batch of years and you, you know you would never make a 77 percent ask for for salary at that time. But in 2021 the shipping companies made more profit than they did in the decade before combined. And then in 22 they made even more. And it's like and you know the ship, the ILA, is like okay, where's our part of this? You're offering 22%, you won't negotiate, I'm not going to be at the table.
Dr. Sal Mercogliano:And what we saw is, on the eve of the uh, eve of the uh, uh strike, the maritime alliance came out with a paper uh, basically a press relief that said we're willing to go to 50%. What they agreed in that statement was amazing. I mean, I know it's not what the ILA said, but it was 50%. It was three years of, or three times the matching going into retirement funds, it was increased health payments and healthcare. And the biggest statement I saw in there was they agreed to talk and stabilize automation and semi automation. You know you could have won the ILA on that right there. But I think they wanted the press, they wanted the story, they wanted to show that they were willing to walk out.
Dr. Sal Mercogliano:And to me that's what Daggett represents. He's willing to go out there and push it to the limit and make it that low, willing to go out there and push it to the limit and make it that low. And then you know, then you get the response from the administration. Biden comes out and says we will not negotiate. You know we're not going to intercede, we're not going to invoke Taft-Hartley I'm not Bush, we're not going to do 2002 with the PMA and the ILWU. You get Secretary Sue coming out, the acting Secretary of Labor, you get Buttigieg, secretary of Transportation, come out Bad comment from the Secretary of Commerce, but everyone else was kind of good, and you know it's a very advantageous position.
Dr. Sal Mercogliano:I don't think this goes very long. You know, when this comes out I'm going to say we're getting close to an agreement. They may run it for a new cycle or two over the weekend, but I think they're close. But what's going to be really interesting is the fallout, because you and I both know that once you close the port and this happened beforehand, we already saw it happening because we were front-loading cargo into the East and Gulf Coast, shifting cargo to the West Coast. This is going to cause global delays. We've already seen cargo getting. I had somebody call me the other day saying my cargo is dumped in the Bahamas. How am I supposed to get cargo from the Bahamas here? And it's going to be dumped everywhere it's going to be. There's going to be literally American containers literally in the globe and it's going to take months to reset this.
Lauren Beagen:Yeah, well, even when Hanjin went bankrupt talking about the carriers, in the 2010s, when Hanjin went bankrupt I mean up until maybe a few years ago, you were still finding empty, deserted, hand-given containers out there in the wild. So, and that was one specific company Now you're going to have, like you're saying, the American cargo kind of out there. You know, there were a few things that you talked about. You said June was when the kind of forethinking started to come. Perhaps the ILA was telling its members hey, get ready. The significance of June was that was when the last formal discussions happened, right, and so, knowing that June was when they last sat down and, at that point, going after the Mobile Alabama semi-automated gates, which wasn't necessarily a new tech or even like a new thing, right?
Dr. Sal Mercogliano:It wasn't. It's been there for a while. That's like finding out there's gambling going on in this establishment. I'm shocked all of a sudden.
Lauren Beagen:You know it's like okay, exactly Well. And then you know you talk about the retirement funds and the automation that's part of what's happening. Here too is right. You have this whole slew of retirees from the ILA who who the the association has to also support, and so the automation attacks the potential jobs for the current workers but then also protects the potential funding of the association to to cover the retirement funds. You've talked about that a little bit on on one of your shows as well.
Dr. Sal Mercogliano:Yeah, and you know I mean the ILA is in a very unique position. I mean, ports on the east and Gulf Coast were huge for a long time and you know Dagen says he resists automation. Remember, the biggest technological shift that happened was containerization period stop, end of sentence. That was the biggest thing. It basically unemployed massive amounts of the ILA because you weren't doing break-bulk cargo anymore, and so you know they're dealing with a retired base that's really large. You know, one of the things I'd love to get into is the numbers at ILA is okay, how many members you have? What kind of money do you have put aside? How's your management been going with your retirement funds? You know, because it doesn't sound like you've been doing very well with that retirement fund budget, because if you need more money coming in from members, all of that is a key thing and he's got to be very careful. I mean he sees what happens If he loses. I mean we're talking about thousands of members of the ILA.
Dr. Sal Mercogliano:It used to be hundreds of thousands and you start automating yards, you lose 500 to 800 people in a pop and that's a big problem for them. It's one of the reasons why we saw on the West Coast during the height of the COVID crisis the supply chain crisis the ILWU would not bring on new members. It's like we can't afford to bring on new members. I know you want us to put new members into the yard and move more cargo faster, but we can't, because then they become members and we're required to take care of them and pay into their retirement and we don't need the retirees. We've got to manage this their retirement and we don't need the retirees. We've got to manage this. And that's why I think the issue right now I think that's that's is this automation issue. They got to do it. You can't resist it.
Dr. Sal Mercogliano:I know Daggett says he can't, he doesn't want automation, but there's got to be an element in there where they talk about it because it but? But the key thing is the phase. How do you phase in automation, especially when you're operating on six-year contracts? Because in automation, especially when you're operating on six-year contracts, because it's such a big gap between these contracts, because they didn't want shorter contracts for fear that they're always negotiating and so they want longer contracts. But now the technology is such that you're seeing automation come in and again, you know, automation isn't the end-all, be-all. It's a really expensive proposal to come in and automate.
Dr. Sal Mercogliano:Where we see automation worldwide, you know, uh, jean-paul rodriguez, who's the master of port economics, you know, sent me a note he says about worldwide. We're looking at, about 7.6 percent of the world's terminals are automated. You know, because everyone highlights shanghai and ratatouille, but in truth most ports aren't. I mean, they're nowhere near that. So the us is not, you know, unusual in this. It takes a lot to bring it in, it's a huge investment cost, and that's something the shipping companies aren't always interested in doing either.
Lauren Beagen:That's right, that's right. Well, and even getting Wi-Fi on the yard, right, I mean, that's like it's a very paper based industry to begin with, and so you know, of course, it's kind of there's a podcast out there, the Last Remaining Dinosaur, right? Because this industry really is very, very paper based, for good or for bad, I mean. And so, to start there, right, how much paper do you use in your regular day? Of course, most people are using emails. I mean, they're posting their things on Facebook which you're not getting from a written word that you're sending by carrier pigeon to somebody, right? So there's already a form of technology integrated, and I think, for the benefit, it's striking that balance Right, and we as a nation will need to be a little bit more efficient, a little bit faster and perhaps a little bit more tech forward, but not at the cost of the American worker, and I think that really is the crux of the conversation here on now that it's garnered some national attention, the national stage as well. You know that. In general, though.
Lauren Beagen:So, coming from COVID, right, it was a wild time, but remember, those first few days and weeks and months were particularly scary because of the unknown, and it was right around maybe 2021 that I started saying. I think we're going to see the rise of the union or of the employee, the essential employee, because you're going to start to see these contracts expire and not just the profits that were made in this specific industry, but I think the larger thing and I teach a class called organizational behavior and it kind of gets into the psyche, the psychology, if you will, of kind of an organization. And we use the case study of the ILWU and the ILA as what else are they asking for here? This is their first chance to have the conversation of how the COVID experience was for them and, like we said from the outset, this is an incredibly dangerous job. And then to add in, you're afraid of a container falling on you and now to add in, you might get sick, really sick, from the guy sitting next to you.
Lauren Beagen:You know that creates a different level of an already difficult time, right, those first few weeks and months of COVID when you didn't really know what was happening, we were afraid to go out and outside, right I mean. So that I think is also playing into the psyche here, and we saw that with the ILWU contract negotiation of the Heroes Fund, right, the one-time payment of the thank you. So I wouldn't be surprised if we saw something along those lines. It certainly isn't the height of the topic, because here we are four years from the start well, four plus years from the start of COVID. But that's also, I think, playing into the more we're seeing the heightened conversations around some of these contract negotiations.
Dr. Sal Mercogliano:Oh, I think so. I mean you kind of heard it from DAG when they brought on the container royalties, because some of that money goes to a very similar style fund for them. And you know, one of the things that gets me about this too is, you know, this strike takes place in the backdrop of some very tenuous labor negotiations, where we're talking about the ILWU but let's not forget, we had UAW, we had Teamsters, you got Boeing. There's been a lot of union things going on and one of the things that the ILA really represented is a national union. I mean there really was. I mean I had people telling me it's like Houston dock workers aren't going straight to Texas, it's a right to work state. It's like no, they're going. It's like I don't care if it's a right to work state, the docks are unionized.
Dr. Sal Mercogliano:And you know, a few years ago, I don't think Daggett's able to drag Texas local and even South Carolina's local, which have been fighting over, you know, the Leatherman Terminal down there for a long time, you know, in this, but he had the locals in line, he really did. And you know we keep forgetting it's not Daggett that dragged him into the strike, it is the membership who voted. He may be local, vocal and loud, but it's the locals that voted for this and you know they represent a coherent opposition against things like the US Maritime Alliance which is representing. You know again, you know the top 10 container liners in the world control 85% of the container capacity out there in three or four alliances, wherever we're at right now in this structure. Meanwhile, you know, the flip side of that always to me is that idea of trucking in the US. 85% of trucking in the US is a company that has one to six trucks. You know, and it's the exact opposite. Back in the 70s and 80s you had the strong trucking, you had that big unified trucking and in many ways what ILA represented here was this kind of coherent front and Daggett's mad about that. He's mad about the fact that his workers were showing up on the piers during COVID, that they weren't. They deemed essential workers, that they were doing a lot of risk.
Dr. Sal Mercogliano:And let's be clear even if you automate a port, you don't remove ILA workers because someone's got to climb on that ship and throw lashings on and off in the heat down in Houston or freezing up in Boston. Somebody has to do that and it is extremely dangerous work and there's still jobs that have to be done. I think the biggest issue they have got to get into is how you phase automation in so that you protect the current workers and at the same time, the ILA is going to have to bring in new workers. There's going to be maintenance for those automated container movers, there's got to be data processors. There's got to be a lot of other jobs out there. And if I'm worried about automation, I see those control panels they have where people are working a port. I want to make sure that's in the port. I don't want it being in India, I don't want it being overseas, because it could happen, and that's the fear they have.
Lauren Beagen:That's right, and even you know, I mean talking about the technology and the automation side of it. I mean even manually typing in container numbers versus QA container numbers. I mean, who actually wants to be typing in all those different characters making sure, did I get it right? Right? I mean, like that can be a little tedious as an experience of a worker, but, but instead being kind of QAing. You know that that it's it's a similar job, but perhaps a little bit of a of a more enjoyable thing, but that that's part of the conversation. I'm sure that's taking place there, you know. So let's.
Lauren Beagen:You mentioned the Global Ocean Shipping Alliance, or the Global Alliances, these vessel sharing agreements.
Lauren Beagen:Let's stop there for a minute, because I think that they also get perhaps.
Lauren Beagen:I mean, I don't hate the alliances.
Lauren Beagen:I think that the alliances serve a very important purpose and the same way that you bring up trucking and the concentration that happens during the 2010, 2015 time period, when everything was downturning and you had vessels that were half loaded, they were all kind of going to the same place and it's unsustainable.
Lauren Beagen:And so now, as we know, you start seeing better routing options, right, you start seeing some of them working together for vessel sharing, but they're still competing with each other for the actual business. They still want it being shipped under their own company, and so the vessels that are part of the alliance aren't a full array of their entire vessel fleet, it's a portion of their vessel fleet, and so to say that it really is a concentration is opposite and actually prevents, I would argue, that concentration, because had they all gone out of business and bought each other out, we would only have two or three companies. Instead we have nine or 10 companies with two or three vessel or three or four vessel sharing agreements, and so I think that we still benefit, as kind of the users of the supply chain generally, by keeping it in the alliance structure with some checks Right, and so that's where our conversation to the Federal Maritime Commission starts to come in.
Dr. Sal Mercogliano:Right, and one of the things that really amazed me in this discussion is let me be clear, I agree with you the Maritime Alliances and the global shipping companies you can talk about big band companies and everything. They have given us prosperity. In many ways, the freight rates we get, the ability to move goods, is only possible because of what we have right now and it was moving from that for a long time. And there's no bad guys or good guys in this scenario, there are just competing parties in here. What I was really interested in is you hear a lot from the government side on the support of the ILA, but there was some leverage and I think they missed an opportunity here to call in some of the shipping firms, call in those CEOs, bring them in. And you know, I think nothing more than Roland Saad or Aponte or the CEO of Marist, vincent Clark would love is to get a call from the White House and say, hey, I want you to come here and let's talk and let's settle this down, because that gives them gravitas, makes them look important, it raises them up. And you know, for the shipping companies this is a rounding error, this is not enough money. That's going to be an issue for them. But I think there is an opportunity and plus, you do have the leverage to sit there and say listen, there's a lot of antitrust issues going on, let's talk. You know you do have a little bit of leverage there to kind of let's get the negotiating going Very visible.
Dr. Sal Mercogliano:And I think you know but that goes to visibility Does the government understand how the shipping industry works and understand the? You know who are the big players here. You know, because you make fun of Daggett and his house and the money he gets and everything. But it's a drop in a bucket to Aponte and the Mediterranean shipping company and the yachts and houses and jets he has, and the Mediterranean shipping company and the yachts and houses and jets he has. So you know, I think that's that's a context that's really important and again, that's where FMC comes in. In many ways should have been, you know. I think that's that's an element there where they know how to kind of apply leverage because with the new powers given to them under Ocean Shipping Reform Act and more people, they have a lot more visibility of that.
Lauren Beagen:Yeah, but I mean, and to be fair, right, so, so certainly family owned companies, right, and the CEOs at the top.
Lauren Beagen:But I mean, I just go back, like nobody thought that the companies could go out of business and yet 2014, right, Hanjin went down, it went bankrupt, and that was, you know, partially supported by by the country itself, and so you know it's, it's possible, it happens. And the fact that freight rates, like a normal freight rate, you know, on a pre-COVID normal year, it's like twelve hundred bucks Right From from Asia to West Coast, maybe no longer Right, I mean now it's certainly raising, but like that is so cheap and so you can, you can ship an entire TU 20 foot equivalent unit for one thousand two hundred dollars, or previously, right, I mean, it jumped up to 20,000, potentially during COVID. There's been some wild numbers thrown around. These days I'm not sure that we're seeing anywhere near that on the East Coast right now, but you know, I mean so it costs a lot for these vessels to operate, it costs a lot for all of the new environmental regulations that are being put on the fleets, and so there's a balance.
Dr. Sal Mercogliano:I mean, you're talking in big numbers, but those big numbers, you know, have big risk to them as well, and so and I would argue, that's where the Maritime Alliance really fell down on their you know, because I can make the argument very well that, listen, we had to buy a new fleet. I mean, we literally were facing this issue of IMO 2020. We're facing IMO 2050. We're the ones who are investing in new technology. You want us to be cleaner. We literally have to replace our entire fleet of vessels because they're not going to be able to operate under CII and all the regulations that are there. So, yeah, we made a lot of money, but we're also spending a lot of money to get our new ships up so that they can be the cleanest method of doing it. Again, both sides, I think. Just, you know, it's a lesson learned here in how to articulate and how to discuss things, because you can point at both sides and find problems, without doubt.
Lauren Beagen:That's right, and there's definitely more information. I mean, you have the attention of the American public and hopefully you know on the larger global scale, and so perhaps this is an education moment, right, I mean to kind of have more of those conversations of you know. Well, what else are you know either the maritime workforce under pressure for, and what else are the ship owners under pressure for? So you know, I don't want to go too far into this, but the FMC also had this 2015 congestion report. It was almost a playbook we brought it up many times before a playbook for what congestion looks like and what we're about to see. Right, equipment shortages. They talked about all of these things in 2015. So if you haven't seen that that's, the Federal Maritime Commission released a port congestion study in 2015 before everything kind of hit the fan. But what was going on during that 2015 time period that would kind of predicate that report? We haven't really talked about that side of things.
Dr. Sal Mercogliano:Well, I mean you saw what I mean 2008,. You obviously have the global recession. All of a sudden you had reduction in fleets. I mean, I mean the ocean shipping companies were bleeding money. I mean bleeding money. I mean this is where they got rid of their container fleets. They got rid of terminals. I mean they were just doing everything they could to try to literally stay afloat at it. It created a lot of problems for them. And then, you know, you had Maersk, who had just all of a sudden introduced the new. The triple E was coming in. These new, you know big, huge vessels, economy vessels were coming in. The plan was to build bigger and bigger to lower costs and we're going to be much more efficient in doing it. And you know, you look at those profitabilities during that period of time and it's you know it's like it's like a flat line of a patient. You know it's like it's not good.
Lauren Beagen:You know it's like a few. Yeah, the patient died a couple times, it's down, it's up but it's nowhere.
Dr. Sal Mercogliano:It's like bouncing between zero and it's like this is not good. I mean, it's a. That was a terrible time to be investing in container companies. A terrible time to be in a container company. It's. I know we're talking about record profits now, but, man, it was the exact opposite. It was, it was, it was. It was a terrible period and, as you mentioned, we we had.
Dr. Sal Mercogliano:You know, the concept of bankruptcy of Hanjin was. I mean, it shattered everyone's imaginations. We're talking about the seventh or sixth or seventh largest container line in the world. You got to go back to US lines going out in 84 to find anything close to that. But the companies were so much different. You know, two decades later, this is a major carrier supported by the Korean government. You know everybody expected the Korean government to come in and intercede. We'd seen basically alliances form.
Dr. Sal Mercogliano:The original concept of alliances you and I noticed back in the 90s were for the small companies to be able to compete against bigger companies. So you got a couple of small companies together, you got a vessel sharing agreement. You can maybe stand up with the likes of sealand or marisk or one of the big ones. But then, all of a sudden, we saw kind of musical chairs after 2008. It was like, okay, let's form alliances, and if you look at those graphs and who's in what alliance, it's like it is everybody's moving around. And I always use the analogy that a handgin was the last player player out when the music stopped and there was no chair for them and they were kind of found themselves in a really bad kind of position to be in. And what we saw was the bankruptcy of a line. I mean, you had 94 ships floating on the high seas. They told some of their ships not to come to port for fear they're going to be arrested and, as you mentioned, it created havoc across the board.
Dr. Sal Mercogliano:And I remember a conversation right after that, and I remember a conversation right after that and I said, oh, company's going to buy up those ships. And it's like, oh no, no one's going to buy those ships. And they bought them up in no time. It was the companies eating their own. It was like they were going to kind of consume their own. But, as you mentioned, it created for us the situation we're in coming into COVID. I think that the thing that we tend to focus on in the supply chain is wow, there are 109 ships off of Long Beach in LA, and it's like there wasn't a shipping shortage. You know that, right, we had 109 ships. They came from somewhere. We had plenty of ships. What broke down as we talked about, was the infrastructure to be able to handle that much.
Dr. Sal Mercogliano:Coming into the port at one time and I was, I was always I've told you this many times I was fascinated reading that report at the time. It's like holy cow, this is the playbook for what happened in 2020. It's like it's like Merrick Cordeaux had everything figured out. It's like this is this is exactly what happened. And my fear is we really haven't learned a lot from that, because when I hear people sitting there saying, well, we'll just shift to the West Coast. It's like the West Coast hasn't fixed everything. That's there. We learned some lessons.
Dr. Sal Mercogliano:I think one of the things that makes this different today is that we've seen a lot of shippers diversify. They're not 100% coming into LA and Long Beach. They have the capability to go into multiple ports. The months before this are the most interesting to me because when you looked at the amount of containers coming in, you looked at record numbers into LA and Long Beach. It's like, okay, people have learned, they know what's happening here. They're moving cargo, they're shifting where their ports come in, they're front loading as much as they can, which you can't do in manufacturing, because things are being produced and manufactured, you know, on assembly lines and coming out as quick as they're done.
Dr. Sal Mercogliano:But there was a lot of lessons that were learned and it's really interesting that it is the shippers that are learning that a lot more. Now there's going to be a lot of low to medium sized businesses who don't have that kind of visibility and realize and their stuff is sitting on a ship that's going to be queued off of Savannah now for a week or two, even if this port strike ends, it's going to take a while because we know every day you have congestion. It's going to take about a week to clear the backlog behind it, and this issue is global. You're talking about a quarter of the world's containers heading into the east and Gulf Coast of the United States, and what we're seeing right now is containers dumping all over the planet.
Lauren Beagen:Yeah, now you mentioned two things there the diversification of entry and I would also argue what we learned from COVID congestion was the preparation right. We knew that this was a possibility and so it became that hedging of bets. Do you start front loading cargo into the ports early, especially for the perishable things that can be frozen, do you bring those in early, but then you start running out of cold storage space or that sort of thing. And then the other thing, kind of bringing a full circle to the beginning. There's only so much of the ecosystem available. Once you actually hit the inland portion right, you can bring it in, but there's only so much warehouse space, there's only so much, like I said, cold storage or storage in general, and certainly container boxes. If they're in land, then they're tied up right. Chassis are now tied up because they're underneath the box and the chassis obviously is the wheels that make that box move.
Lauren Beagen:So you know, I think that's something that we did learn from the COVID congestion years was to prepare a little bit when you can so that you're not caught flat footed. But the hedging of the bets is well, how long does this go on? And so I think the vessel owners are in that predicament now. Do you keep the vessels offshore waiting, hoping that it's less than two weeks, and I feel like most of the messaging I've heard and most of the feelings that I've the whispers if you will have been less than two weeks, right, I think that that's what everybody's really hoping for and planning for. If it goes much beyond that, you have to make, start making decisions. What do you do with those vessels offshore?
Dr. Sal Mercogliano:What do you do with the mariners Right, they're stuck.
Lauren Beagen:We come back to mariners kind of getting the raw end here that they're stuck on these vessels.
Dr. Sal Mercogliano:It is, it is ever given whenever you can get stuck in the Suez and you know ships kept going to the Suez, I mean they were piling up north and south. We had about 450 ships anchored there because you know it was six days stuck in the canal and so ships are sitting there going. Do I go around? It's like, well, if I go around now and it clears, I'm going to miss the opportunity to go through. But there is a point, there's a breaking point and with Ever Given given we were figuring two weeks. If it went two weeks, that was going to be maybe 10 days. People, you know we already saw some ships start to vert around, but not enough, and but it was going to be a breaking point. When all of a sudden it's like, okay, even if they clear it, I'm going to be in such a line. It's going to take me so long to get through. Same thing on the east coast and the gulf coast. You've got the queues forming up. We see them off savannah, charleston, new york and houston right, savannah, charleston, New York and Houston right now. But right now they're not too bad. They're not too bad and everyone's going to be able to clear those fairly quick, because we get those peaks and troughs. I mean, the good thing too here is when this is happening. We're coming in the last quarter. This tends to be October is usually a big month, but I think everything went forward pretty much in this. So what we usually tend to see is down months coming into November and December, so it's not too bad.
Dr. Sal Mercogliano:The thing I get concerned about more than anything else is this is taking containers out of the system. We're not flowing empties out, and we saw this when the Houthi attacked. When the Houthi attacked and you created the initial diversion around Africa, what you saw is a massive spike in freight rates. Everybody panicked, but then it came down and everyone's like, oh, this is good, everything's getting back to normal. Then Then we saw it go back up again and it went up higher, twice as high as it did prior to that, and that was the long-term impact hitting the system of all of a sudden, the global disruption. And now what we've seen is it's progressing downward again, kind of normalizing, which is everything's getting back into what is a new quote, unquote norm. That's what we're going to have here. We're going to see I expect to see rates spike. We're going to see a big, huge jump in rates, spike all of a sudden, and then it's going to kind of settle back down. But then the long-term impacts are going to come in. If you don't have containers leaving the United States this month, in October, those containers are not going to be in East Asia in November, you know, which means that they're not loading, which means they're not prepared for the new year when Q1 kicks around. And all of a sudden you start having that big spike before the Chinese New Year that you've got to get everything shipped because you're going to lose something. You're going to lose a week in February. And again, that's that visibility. That's the impact this has. You know, you would think.
Dr. Sal Mercogliano:I used an analogy the other day and somebody you know all of a sudden, I think it triggered in them. It's like, remember when the airports closed down, everybody got stuck and everywhere, like that. How long did it take to sort that out? It's like if you were stuck in the airport in Atlanta, did you just go rent a car? It's like, no, there are no rental cars left, I couldn't go anywhere.
Dr. Sal Mercogliano:It's like I couldn't, which is a nightmare. And now people are seeing that on a shipping scale.
Lauren Beagen:That's right. Well, and so what happens next? Right, even if they come to an agreement right now and maybe even before this video airs. Even if that happens, we still have quite a bit ahead of us and one thing that I've been advising my clients is just keep meticulous records right, because we all know the story as it's happening in real time.
Lauren Beagen:But how does that apply to your goods, your shipment? How does you know the charges are kind of their applications or all of this is so nuanced that you have to really pay attention and be able to tell that story afterwards. Hopefully we learn something about detention, demurrage and surcharges generally from COVID congestion and how to keep good records there so that way, when we do have the congestion of the ships coming in, we can be prepared for it. We can be ready for it and you know, as the shippers, the better prepared they are, I think, the less inflation. Hopefully they can maybe hedge against that inflation, but you know, as the American economy is reliant on these goods coming in right, I mean 80 to 90% of everything moves by ocean transit.
Dr. Sal Mercogliano:Well, and you know as well as I do, the FMC are still dealing with the issues left over from the supply chain crisis. This is going to add a whole new dimension to this because we're seeing, you know, the shipping companies are putting out the notices. The surcharges are out there. Some of them are excessively high and we think they're going high for a reason. They can always ratchet them back down again, but they got to put the 30 day notices out. You know they're hedging their bets in some ways and you know it's going to take a while to reset everything and there's going to be claims.
Dr. Sal Mercogliano:You know, is, is, is, do you have? You know, is this force majeure? If you're the operating company and you're not negotiating, I mean, I can make that argument. You know it's like well, wait a minute. It's like you didn't negotiate the contract. You can't declare force majeure, you, you, you know, if you finally agree to what they, the union, wanted, then you were the one holding it up. It's like why am I paying for that? There's a tension in the, in the arts. You know, wait a minute, I can't there. And at the same time too, let's be clear, some of the terminals are loving this, because if you're LA and Long Beach, you're like, oh man, come on back baby. It's like you know it's golden time, you know, you know you got Gene and Mario and LA and Long Beach sitting there going hey, we got capacity. We're at 75, 70% operating capacity. Come on back to Southern California.
Lauren Beagen:That's right, and some of the diversion that happened from the ILWU conversations and negotiations that moved it to the East Coast might be on its way back.
Dr. Sal Mercogliano:Let's be 100% clear here New York, new Jersey and a lot of the ports on the East Coast were loving the issue on the West Coast and they were like come on, come to the East Coast, we got you. And so you know it's that kind of competition. And again, it's really interesting about the terminal and port competitions because those are local based. They tend to be, you know, very much state or municipal ports, and then we have the operating terminals who lease from them and you know it's a lot of competition. And this is one of the arguments too that the ILA makes is like listen, we represent the ports entirely, we represent all the ports. We're one of the few united fronts here.
Dr. Sal Mercogliano:That between because let's not forget, when Daggett went on strike October 1st, the guy standing right next to him was the president of the ILWU, I mean. So that was a pretty unified front right there. We had the Teamsters come out with a very interesting letter telling the government what to do. So I mean it's a really interesting time for labor. I do think you're right. I think labor is in one of these kind of interesting revital, revitaling periods, you know, and because people have a knee jerk reaction against unions. But if the unions get what they want here, if they get a 77% raise, you know people are going to go wait.
Lauren Beagen:Why don't I have a union? I can use this.
Dr. Sal Mercogliano:I can use the 77% raise.
Lauren Beagen:I don't know about you.
Dr. Sal Mercogliano:Lauren, I could use one.
Lauren Beagen:The maritime professors union? I don't know. I don't know authority right, because they're limiting. They're granting limited antitrust exemptions to ports working together. So, like LA, long Beach, we say, is almost one long name, they are two separate ports that compete against each other. The same way we're seeing these ocean alliances, the different ones. They are competing even within the alliance with each other. But even that agreement is publicly accessible.
Lauren Beagen:You can go on the Federal Maritime Commission website, look up their agreements library and see, well, what are the terms of these vessel sharing agreements, what are the terms of these global alliances? You can see what they say, you can see their expiration terms. All of those things are there. And, if it makes you feel better, the FMC, an independent regulatory agency not an agency of necessarily the administration, an independent regulatory agency is watching it and making sure that it doesn't get out of control, and so that's where they come in.
Lauren Beagen:They have an enforcement arm. They certainly have a monitoring arm. They have a whole slew of economists that are watching all of this, and so they're also making sure that these alliances, in their individual alliance capacity, are not getting too high of market share. So all of that hopefully makes people feel a little bit better that somebody is watching on the government side as much as you might want government watching, but the FMC, I feel like, tends to be fair about it and really they are there for the protection of the US importer, exporter and consumer and that's the exact reason we saw the 2M split, because it was getting too big.
Dr. Sal Mercogliano:Everybody knew Maersk and MSC could not sustain themselves. Someone was going gonna have to give up something they didn't want to. So you see that fracture, I think. You know, one of the greatest things that came out of supply chain crisis to me was the increased visibility of the FMC, the increased power to it. You got five commissioners served for five-year terms. They overlap so that you know you always have one coming up every year. They go through a Senate confirmation, you know, appointed by the president. So it's different groups on there. You've got different backgrounds, a very diverse group that's up there. The knowledge base is amazing. They've finally got some resources that allow them to do it.
Dr. Sal Mercogliano:And again, I think the other thing that this does more than anything else is, I think, raise visibility of shipping and really how dependent we are on it and why we spend a little bit more time and focus on it. You know I get really. You know I understand the Secretary of Transportation wants to talk about air travel because that's what touches most people. He's going to talk about that because you know if he's going to run for president, you need to show that you're doing that. But you know a quarter of what he does is maritime. You got air rail, you got road. You know a quarter of what he does is maritime. You got air rail, you got road.
Dr. Sal Mercogliano:And then you have maritime and you know his focus should be a little bit on that too, and I think this really raises that issue up quite a bit. You know, I had somebody you know just got in an argument with telling me it's like you know, what do we export from the East Coast? That goes and you know what do we export? Anything? These containers are all 100% empty when they leave the US. It's like no, they're not. It's like I don't even know how you make that statement.
Lauren Beagen:It's like that's a crazy statement to make and at some point this is starting to affect our farmers, right? I mean because they are relying some ag products going out, are relying on these containers being available to be filled with the goods going out.
Dr. Sal Mercogliano:Well, and I think that's why, too, the ILA has got to be careful. You know you can have a strike for a week in the ports and it really doesn't affect you on your shelves, except for maybe people panicking and grabbing stuff. But you know, it's after the week that it starts getting tough, especially when you start seeing businesses having to, you know, stop production because they're missing key component parts. So you're laying off workers. All of a sudden you start running low on coffee man. If we run out of coffee we're in trouble as a country because a lot of people without caffeine would be a grumpy, grumpy country in the morning. And so I mean there's certain things that you want, but again, it really does show. I mean, I'm a history professor.
Dr. Sal Mercogliano:I teach business and trade. I talk about the fact that the Mesopotamians are created because they're trading up and down the Tigris, euphrates and the Persian Gulf. You find Chinese coins in Pompeii, which was covered with volcanic ash, showing that globalization existed over 2,000 years ago. And trade is good. Trade makes our lives more affordable. It brings up the lives of many. If you ever look at the graph of poverty in the world, it's like almost a straight line at 90-something percent for most of history until recently. And then it drops down. It just kind of falls off a cliff, and that is because of the fact that you can ship a container across the Pacific for, you know, $1,500. And if you load it with 1, on on it, that's a dollar. A phone it's, it's nothing.
Lauren Beagen:That's right. That's right. Well, let's hope things get scooting soon. Hopefully, by the time this video airs, we we will have some sort of resolution. Uh, because the free flow of goods is a benefit to all. Right, and so um.
Dr. Sal Mercogliano:I have no doubt, Lauren, if they put you and me in charge, we'd have this settled in no time. We should be the mediators between the US Maritime Alliance and the ILA.
Lauren Beagen:I'm going to put this out there right now.
Dr. Sal Mercogliano:If this strike is not done, call the maritime professors. We will get this straightened out very quickly.
Lauren Beagen:That's right. Well, thank you so much for joining me today. I really enjoyed the conversation. Perhaps we'll do a debrief, maybe a further deeper dive on the congestion surcharges or work disruption surcharges or just generally D&D and all the rules coming out there. But really great conversation today. Thank you, Sal, for being here.
Dr. Sal Mercogliano:Thank you for having me, and I think this is not going to go away anytime soon. I think we're going to definitely have a conversation about this for a while to come.
Lauren Beagen:That's right. We're just getting started. Right, the work is just getting started. Even with an agreement in place, there's a lot to unpack still. So well, thank you very much. You're welcome. Thank you for having me.
Lauren Beagen:So, as always, the guidance here is general and for educational purposes. It should not be construed to be legal advice directly related to your matter. If you need an attorney, contact an attorney, but if you do have specific legal questions, feel free to reach out to me at my legal company, small Strategies. Otherwise, for the non-legal questions, the e-learning, the general industry, information and insights, come find me at the Maritime Professor. I hope you enjoyed the conversation today. If you like these videos, let me know, comment, like and share. If you want to listen to these episodes on demand, or if you missed any previous episodes, check out the podcast by Landon Bicy. If you prefer to see the video, they live on my YouTube page by Land and by Sea, presented by the Maritime Professor. And while you're at it, check out the website themaritimeprofessorcom and make sure to follow Dr Sal Mercogliano on what's going on with shipping too. He has a wildly popular YouTube channel. So until next week. This is Lauren Began, the Maritime Professor, and you've just listened to by Land and by Sea. See you next time.