GARAPAN Saipan — "The freight rates will go up and it only makes business sense to assume that ” said Mar Labrador general manager of CSX lines.
Northern Mariana Islands consumers can expect to see shipping rates rise if the volume of garment industry-related shipments stay the same or deteriorate further he said.
Labrador gave a hushed audience at the Marianas Round Table economic conference in Saipan his assessment of the imminent effect of the downturn in volume in the garment industry in the Northern Mariana Islands.
Speaking to a packed conference on May 20 he said "Garments provide volume and economies of scale.”
Labrador told the Journal “I presented the argument that what really drove the service there — in and out of Saipan — is the garment industry.” Were the situation not to improve or to worsen Labrador said “Then the emphasis for carriers to maintain that level of service will go away. You may not have the same frequent level of calls or fast transit times. If service levels go down or stay where they are given that the revenue may go away prices may have to go up. It’s cause and effect.”
While a rise in price would not be Labrador’s decision “At the end of the day that’s not my call.” He said shipping companies in the region would be faced with two ways to maintain revenue.
“The shipping companies can do one of two things — bring their service level down or if the community maintains the service levels then the cost would have to be higher given the volume whichever is more appropriate.”
Labrador said the air-freight sector of the transport industry had been the first to feel the downturn in loads.
“The significant drop really occurred with the air-freight side. They’ve been impacted pretty dearly for the past couple of months. It’s only really now that we’re starting to see an impact on the shipping side.”
Labrador said Horizon had only weeks of data that showed a significant drop in shipping volume.
The flow-through effect would also touch goods imported into the Northern Mariana Islands he said. “Once again one of two things can happen: the less timely availability of all those products in Saipan or it would cost more to get that product in Saipan because of a higher freight rate.”
A less buoyant shipping market would also affect Guam and organizations that do business there Labrador said.
“Guam is really the transhipment point for Saipan so the impact would be in transhipment revenues. For the feeder lines that call between Asia and this region — they’ll have to assess what they are going to do.”
The impact has been softened for the Marianas by the recovery of Guam’s economy Labrador said.
“A shipping company that ships here from Asia or the U.S. looks at the Marianas as a whole. For the region it’s OK but that’s because Guam’s looking good and holding up pretty well. That might be diverting some of the impact on Saipan.”
Michael P. Henderson marketing and communications manager at the Port Authority of Guam told the Journal while Saipan cargoes have receeded the transhipment market was holding steady.
Overall he said despite a dip in January and February tonnage had not dropped. “While the garment shipments have dropped substantially other cargo markets are being opened up. Henderson said one shipping line had been making more use of Guam as a transhipment point for the freely associated states of Micronesia. He said the downturn in transhipment cargo had been quickly noted at the port and had occurred “as soon as business started to drop after the first of this year. Saipan’s not our only transhipment customer although they are the major one. But anything that comes from the U.S. mainland that ends up in Palau Yap or Chuuk usually comes to Guam first.”
Seabridge Inc. which ships between Guam and Saipan as well as between other Micronesian destinations has seen a decline of 35% in export (Saipan to Guam) volume as well as a 10% decline on imports (Guam to Saipan) since the beginning of 2005.
Paul L. Blas general manager of Seabridge told the Journal “The decline has had the same residual effect on revenue which thus has increased the cost of our operations to Saipan. The 35% decline was compared to the 2004 total export volume numbers which also witnessed a 30% decline compared to prior years. In 2004 garment manufacturers in China started to expand capacity in anticipation of lifting of quotas. With this Saipan started to see the effects late last year. This change has made a significant impact on the cost of our operations. The reduction of volumes plus the increase in fuel costs have been a double whammy that we have had to contend with the last 18 months.”
Rising rates were inevitable Blas said. “The effects on shipping in the market caused by the opening of China for garment manufacturers will not go away. The effects of this change in the business environment on Saipan will be a long-term one as the costs of doing business in China are far better than the costs on Saipan.”
Blas said lower freight volumes entering and exiting Saipan in the last 18 months increased Seabridge operations costs by about 50%. “Frankly this would be too high to pass on so we have been looking at ways to minimize the impact on rate changes. We are going through the exercise of looking at cost reductions internally and other savings opportunities before we conclude a rate adjustment factor.”
Seabridge had considered leaving the Micronesian market Blas said. “Although there is opportunity to move our assets elsewhere we cannot abandon this market as we feel committed to sustaining our service to our island brothers and sisters who we have served the last 20 years. Unfortunately different economic condition dictates that we need to change certain elements of our rate structure in order to stay viable in this market. I am sure all carriers who service this market have the same issues to contend with. Any changes in our rate structure will have to occur sooner than later as we have held out doing so even after the impact started occurring over 18 months ago.”
We did this in order not to discourage the manufacturing activity here on Saipan but unfortunately China is just more attractive for those garment manufacturers looking for a better environment to save on their cost of producing garments.
The impact of a downturn in the garment industry should not be underestimated Labrador said. “The multiplier effect of the garment industry on retail operations real estate and shipping — those are huge impacts — and an indicator of how near and dear the garment industry should be to Saipan.”
Blas said the impact on Saipan with the opening of the China garment market had been underestimated.
“We believe that while many people hoped for the best while China geared up for this new opportunity people were not paying attention to the events that were already happening. Orders for CNMI-manufactured garments started to show signs of reductions over 18 months ago and garment manufacturers started to close as soon as the year started. These were real circumstances that people were rationalizing and unfortunately the lack of action to save the industry has put the industry in its current condition.
“It will be an uphill battle to save this industry unless people pull together and get focused on the issues. Nonetheless whatever happens in the course of trying to save the industry will not bring back the industry to its previous level since the savings benefit China offers to businesses far outweighs the opportunities that CNMI previously offered since the ‘Made in USA’ branding is no longer advantageous.” MBJ