THE IMPACT OF THE TRUMP TARIFFS ON THE FF&E INDUSTRY

by Kevin Williams, Director at JMC Global  

Let’s start with a quick recap of what has changed over the past six months, then look forward to 2019.

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  1. Trump announced a "Trade Policy Agenda" intended to benefit US workers and companies in February 2018. He called for a re-negotiated NAFTA and a “Section 301” investigation into Chinese practices, related to forced technology transfer, unfair licensing, and intellectual property policies and practices. Subsequent announcements threatened to impose tariffs on Chinese goods unless an agreement with China was reached.

  2. A 10% additional tariff was imposed – including Furniture Starting September 24, 2018, US Customs began collecting an additional 10% tariff on $200 billion worth of Chinese-origin imports, including most furniture products.

  3. Increased bonds required of importers Many importers have been forced to increase the level of the bonds they maintain with US Customs (CBP). Required bond amounts are often 10% of the projected amount of annual duties, taxes and fees the importer of record pays to CBP each year. Since many tariffs on furniture were ZERO, these new requirements are 20 to 100 times what they were, creating confusion and a burden om many small importers.

  4. Stronger US dollar buys more abroad Financial impact of these 10% tariffs has been offset by currency strengthening. The USD has strengthened in value over past 6 months, up 10% in value vs Chinese Yuan/Renmibi (CNY) – from 6.31 CNY on 4/9/18 up to 6.92 on 10/10/18.

  5. 25% tariffs on the horizon Unless a trade deal between USA and China is reached soon, these tariffs will rise another 15% (up to 25% total) as of Jan 1, 2019.

  6. Peak Season Congestion = Longer & Tighter than Ever! Net effect of all this tariff uncertainty has been importers rushing to accelerate all their material on order, trying to arrive before these higher tariffs begin. Result has been that “Peak Season” has started sooner and is going longer and stronger than ever, with major congestion and delays in China and vessels fully booked up for weeks / months.

  7. Shortage of US Trucking Nationwide, carriers are reporting increased “Load to truck ratios” and a growing shortage of drivers. Thus, rates have risen (2% per month!) and LTL carriers are packed, causing customer service issues.

  8. NAFTA 2.0 On September 30, USA announced that a new trade agreement (USMCA) had been reached with Canada and Mexico. In 2017, Mexico exported $1.14b of furniture to USA, and this is expected to more than double in the future.

  9. Global Oil prices reach 4 year highs and even higher in foreign currencies. This has caused a significant increase in costs for all modes of transportation – ocean, rail, trucks, and air.

  10. GDP Rising, Unemployment Rate Falling US unemployment rates have reached 50 year lows, as the strengthening economy is putting millions back to work. Wages are rising and companies doing more to retain current staff and recruit new employees. The economy continues to grow: GDP growth hit 4.1% for Q2 of 2018. 

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Here’s the outlook over the next 6-12 months:

  1. The hospitality industry will continue its strong growth trend, with expectations of 5% growth in new projects in 2019 and 2020.

  2. Tariffs will rise to 25% starting January 1, 2019, impacting budgets everywhere.

  3. Oil prices are projected to continue to rise – up to $100/bbl by 2019. The impact here will be rising transportation rates (or at least sustaining them at the Peak Season levels).

  4. Expect a rapid growth in sourcing outside of China, where furniture manufacturers are already experiencing RECORD SALES, and they are expanding their production capability as quickly as they can. Alternative countries include Vietnam, Indonesia, Malaysia, India, Brazil and Mexico. However, China still has a 55% market share ($13.7b in 2017), more than all other countries combined. Thus, Chinese factories will continue to manufacture the majority of furniture for some time to come. Which leads to point 5…

  5. Cheating will increase. Some competitors will try to avoid tariffs by mis-labeling their goods, either hiding their Chinese origins or re-classifying them under a different harmonized code number. The Wall Street Journal wrote an excellent piece on this (email Kevinw@JMCgl.com if you can’t access the full story behind their paywall).

  6. Want more insights? Check out this excellent piece by Thomas Russel, Editor at Furniture Today – titled: “Global Sourcing: What’s the Next Move?

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STORM WATCH: HURRICANE MICHAEL IS MAKING LANDFALL

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Hurricane Michael is coming ashore now - at Panama City, Florida - as a 150 mph Category 4 hurricane. This storm is potentially catastrophic; if Michael reaches the coast with top winds of at least 130 mph (minimal Category 4 strength), it will be the strongest hurricane landfall ever recorded in the Florida Panhandle, as well as along most of Florida's Gulf Coast — all the way from the Alabama border to Punta Gorda — in records going back to 1851. PLEASE be safe.

Michael's track will take it up through Georgia, near Atlanta, then it will veer off to the North East. Highways impacted include I-10, I-20, and I-85 & I-95. Operations will likely be impacted throughout its path. Again, PLEASE be safe.

In Its Teenage Years, Montage Is Going On A Growth Spurt

by Doug Gollan, a Contributor, for Forbes.com

In a private dining room at The Bellagio Resort in Las Vegas during August when many CEOs would rather be on vacation somewhere that the outside temperature is not 115 degrees, Alan Fuerstman was clicking through slides of his hotels, recently opened ones, locations about to open, some of his classics, and the pipeline of projects for his two luxury brands, Montage Hotels & Resorts and Pendry Hotels. It's something the founder, chairman, and CEO of Montage International has been doing for three straight days every August since 2003 and apparently enjoys immensely. The adoring audience for the presentation is top producing travel advisors from the Virtuoso network attending their annual conference.

As images of hotels and resorts in Los Cabos, San Diego, Kapalua, Laguna Beach, Beverly Hills, South Carolina, Baltimore, New York City, the New Jersey countryside, Sonoma and Montana roll by one of my tablemates says under her breath, “It gets longer every year,” creating a few laughs, but not enough to stop the proud boss and the company's largest shareholder. After a few more clicks one of his colleagues gets up and whispers to him, causing a pause. Fuerstman then stops to tell the advisors, some of what he is showing them are projects that haven’t been officially announced, but since he considers the agents part of the Montage family, he is going to show a few more, but please don’t post anything about them…yet.

If it seems more like one of those gatherings where your favorite uncle is showing home movies from his most recent road trip across America, it’s not an accident. Most of the group have known each other for decades. Much of the management team at Montage has been there from the beginning or just about, including Fuerstman’s son Michael who serves as co-founder and creative director at Pendry. Fuerstman jokes to the audience that his scion's entrée into hospitality started a few hundred feet away as a lifeguard at the Bellagio’s pool back when dad was the vice president of operations here.

Things are changing, however. Montage entered its teen years with just three hotels, Laguna Beach, Deer Valley, and Beverly Hills, and a single brand. Earlier this year it celebrated its 15th anniversary by opening a stunning resort in Los Cabos that brings the current count to eight open properties. By the time the group turns 21, there should another seven or eight venues, possibly more, based on Fuerstman’s slide show.

The growth comes against a backdrop when many were wondering if smaller luxury groups could survive in a world where the big players were getting bigger. Over the past several years, Marriott International added The Luxury Collection, St. Regis and W Hotels to its own The Ritz-Carlton, Bulgari, Autograph Collection, Edition, Reserve and JW Marriott brands. France’s Accor picked up Fairmont, Raffles, Swissotel, Onefinestay and an interest in Banyan Tree and SLS parent SBE in addition to its Sofitel, Legend, M Gallery and SO flags. U.K.-based behemoth IHG has been moving away from its core of Holiday Inn and Intercontinental business hotels bulking up with Kimpton and Regent. Not to be left out, Hyatt recently signed a partnership with Small Luxury Hotels and is pushing its Andaz brand into the 5-star segment alongside Park Hyatt and Grand Hyatt.

Most luxury hotels aren’t owned in any significant way if at all by the companies whose signs you see on the door, so growth is based on top brass making a constant stream of presentations to developers and financiers working to get deals to manage hotels either as a new build or conversions.

“For a hotel owner, you select a management company for their expertise, but also for distribution, their ability to make technology investments for the future, research into consumer trends, loyalty programs that drive the types of business you need, buying power for everything for refrigeration units to paper towels and so on. The bigger the company, the more scale, so scale is a very powerful proposition for an owner,” says one hotel executive I talked to, adding, “When you see a small group with a big pipeline of management contracts, it’s saying that owners are rating management, operations and the product they are delivering at a level that offsets the disadvantages of being small.”

And perhaps that’s the point. Both the owners who hire Montage to manage their hotels and the travel advisors who recommend them to their well-heeled clients are buying into the Fuerstman’s vision, with Montage the idea that the highest level of luxury service can be delivered in a modern way, localized to California Cool or Southern Charm. With its second brand, Pendry, the company wanted to prove that you could have trendy lifestyle hotel and a bit of a party scene but with the same attention to pleasing the guest as at the mother brand.

"Alan and his executive team have elevated (Montage) to the top of the luxury hotel market. My clients love staying at their properties and are always wanting to try another hotel within the brand," says Anne Morgan Scully, president of McCabe World Travel, adding, "Their newest brand Pendry is attracting their own following and has one of the most forward-thinking hotel designs in today's hotel market They are creating great public spaces that are cutting edge, fun and the place where clients want to be seen. Alan has the golden touch on delivering hotel brands that are sought after by clients looking for excellence in hotel satisfaction."

Nancy Strong, the CEO of Strong Travel Services says, "Montage is an intelligent brand with a true vision of the future independent traveler.  Their ability to understand the needs of the luxury traveler is the secret sauce of their success."

With rates at some of its Montage hotels that can start in the high hundreds of dollars per night and go up from there, Fuerstman acknowledges as the luxury market buoyed by the strong economy stretches to see how far it can increase pricing, the pressure is greater than ever to deliver that perfect stay. He says the company has been preparing for its expansion and maintaining its uber-luxury service by doubling down on investments in training and bulking up its executive team. Interspersed with company veterans are newcomers recruited from Marriott, Hilton, Hyatt, Rosewood, and Viceroy.

Lindsey Ueberroth, the CEO of Preferred Hotels & Resorts, a marketing group which represents over 650 luxury hotels in 85 countries visited Montage Los Cabos over the summer. She says in addition to being impressed with the hard product, including the space and finishes of even entry level rooms, the service delivery was already in full gear, something most experts believe takes at least a year to nail at the high end of luxury.

When after the lunch in Las Vegas I told Chris Hamaway, the group’s senior vice president of sales and marketing that Montage reminded me of Ritz-Carlton in the early years under its legendary founder Horst Schulze, he replied, “Horst hired me in 1999 and to this day many of the things he said in those first few years resonate. We try to be humble, keep our head down, and take care of the guests.”

While for now, Los Cabos is the only international destination in its portfolio and Maui is its furthest afield, looking at its future map highlights that even if you are super rich, you won’t have to travel to another continent for an interesting luxury experience. Last year the company broke ground on a Montage and Pendry in the picturesque California desert at La Quinta. In January, it signed a deal to build the Montage Healdsburg on 258 acres in Northern California's wine country due in 2020 featuring 130 bungalow-style accommodations.

Last month, the news was Montage Big Sky, which is set to open in 2021 less than one hour from the Bozeman Yellowstone International Airport and only 45-minutes from Yellowstone National Park. With a mountain modern design with aesthetics inspired by the natural setting, the $400 million resort will feature 150 guestrooms and suites and 39 Montage Residences. Resort amenities include a three-meal restaurant, lobby bar, and lounge, market, pub and recreation room with a bowling alley, indoor lap pool, family swimming pool, fitness center, Spa Montage, and 12,870 square feet of meeting and event space. The resort will feature ski-in, ski-out access to Big Sky Resort’s 5,800 skiable acres and access to Spanish Peaks Mountain Club’s 18-hole Tom Weiskopf-designed golf course.

Scheduled for 2020, Pendry Natirar in the rolling hills of New Jersey’s Somerset County about an hour from Manhattan will use a 33,000 square foot Tudor-style mansion formerly owned by the King of Morocco as the focal point for an adjoining hotel with 66 guest rooms and suites. In addition to residences for sale that will range up to 4,000 square feet, there will be over 13,000 square feet of meeting space that will make the resort a prime destination for executive meetings as well as family celebrations.

Stacy Small, CEO of Elite Travel International says, "I feel like I was on the ground floor and since (its first property in) Laguna Beach, I couldn’t wait to see what’s next. They’ve been true to what they said they were going to do. They’re not just going into the traditional markets everyone else is, and that’s good for me because clients always want new places."

Perhaps the most important of Montage’s recent spurt of announced announcements was its June deal to open the 164-room Pendry Manhattan West hotel in 2021 as part of an eight-acre shopping, residential and office complex that already has signed up Accenture, Amazon, Ernst & Young, J.P. Morgan Chase and the National Hockey League as tenants. The development is well situated adjacent to the ongoing $25 billion Hudson Yards project and Penn Station redevelopment which will change the face of one of the city’s last grimy areas. It’s also a significant win when one considers the list of luxury hotel groups that have had New York on their wish list for years and decades. There are more projects in the pipeline that we’ve heard about and actually seen, however, you’ll have to wait. Either way, as Montage matures from teenager to full-fledged adult, if Fuerstman's slideshow is any indication, the best is yet to come.

Swiss village of Corippo to be turned into big hotel

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By Maureen O'Hare for CNN

The tiny mountain village of Corippo, arranged higgledy-piggledy on the green slopes of southern Switzerland's Verzasca valley, looks like something out of a fairytale. 

But here, in what is Switzerland's smallest municipality, the citizens are facing a harsh reality. 

What was once a thriving farming community of around 300 people has dwindled to just 12 residents, 11 of whom are over 65. Today, the only economic activity in the town is the local osteria, a rustic restaurant. 

Here, in the Italian-speaking part of Switzerland, not far from Lacarno, Corippo's slate-roofed buildings, built from local Ticino granite, have remained largely untouched for centuries -- but it's now on the verge of becoming a ghost town. 

Scattered hotel

However, all's not lost. A local foundation, Fondazione Corippo 1975, has come up with a novel way to save the village: Corippo is set to become the country's first "albergo diffuso," or scattered hotel

Borrowing a model that's already proven successful in Italy, around 30 of the village's 70 buildings -- slate-roofed, built from local Ticino granite, and centuries-old -- are to to be converted into vacation cottages and hotel rooms. 

It will, says Fabio Giacomazzi, an architect and president of the foundation, give visitors "the chance to experience a very particular sojourn in a genuine rural village that remained practically the same since 1800."

Aside from soaking up the atmosphere of an authentic Ticino village, guests will also be able to hike through the region, visit cultural sites and enjoy the local gastronomy. 

Open for business

"The idea emerged in the '90s," says Giacomazzi. "The original idea to bring back permanent inhabitants was [no longer] feasible, because the buildings are too small and not directly inaccessible by car." 

And now, finally, things are starting to happen. The first cottage, the two-bedroom Casa Arcotti, opened to guests in late July 2018, while the hotel proper is scheduled to open Easter 2020. 

The full three-stage restoration plan -- which comes with a price tag of around $6.5 million -- would see the osteria expanded and refurbished, in order to become not only the hotel's dining room but also a reception and meeting point. 

The public squares in front of the town hall and church are to become open-air communal spaces, while a mill, a bakery and a chestnut-drying room are also slated for renovation. 

There are also plans for landscaping, and the reintroduction of goat farming, as well as rye, hemp and chestnut trees. 

What next?

The project is not yet fully funded, although the New York Times reported in August 2018 that $2.7 million had been raised so far, through public funding as well as bank loans. 

There's been a lot of international interest in the project, with visitors keen to immerse themselves in Swiss village life. And in 2017, the project won the Swiss hotel and restaurant association Gastrosuisse's Hotel Innovation Award. 

However, there are some question marks as to the feasibility of the project. 

With such a small, aging population, there are relatively few people available to greet the visiting tourists. Concerns have been expressed about whether efforts should be focused on fixing infrastructure issues like poor water supply instead of attracting travelers. 

Giacomazzi says the hotel concept could boost resident numbers. 

"We hope that the hotel will offer the opportunity for a young family to undertake the management and to settle in Corippo together with some employees," he says. 

The plan is also to attract craft traders to the area, to further revitalize the village.

6 Free Activities Concierges Always Recommend

By: Mackenzie Dunn for Domino.com

Have you ever used a hotel concierge? They’re actually quite wonderful. Too often, while traveling, we rely on recommendations from friends, Google, Yelp, or our favorite travel blogs, without taking advantage of the very people whose job entails helping patrons find the very best things to do while on vacation. Note to self: Use the hotel concierge service more often.

These hotel staff members know the area around their establishment like the back of their hand, so their recommendations are quite valuable. And forget what you knew about concierges, they’re not just for the rich and famous looking to live the luxe life. You can often use their services without spending a dime, and they can recommend a ton of free activities, too. In fact, using concierges is a great way to save money during your stay. Some will even create a custom itinerary for you based on the highlights you definitely don’t want to miss out on, From the activities included in your hotel stay to those in the area that won’t cost a thing, we asked a few hotel concierges what their favorite free attractions were around their establishments. Though some of their top picks are location-specific, keep in mind that many of these destinations have similar activities to offer—so when in doubt, just ask! Just take it from NYC-based concierge Patrick Trevor, who says, “Always make sure you wander because you may stumble upon some secret gems.”

Learn about local history and culture

Many of our concierge experts love to recommend free cultural experiences that guests can take to get to know a bit about the history of their surroundings. If you’re visiting somewhere totally new, this can be a great opportunity to get to know the city’s backstory or immerse yourself into a bit of its cultural history.

For example, places like Philadelphia and Portland have free entry to the Museum of Art, according to the concierges at The Logan and Hotel Modera respectively, while Chicago has a hidden experience called The Chicago Money Museum where patrons can learn more about how and where currency is made. The LondonHouse Chicago’s concierge Shannon Boland also loves recommending the Chicago Cultural Center as a chance to take in more about the city and see some incredible rotating art exhibits, but any large metropolitan area is bound to have a cultural center that also acts as a free sightseeing activity. If you are in D.C., Chris Adcock, the Clefs d’Or Concierge at The Jefferson, recommends you check out the free Smithsonian museums, in particular, the National Air and Space Museum and the National Portrait Gallery, as well as the Library of Congress.

Even if you are traveling abroad, be sure to ask about free museum days or deals in the surrounding area. Take the concierges at the Bank Hotel in Sweden for example, who recommend learning about Swedish architecture and design at the Architecture and Design Center or even going underground to see the amazing subway art. The point is, you never know what you can find in a new city. These concierges recommend trying to learn about your surroundings through free museums and cultural experiences you won’t soon forget.

Meanwhile, if a hike or bike ride seems too involved for vacation,  sometimes a walk will suffice as a simple and relaxing activity for the family. Eric Landt, General Manager at The Wauwinet in Nantucket loves pointing his guests to the ‘Sconset Bluff Walk (also known as the Cliff Walk)  which is the most scenic path in Nantucket or suggesting they opt for some free morning meditation on the beach.

Whether it’s in the valley, the mountains, or by the sea, these concierges say it can never hurt to get outside and take in your surroundings. As a visitor, you’ll be able to appreciate the landscape through walking trails, boardwalks, and open parks.

Explore the downtown

As we said, hotel concierges know their area, and they want to help you get to know it, too. Several hotels will offer free walking tours of the surrounding city, but concierges suggest you also wander on your own. If you’re a book lover, some of our concierge experts loved recommending small, niche mom-and-pop bookstores that were a part of the local fabric for a taste of where the locals go.

The concierges at the Bank Hotel in Sweden pointed out that in some big cities there are older, more historical sections, along with the newer, built-up ones. They love suggesting guests that walk through Stockholm’s old town along the narrow streets, as well as the newer, more modern heart of Stockholm’s downtown, but you should take this into account and use the concierge to scout out all the lesser-known spots, no matter what city you’re in.

Try Local Cuisine

Concierges can recommend the best restaurant for you based on budget, but if you’re looking to cut costs on eating out or sampling some of the local fare, many of our experts suggested that markets are the best place to go. Concierge, Patrick Trevor, from Mr. C Seaport loves sending his guests to the local farmers market.

“My favorite free recommendation is to take a trip to Union Square Farmers Market for a free sample extravaganza,” he says. “All of the farmers are very excited to share their products and ask them for a free sample!” The Grove in Beverly Hills is also famous for this, as is Smorgasburg in NY and LA. The concierges at The Nines in Portland, Oregon recommend the Portland’s famous Saturday Market. And if you’re traveling abroad, finding a local open-air market may be easier with cities like Paris and Barcelona boasting expansive spaces for taking in both the culture and the cuisine. Either way, these spaces are often the best places to mingle with locals. You might even want to ask vendors for their favorite local restaurant recommendations—locals know best!

Listen to some local live music

This one might not be thing first thing that comes to mind when you’re thinking of how to occupy yourself during a trip, but you’d be surprised at how many cities have live music events throughout the week. After a day of exploring, relax with some music. Take advantage of the talent around you and sample the sounds of the city by asking your concierge where the free concerts are throughout the week. From live rock to jazz and instrumental, there’s bound to be something for everyone’s musical ear.  The concierge at The Ritz-Carlton in  Los Angelesrecommends those visiting check out the numerous free concerts, festivals, and more at the historic Farmer’s Market at The Grove or Grand Central Market, while Zachary Serrano, the Clefs d’Or certified Concierge at the SLS Hotel in Beverly Hillssuggests concerts at Amoeba, where your favorite bands will play in between major festivals like Coachella. One lounge near this Michigan hotel hosts top local jazz musicians on Sunday nights with no cover charge. 

Take a day trip

While it’s always fun to explore the area around your hotel accommodations, concierges also like to recommend taking a day trip if you have the time. Ask them if there are any places nearby that you should definitely check out. For example, the concierge at  King Charles Inn in Charleston’s Historic District loves to have his guests tour the city, but also recommends they take a fun day trip to nearby John’s Island. Concierges are also able to help you arrange transportation for your day trip excursion: whether that means taking a scenic train or boat ride, or getting a car service to take you where you need to go. If you plan your trip out right, sometimes you can fit multiple exciting day excursions to nearby cities, towns, or islands.

Oil Soars to Four-Year High

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  • Oil prices rose to a four-year high following OPEC’s meeting this weekend, according to the Wall Street Journal.

  • Transportation costs are rising too – in all modes of transportation – by sea, land, and air.

  • Over past 12 months, WTI crude oil prices rose 37%, from $47 to $65/bbl.

  • This caused diesel fuel prices to rise 29% (from $2.50/gal to $3.22/gal).

  • Thus, overall trucking costs rose by 23% - about 2% every month.

  •  Container shipping costs are being driven up as well, as prices for bunker fuel have surged 270% since 2016.

  • Outlook for 2020 (when IMO pollution standards kick in): EVEN HIGHER!

How will this impact FF&E supply chains?

What can purchasing companies do to mitigate these rising costs?

Download OPEC’s World Oil Outlook 2018: https://woo.opec.org/, or contact Kevin Williams at KevinW@jmcgl.com, or your JMC sales representative to discuss alternatives  

Urgent FAQs on the New China Tariffs

Q1: What’s new? Starting Monday 9/24, US Customs will collect an additional 10% tariff on $200 billion worth of Chinese-origin imports.

Q2: Just 10%? Is that it? Nope. Starting 1/1/19, this additional tariff will rise another 15%, up to 25% additional tariff (unless negotiations are successful).

Q3: How can we avoid paying this 25%? JMC is working with many of our clients to accelerate their shipment, to arrive before 1/1/19. This can save them the difference (25%-10% = 15% possible savings)

Q4: How do we determine if OUR items are impacted? The list contains 5,745 full or partial tariff lines. Note that there are two parts the list: Part 1 products are fully covered (pages 1-18). Part 2 lists products that are classified in the 8‐digit subheadings of the Harmonized Tariff Schedule of the United States (HTS) that are partially covered by the action (pages 19-31).

Click here for the official list

Contract US truck rate growth to slow, but still climb, in 2019

by William B. Cassidy, Senior Editor, and Ari Ashe, Associate Editor, respectively, for JOC.com | Sep 18, 2018 10:31AM EDT

  US carriers are ordering trucks at record high numbers, but those trucks won’t be built, let alone hit the road, until next year. Drivers will still be hard to hire.

US carriers are ordering trucks at record high numbers, but those trucks won’t be built, let alone hit the road, until next year. Drivers will still be hard to hire.

After rising by double digits in 2018, US contract truckload rates could rise a more modest 5 percent on average in 2019, and swing even farther towards shippers afterward, if the hot US economy begins to cool.

Some industry analysts believe 2019 will be a transition year in which carriers still hold power over shippers, but the grip is loosening and could be lost completely, if economic growth stalls by 2020. Others understand conditions may change eventually, but say a repeat of the freight recession in 2016 is unlikely to happen unless the US economy slumps into recession.

Forecasters also warn shippers that they are merely making an educated guess, so a sound strategy would include paying close attention to spot markets in the next six months. Much depends on the strength of economy in 2019, and whether the balance between truck supply and freight demand swings closer to an equilibrium next year.

Shippers should not set hopes too high

Shippers looking for a return to balanced conditions shouldn’t set their hopes too high, based on currently available market data and projections of US economic growth. Some believe today’s bullish conditions — for truckers, that is — will last longer.

The US economy seems able to absorb capacity faster than trucking companies can add trucks and drivers. US real GDP expanded 4.2 percent in the second quarter and is growing at a 3.8 percent rate in the third quarter, according to the Federal Reserve Bank of Atlanta.

Carriers are ordering trucks at record high numbers, but those trucks won’t be built, let alone hit the road, until next year. Drivers will still be hard to hire.

For every pro-carrier market, however, there is a pro-shipper market — chief financial officers just have to be patient. Often spot rates are a leading indicator on contract pricing and history can teach us valuable lessons on the issue.

In 2014, spot market rates rose more than 25 percent on a year-over-year basis. Growth rates, however,

decelerated to 15 percent by the end of 2014, and into single digits by February 2015. Eventually year-over-year spot rates went negative in June 2015, according to DAT Solutions. In the 2015 third quarter, US real GDP expansion dropped to 1 percent, and to 0.4 percent in the fourth quarter, and remained between 1.5 and 2.3 percent until the 2017 second quarter.

In the contract market, motor carriers secured rate increases in 2014 and 2015, but shippers negotiated freezes and rate cuts in 2016 and early 2017.

The spot market began to recover in March 2017, eventually climbing more than 32 percent year over year this January. Contract rates quickly responded too, growing more than 10 percent earlier this year, and by 20 percent in August, versus a year ago.

Small victory for shippers: spot market rate growth decelerated since January

For shippers, the silver lining is that spot market rates have decelerated since January, ending August up 17 percent higher year over year. DAT predicts rates will grow in the teens through December, then further slow into single digits in 2019.

It will be increasingly hard, even with a healthy economy, to sustain year-over-year increases comparable to those seen in 2018. If history repeats itself, contract rates next year will look like 2015, then flip back towards shippers in 2020.

“There is enough pressure from the economy to continue to push rates higher but at a more moderate pace going forward,” said DAT industry analyst Mark Montague. “When you look at the structural drivers — energy, e-commerce, or general economy — everything says rates will still be higher next year, but there will be moderation in both the spot and contract markets.”

Matthew Harding, vice president of Chainalytics, explains that it’s very difficult to anticipate where the spot market will head because there are too many variables. Some of it is behavioral such as actions to counteract tariffs on Chinese-made goods. It can also be psychological, however, such as retailers panicking about empty shelves this holiday.

“What is most important to us is the differential between spot and contract rates. Coming out of August, our data show there was a 10 percent differential in rates. That 10 percent falls below the pressure that is necessary to continue sustainable growth in contractual pricing,” Harding said.

Based on a seasonally adjusted reading of Truckstop.com’s Market Demand Index, trucking economist Noel Perry thinks capacity has reached an apex, and spot rates will continue to fall, pulling down contract rates in 2019.

“Pricing and profits will stay strong in the contract segment through the end of the year, at least, and perhaps through the end of the 2019 first-half seasonal peak,” Perry said in an Aug. 3 column published on his Transport Navigator website. In early September, however, pricing relief still seems far off.

Broughton Capital economist Donald Broughton has a different view. Rather than being in the ninth year of a recovery, he believes the consumer market is still early in the recovery cycle, with the consumer-led portion of the recovery less than two years old.

“Although the comparisons are extremely difficult in the first couple months [of next year], overall freight shipments and freight expenditures will be higher in 2019 than 2018,” said Broughton, author of the Cass Freight Index and chief market strategist for Freightwaves.

In August, the Cass Freight Index was up 6 percent on shipments, 17 percent on shipper expenditures, and 10 percent on truckload linehaul rates, not showing any inflection point.

Shippers should remember the lessons learned from this year as they negotiate rates in as 2019. Next year won’t be as nasty as 2018, according to Andrew Lynch, president of Zipline Logistics, a Columbus, Ohio-based third-party logistics provider, but he also doesn’t “see freight markets plummeting back to where they were in 2016 for a very long time.”

Chinese-Made Air Conditioners, Food, Furniture, and Toys Part of Trump's $200 Billion Tariff List

By GLENN FLEISHMAN for Fortune.com on September 17, 2018

Boats, TV sets, and cooper are among the list of imports covered by $200 billion in new tariffs against China that the Trump administration announced Monday. The list is a lengthy grab bag of several hundred items, including large categories of consumer and bulk food, raw chemicals, and metals used in industry, personal-care items like perfumes, mattresses, toys, and much more.

This addition brings tariffs to about half of all goods imported from China to the U.S. Tariffs increase the cost of goods to U.S. buyers, and lead to higher prices for the same items from domestic producers and imports from countries that have avoided tariffs.

The surcharge starts at 10% later in September, and jumps to 25% by the end of 2018.

An anticipated and preliminary list of possible products appeared in July. The final list released today removed 300 items that include smartwatches, bike helmets, children’s playpens, some chemicals, and health and safety devices.

President Donald Trump said he imposed the tariffs to pressure China on business tactics that he said unfairly disadvantage American businesses. At the White House on Monday, he said the U.S. trade gap with China—the net between imported and exported goods between the two countries—was too large, and “We can’t do that anymore.”

A previous $50 billion round of tariffs imposed on Chinese imports largely affected products used by American manufacturers in producing goods. China imposed about $34 billion in retaliatory import charges.

The new $200 billion round directly imposes a surcharge on consumer electronics, kitchenwares, tools, and food. China has previously stated if America imposed this new larger set of taxes, China would place tariffs on American imports that total $60 billion.

So far, economists have found no broad negative or positive effect from earlier tariffs imposed on China, and on aluminum and steel imports from several countries. The effects are noticeable in particular categories, however. The price of washing machines in the U.S. increased 20 percent following tariffs on metal imports, and all appliances on average jumped 7%, for example.

The U.S. Treasury had invited Chinese officials, including President Xi Jinping’s top economic adviser, to attend talks in Washington this week. But a deputy to that adviser said at a meeting on Sunday that China would not negotiate with the U.S. under pressure. No talks are currently scheduled.

A government collects tariffs as a form of import tax. Tariffs can be effective in narrow cases to offset government subsidies that create cheap exports to the U.S. and others to boost economic growth, a practice sometimes called “dumping,” or to protect endangered domestic industries that have national or cultural importance. Canada, for instance, imposes high tariffs on some imported dairy products as part of price supports for its farmers. But tariffs are also used as a trade weapon, in which a country heavy on imports, like the U.S., attempts to use the surcharge to force policy changes that diplomacy has failed to reach.

The World Trade Organization, to which both the U.S. and China are parties, has a complaints process that can allow the imposition of tariffs if the party claiming unfair trade proves its point, and the offending nation doesn’t change its policies. The Trump administration has bypassed the WTO on its tariffs, however.

The vast majority of economists say that tariffs increase the cost of goods to companies and consumers without a meaningful improvement for domestic industries that benefit from reduced competition, because the higher prices subsequently charged reduce demand.

The United States is now the largest global crude oil producer

Principal contributors: Candace Dunn, Tim Hess on SEPTEMBER 12, 2018, for the U.S. Energy Information Administration

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The United States likely surpassed Russia and Saudi Arabia to become the world’s largest crude oil producer earlier this year, based on preliminary estimates in EIA’s Short-Term Energy Outlook (STEO). In February, U.S. crude oil production exceeded that of Saudi Arabia for the first time in more than two decades. In June and August, the United States surpassed Russia in crude oil production for the first time since February 1999. 

Although EIA does not publish crude oil production forecasts for Russia and Saudi Arabia in STEO, EIA expects that U.S. crude oil production will continue to exceed Russian and Saudi Arabian crude oil production for the remaining months of 2018 and through 2019. 

U.S. crude oil production, particularly from light sweet crude oil grades, has rapidly increased since 2011. Much of the recent growth has occurred in areas such as the Permian region in western Texas and eastern New Mexico, the Federal Offshore Gulf of Mexico, and the Bakken region in North Dakota and Montana. 

The oil price decline in mid-2014 resulted in U.S. producers reducing their costs and temporarily scaling back crude oil production. However, after crude oil prices increased in early 2016, investment and production began increasing later that year. By comparison, Russia and Saudi Arabia have maintained relatively steady crude oil production growth in recent years. 

Saudi Arabia's crude oil and other liquids production data are EIA internal estimates. Russian data mainly come from the Russian Ministry of Oil, which publishes crude oil and condensate numbers. Other sources used to inform these estimates include data from major producing companies, international organizations (such as the International Energy Agency), and industry publications, among others.

Legacy Classic shifts sourcing to Vietnam

by Thomas Russell for Furniture Today. Published on September 14, 2018

HIGH POINT — Case goods resource Legacy Classic Furniture is adjusting its China-based sourcing model due to the threat of tariffs as high as 25% on furniture shipped from China.

The company recently revealed it has lined up new sourcing partners in Vietnam to produce its bedroom, dining and occasional collections as well as standalone bedroom and dining sets and bedrooms in its LC Kids line.

Earlier this summer when tariffs were first announced on mostly component types of product vs. finished goods like furniture, the company initially planned to introduce four bedrooms from Vietnam in the fall.

However, when it became apparent that furniture was in the crosshairs of an estimated $200 billion in additional proposed tariffs ranging from 10% to 25%, the company decided to shift all its sourcing for both Legacy Classic and LC Kids. Legacy is moving all new and inline product to the Vietnam factories, with production expected to begin in December.

For years, the company’s line was produced in China at Lacquer Craft Manufacturing Co.’s Shanghai-area factory. Lacquer Craft is the manufacturing arm of Legacy Classic owner Samson Holding, which also owns Universal Furniture and Craftmaster.

Legacy Classic President Don Essenberg said the company will source from four or five plants in Vietnam, which he declined to identify at this time. As part of the transition, he noted that the company will use the same finishing suppliers — AkzoNobel and Sherwin-Williams — it has used previously.

“I am confident that as far as our customers and consumers are concerned, this transition will be seamless,” he said, adding that the product will be built to the same specs, designs and finishes. “The product strategy doesn’t change; the only thing that changes is the source country.”

While Vietnam has lower labor costs than China, the impact on finished goods won’t be known right away. Legacy’s line currently falls within middle price points, with beds retailing around $599 to $699.

“We really have to get into the factories to see how things work,” Essenberg said, adding that the product will be phased into the factories production schedules. “Our goal is to start production this year.”

Five things to know about the Chicago hotel worker strike

 Workers picket in front of hotels around the city of Chicago. (Chicago Tribune)

Workers picket in front of hotels around the city of Chicago. (Chicago Tribune)

by Alexia Elejalde-Ruiz, a Contact Reporter for the Chicago Tribune. Published on September 11, 2018, at 12.45pm

A strike currently affecting 26 downtown Chicago hotels is the first broad hotel strike the city has seen, according the union that called for it.

It started Friday and, the union says, will go on until the hotels agree to its demands.

Here are five things to know.

Who is striking?
Hotel workers — housekeepers, doormen, cooks, bartenders, room service attendants and more — whose contracts expired Aug. 31 are on strike. The union that represents the workers, UNITE HERE Local 1, says that 6,000 workers are covered by those expired contracts, though it isn’t clear how many people have actually walked off the job.

Which hotels are affected?
Workers are on strike at 26 downtown Chicago hotels, including the JW Mariott, the Palmer House Hilton, the Hyatt Regency and the Sheraton Grand. The strike began Friday at 25 hotels and workers at a 26th hotel, the Cambria Chicago Magnificent Mile, walked off the job Monday. The expired contracts cover 30 hotels, and the four not yet striking are in labor disputes and could join, the union says. A list of affected hotels is at chicagohotelstrike.org.

Why are they striking?
The primary demand of the striking workers is to include a guarantee of year-round health insurance in their new contracts. Currently, many hotel employees lose their health insurance when hotels temporarily lay people off during the slow season, generally October through March, and have coverage reinstated when they are brought back to work when the weather warms. Though workers with seniority are employed year-round and get insurance year-round, the union wants all employees, regardless of tenure, to have uninterrupted health insurance, even during the slow months when they are not working at the hotels.

How does this get resolved?
The union negotiates contracts with each employer separately. So theoretically, if an agreement is reached with one of the hotels the workers from that hotel could cease to strike. But labor expert Bob Bruno said that the most efficient and effective strategy is to get one of the larger employers to establish a baseline agreement on the issue that other hotels in the city will follow.

“The incentive (for the union) is to create a standard for the industry,” said Bruno, labor professor at the University of Illinois at Urbana-Champaign. “And the employers gain some value on that too because they know they’re not competing on the basis of cost.”

Three major hotel groups comprise the bulk of the hotels where workers are striking. Hilton Hotels and Resorts manages the Palmer House, the DoubleTree Magnificent Mile, Hilton Chicago and the Drake hotel. Hyatt Hotels manages the Hyatt Regency Chicago, Hyatt Recency McCormick and the Park Hyatt. Marriott International’s portfolio includes the Westin River North, Westin Michigan Avenue, W Chicago Lakeshore, W Chicago City Center, JW Marriott and the Sheraton Grand.

What is the response from the hotels?
Hotels have been assuring guests that they are open for business and will continue to provide excellent service. But some guests have reported eight-hour waits to check in, long lines at breakfast and having to replenish towels themselves because there are not enough people to clean rooms. Managers have said they are rolling up their sleeves to empty out garbage bins and refill soaps.

Hotels have expressed frustration that the strike came so early in contract negotiations. Marriott, for example, said the union is still in the process of making its initial bargaining proposal.

“There is nothing about the current state of the negotiations or the longstanding and productive bargaining relationship between Marriott International and UNITE HERE that suggests that a strike is warranted or necessary,” Marriott said in a statement. “The parties are not at an impasse on any issue.”

Marriott, Hyatt and Hilton have all said they continue to bargain in good faith.

How Shipper’s Interest Cargo Insurance Benefits the Transportation Intermediary

By Anthony Nunziata and Tom Moran for Roanoke Trade | Published June 22, 2018

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It probably comes as no surprise that Shipper’s Interest Cargo Insurance benefits cargo owners. This policy is an effective risk management solution that transfers the risk of loss or damage to goods from the cargo owner to the insurance company. What may not be so well known is that Shipper’s Interest Cargo Insurance can benefit transportation intermediaries as well. By procuring Shipper’s Interest Cargo Insurance for clients, transportation intermediaries add a level of protection against gaps in a carrier’s motor truck cargo policy and financial risks including those resulting from contractual liability claims. Procuring insurance on their clients’ behalf can also serve as a tool to enhance client relationships.In order to evaluate how a cargo insurance program can benefit your organization, it is important to understand a few basic principles.

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How Shipper’s Interest Cargo Insurance Works

When a loss to goods in transit occurs, a cargo owner has limited options to recover their financial interests.
They can issue a claim against a Shipper’s Interest Cargo Insurance policy, the carrier who had possession of their goods at the time of loss or the transportation intermediary who arranged the shipment. Of these three choices, filing a cargo insurance claim is by far the best option both for the cargo owner and for the transportation intermediary. Subject to specific exclusions, the Shipper’s Interest policy provides door-to-door coverage against all risks of physical loss or damage. In the event of a covered loss, the cargo owner is not required to prove carrier negligence and they will not issue a claim against you as the transportation intermediary. Shipper’s Interest Cargo Insurance is a “first party” insurance product; therefore the cargo owner is reimbursed for their covered losses directly by the insurance company. Because the cargo owner does not have to prove negligence or take legal action, potential conflicts are avoided and the shipper’s relationship with the intermediary who provided the insurance is preserved.

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Details Matter

As a transportation intermediary, it is important to recognize that Shipper’s Interest Cargo policies are not boilerplate and they may differ significantly, especially in regard to limits, deductibles and exclusions. Special insuring conditions may apply to certain commodities such as household goods, servers on racks and fragile items. Certain perils such as improper packing, delay and inherent vice, may be excluded from coverage entirely. Transportation intermediaries should consult a competent insurance broker to guarantee that the product purchased is appropriately structured and priced for the intended use. Additionally, it is recommended that the intermediary require the cargo owner to accept or decline Shipper’s Interest Cargo Insurance in writing and proactively educate them regarding limits of liability which may apply in the event that insurance is not purchased. Another point for the transportation intermediary to consider is that a certificate of Motor Truck Cargo (MTC) Insurance will frequently fail to accurately and comprehensively convey the terms of the underlying asset-based carrier’s coverage. The standard Acord Certificate of Insurance does not provide details regarding policy exclusions or deductibles which may significantly impact a cargo owner’s ability to collect on a claim. Additionally, coverage may be terminated without notification to the transportation intermediary subsequent to the issuance of the certificate. Some unscrupulous carriers have even been known to present intermediaries with fraudulent certificates evidencing coverage which never existed. If unable to collect from the underlying asset-based carrier or the carrier’s motor truck cargo policy, a cargo owner who suffers a loss may even pursue a claim against the transportation intermediary. Even though this claim may not be supported by any prescribed statutory or contractual liability, the intermediary will need to engage legal counsel if a suit is filed and the client relationship is certain to be damaged. By providing the cargo owner with access to Shipper’s Interest Cargo Insurance, the transportation intermediary can avoid any potential liability resulting from the failure of the underlying carrier to answer a MTC insurance claim.

A Sound Investment

Shippers Interest Cargo Insurance is the broadest form of coverage available to address cargo loss or damage in transit and costs a fraction of a percent of the cargo value. When purchased, Shipper’s Interest Cargo Insurance guarantees that the cargo owner will be made whole by the insurer for losses or damages that fall within the policy parameters. Taking advantage of the opportunity to procure Shipper’s Interest Cargo Insurance for their cargo owner clients, provides astute transportation intermediaries with a tool to enhance client relationships and avoid potential liability claims.

How America’s motels became hipster havens

by a JLL Staff Reporter for JLL.com
published on 30 August 2018

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In the heart of Palm Springs, a once nondescript Howard Johnson motel with an on-site Denny’s restaurant is now the Ace Hotel & Swim Club, replete with outdoor fireplaces, live music by the pool, a vintage photo booth and Middle East-meets-California fusion dining.

The Drifter, once a rundown, dodgy edifice in New Orleans, now offers specialty coffees from La Colombe and poolside craft cocktails for guests staying in minimalist-style rooms.

The Vagabond in Miami, a former dive motel built in 1953, today has rooms with hypo-allergenic Italian bedspreads and stenciled geometric wall art.

Across the United States, hoteliers and developers with an eye for a great location and an affinity for Americana are buying fifties and sixties-era motels and giving them top-to-toe revamps, while making sure they retain the retro aesthetic that attracts style-savvy travelers. The trend has picked up so much steam that it has transformed the very notion of a motel – from one of a pit stop to one of a destination.

“These projects have removed the stigma of the motel experience,” says Geraldine Guichardo, VP of Americas Hotels Research at JLL. “There is no longer the assumption that all motels are degraded properties you pass on the road. The idea around the motel is now enhanced.”

A formula for success

The motel — a word which fuses “motor” and “hotel” — used to be the no-frills mainstay of the weary and budget-conscious road-tripper. As modern hotel brands have reclaimed these uniform spaces, a fairly universal approach has emerged. Designers tend to keep the overall architecture and trademarks of the building intact – as well as the exterior corridors, motor courts and small swimming pools. They often throw in a neon sign or two, so the establishment screams “hip vintage.”

But successful moteliers also include the necessary upgrades demanded by the traveler, Millennial or otherwise, who likes the idea of staying somewhere unique but doesn’t want to sacrifice comforts like high-thread-count sheets and fair-trade coffee.

In Napa Valley, for example, the Calistoga Motor Lodge — formerly the Sunburst Motel — fits right in with the aspirational vibe of the area, which is known for its Michelin-starred eateries and bountiful vineyards. Its grounds include three soaking pools, filled with water from local geothermal springs. The amenities range from a mix-your-own mud bar in the spa and pour-over Equator coffee in the rooms.

“In a market like Napa, a place like the Calistoga Motor Lodge makes sense,” says Guichardo. “A motor lodge with a spa that complements the vineyards and the wine experience — travelers want that quaint, simple, retro experience.”

Placemaking potential

Location is key to the success of any revamp. “When you have a market that is undergoing a real estate transformation, motel developers have the opportunity to be part of the market’s evolution and can benefit from the anticipated additional demand the market will observe,” Guichardo says.

The Vagabond Hotel in Miami, for example, sits on Biscayne Boulevard (which runs off from historic Route One), a stretch known for its craft breweries and art galleries. As a consequence, the Vagabond draws in design-savvy travelers.

For hoteliers considering a substantial makeover of an existing motel property, seeing thriving adjacent properties, both residential and commercial, “offers some level of assurance,” Guichardo says.

“If they see new restaurants coming in and multifamily complexes going up, with residents who have guests from out-of-town who can stay at the local motel, it makes sense for a hotelier to follow suit and create a new lodging product that’s in line with the cool feel of the neighborhood,” she says.

But it can also go the other way. Some hoteliers take these renovations to the next level by simultaneously sprucing up retail or restaurant properties in the immediately adjacent area, creating, in effect, a hip district.

More money, more problems

Despite the success seen by a number of these new motels, Guichardo says that, like every incipient trend, this one has its challenges. In order to reap the desired profit from their makeovers, many hoteliers need to charge rates that are double or even quadruple the rates of the original motel. Certainly, if a motel’s prices rise from $69 a night to $169 to pay for all the sophisticated touches, some travelers may elect to stay at a recognized hotel brand instead, a place where they know what to expect.

Investors entering the space need to be sure there is enough demand from cash-rich, minimalist travelers. Market research is key to understanding what visitors to an area value, Guichardo says.

Developers should also be cautious of focusing too squarely on Millennials, Guichardo says. While they “make up a considerable proportion of the lodging demand and are known for prioritizing experiences,” Millennials too are pairing off and having families. This may lead many to seek a more conventional hospitality experience.

While there are clear hurdles to a successful revamp, it’s clear the mass perception of a motel stay has changed, and more roadside eyesores will likely go the way of the Ace.

“They’re no longer a place where you pull up blindly after a night of driving,” says Guichardo. “Motels are a place you may want to consider far ahead of time, while planning a vacation. Some are so popular, there’s a waiting list.”

Higher bonds needed for tariff-hit US imports

  The United States Custom House in New York

The United States Custom House in New York

by Eric Johnson, Senior Technology Editor of JOC.com on Aug 13, 2018

Importers may be unaware that they need to increase the level of the bond they must maintain with US Customs and Border Protection for duties due to be paid over a 12-month period.

There’s a secondary impact to the recent imposition of tariffs on certain goods that US importers are likely overlooking: the need to increase the level of what’s known as a continuous bond, which covers a defined percentage of the projected amount of duties, taxes, and fees an importer is expected to pay over a 12-month period.

Failure to maintain a sufficient bond can hamper importers’ ability to get their cargo released at US ports and cause importers to incur demurrage, since US Customs and Border Protection (CBP) can direct shipments with an insufficient bond to be held. The increased bond requirements are also taxing the balance sheets of small and mid-sized importers.

Experts in this field told JOC.com this week that the tariffs assessed as part of the Section 301 and Section 232 actions by the Trump administration this year compel importers to recalculate their estimated exposure to duties. In some cases, that means an importer might need to increase its bond level by 20 to 100 times what it is today. And there’s evidence that CBP is increasing its watchfulness of importers not meeting their bond requirements, with one source saying that from June to July, CBP tripled the number of notices it sent to importers with insufficient bonds.

The import bond is required for all companies importing goods into the United States, with CBP having set the continuous import bond amount at 10 percent of those estimated duties, fees, and taxes. The amount of a continuous bond is not based on the value of the goods themselves.

So, for instance, an importer that expects to pay $1 million in duties, fees, and taxes over the course of a year would need to secure a continuous bond of $100,000. Generally, such a bond automatically renews on an annual basis, unless the importer, or the importer’s customs broker, determines that the importer’s exposure to duties, fees, or taxes will increase or decrease. That calculation could come as a result of lower or higher expected import volume, or a change in the duties applicable to that volume.

Tariffs increase the amount of duties payable

The tariffs assessed earlier this year — from the 232 tariffs applied to steel and aluminum imports to the 301 tariffs applied to certain imports from China — by definition increase the amount of duties payable. And that can have a significant impact on importers from a couple different perspectives.

“On the steel tariff, we had one bond that went from $200,000 to $5 million,” said Colleen Clarke, vice president at Roanoke Insurance Group, which provides transportation-related surety bonds and insurance for the international trade community. “Another steel importer had a $200,000 bond and we have estimated they’ll now need an $11 million bond.”

First, those higher bond amounts translate into higher continuous bond premiums, a straight cost increase. Shane Garcia, owner and vice president of the Houston-based customs broker RW Smith, estimates that the cost of an annual premium might increase from $500 to $15,000 as a bond increases from say, $50,000 to $5 million.

But potentially more impactful is that importers often need to provide some collateral — generally a letter of credit — when the bond amount increases so substantially. That increased bank exposure can significantly hamper the finances of a small to mid-sized importer.

“It’s not just the bond premium, which is nominal in relation to the bond amount, it’s the underwriting and potential collateral requirements,” Clarke said. “It takes away from their available line of credit with their banks, and that might inhibit their ability to grow. That could happen.”

The increases in premiums are not necessarily linear with the increase in bond requirements, so a bond requirement that rises 20-fold wouldn’t translate to a 20-fold increase in premiums. Sometimes the premium rate goes down relative to the size of the bond, sometimes it goes higher — it’s largely dependent on the surety’s assessment of the importer’s ability to pay, a risk calculation. That goes back to whether the importer has a strong enough balance sheet or the cash balance to back the increased bond.

Cargo fluidity implications — CBP can hold cargo at the port

There are also cargo fluidity implications. If CBP deems a bond to be insufficient, it can hold cargo at the port of entry. Not only does that stymie an importer’s ability to get its cargo, the held cargo can also incur demurrage fees, Garcia noted. If the bond is deemed insufficient, CBP can inactivate the bond (which is essentially a three-party contract between the importer, customs, and the surety) and require importers to obtain single transaction bonds.

Those bonds, unlike continuous bonds, are in an amount of the total value of the shipment, including duties, fees, and taxes. They are primarily designed for infrequent importers and are also prohibitively more expensive than continuous bonds.

Clarke, who also currently serves as president of the International Trade Surety Association, said that in July CBP sent 183 letters to importers notifying them they had insufficient continuous bonds, a sign that enforcement of the bond levels is rising. In the months prior, that number had been around 50 to 60, she said.

“It is trending up, and certainly in the next few months it will trend higher,” Clarke said, alluding to pending tariffs due to be assessed on as much as $200 billion in goods from China as part of the next round of Section 301 tariffs.

But Garcia said it’s part of a wider ramp up by CBP with regard to continuous bonds.

“Customs has gotten more intense that importers have the correct bond in the last 18 months,” he said. “They’ve been more enforcement-minded, and then the rates go up, so importers are getting a double whammy.”

Garcia said that importers — even those mindful of the tariffs — often don’t link those increased duties to the impact they have on the bond they need to maintain.

“In general, they have no idea,” he said. “The ones that might have an idea are involved in antidumping cases, so they may be aware of it. Other importers may be very sensitive to the news and tariffs — I get calls all the time, ‘do you know what’s going to be on the list out of China?’ — but for some reason, they don’t correlate that to what the bond’s going to be.”

Part of the issue, Garcia said, is that the bond typically auto-renews, so it’s a case of “out of sight, out of mind.”

Another issue is that many importers — particularly those bringing in steel or aluminum products from Canada, Mexico, or other countries where there’s an existing free trade agreement with the United States — have the minimum continuous bond level, $50,000. Even if a company assesses that all its goods will enter duty-, tax-, and fee-free, CBP still mandates it maintain a $50,000 bond.

The tariffs are impacting these importers the most, since they’ve gone from a minimum bond based on zero duties, taxes, and fees to potentially multimillion-dollar bonds that need to be calculated at higher rates of duty every time new tariffs are enacted.

Customs brokers — a key role

Customs brokers play a key role in this process. Sureties tend to work directly with brokers, not the importers, who then alert their customers about the potential for an insufficient bond. Proactive sureties and brokers do this preemptively, particularly since importers are not always proactive about maintaining adequate bonds themselves.

There are other wrinkles to the issue as well. Bond requirements start accumulating — or “stacking” — when importers bring in goods that are affected by anti-dumping or countervailing duties. Those cases often take the US Commerce Department more than 12 months to decide, so multiple bond periods remain exposed until the cases are decided.

“That’s because of the length of time it takes to liquidate entries subject to anti-dumping cases,” Clarke said.

The bond issue is likely to escalate in the coming months as importers across a range of sectors determine whether the additional $200 billion in tariffs from China affect their goods. The second tranche of tariffs under the original China tariff enforcement, affecting $16 billion worth of Chinese goods, is also due to go into effect Aug. 23.

Expect peak shipping season to be tougher than ever, experts warn

  BNSF IS ONE OF THE LARGEST INTERMODAL RAIL PROVIDERS IN THE US

BNSF IS ONE OF THE LARGEST INTERMODAL RAIL PROVIDERS IN THE US

by Michael Angell for FreightWaves.com

Perfect storm of tight supply, strong demand hits shippers 

As shippers enter their peak season, they face a steeper and tougher peak to climb than in seasons past.

The U.S. economy remains on one of its best trajectories in years, leading to higher demand from consumers. The demand is butting up against tight transportation supply, especially for trucking. As a result, intermodal freight likely will become an increasingly popular option during the peak season.

A panel of freight industry experts delivered this message during last Thursday’s “Navigating New Realities: Peak Shipping Season Intermodal Outlook” webinar hosted by American Shipper. Patrick Duffy, research director at American Shipper, said this peak season stands out for “particularly daunting conditions: surging imports, perhaps to beat tariffs; reductions in carrier service due to consolidation; GRI (general rate increases); and bunker surcharges.”

“As trade rhetoric continues to grow negative and trucking capacity remains tight, you have beneficial cargo owners and forwarders shipping earlier this year and wondering whether they will have to rely on air cargo to fill their shelves,” Duffy said.

Webinar panelist Ibrahiim Bayaan, chief economist at FreightWaves, said this year’s peak shipping season comes against the backdrop of a robust U.S. economy.

U.S. gross domestic product grew 4.1 percent on an annualized basis in the second quarter, “one of the strongest quarters since the recession,” Bayaan said. While annualized GDP growth once hovered closer to 2 percent to 2.25 percent, “we have been able to exceed those levels over the past several quarters, particularly this year because of some policy changes.”

The U.S. economy “is in a different state than it was four or five years ago,” he added.

Other economic indicators also are strong and accelerating. Bayaan noted that retail sales plateaued last year, especially after a series of hurricanes hit the U.S. Southeast and Gulf Coast. But low unemployment and high consumer confidence are pushing retail sales up 6 percent this year. Retailers, though, are still keeping their inventories lean, with the U.S. inventory-to-sales ratio falling from the high levels of the second half of 2016.

“You have this combination of low inventories and high demand, which means inventories have to be replenished and sent out again,” Bayaan said. “This lean inventory is positive for the transportation industry, but it does put pressure on carriers to do things in a timely fashion.”

Of course, more of those goods are moving through ports, and FreightWaves’ data platform SONAR points to shippers having started their peak shipping early. Bayaan said the inbound tender volume index for shipments coming through Los Angeles peaked at over 189 in July before settling at its current level of 175. The San Francisco inbound tender index hit a 121 level in June before settling to its current 98 level.

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“Everything is pointing to a very strong peak season as far as freight,” Bayaan said.

The increase in inventory replenishment, along with shrinking truck capacity due to electronic logging device and hours-of-service mandates, has pushed up producer prices for trucking 11 percent year-to-date, Bayaan said. Meanwhile, the pool of commercial drivers has not kept up, with 2 percent growth this year.

“It feels like the U.S. economy is running out of excess capacity,” Bayaan said. The United States is “producing as much as we have capability to produce.”

Steve Golich, executive vice president & COO of Alliance Shippers, one of the largest privately held intermodal marketing companies in the United States, echoed that trucking capacity is tighter than it’s been in a while because of the ELD and HOS mandates.

For example, moving a trailer from the Chicago rail ramp to auto industry customers in Michigan used to take one day. But the new mandates mean “a driver cannot make that turn in a day. We are paying a driver for two days as opposed to one.”

That is when you can find a driver. Golich noted the aging workforce, with the median age of commercial drivers now in the mid-50s. Better pay and lower barriers to entering the profession help, but “we are behind the eight ball in truck driver capacity.”

The upshot for Alliance is that “we are not on edge looking for new business as much as trying to maintain and protect the business we have today,” Golich said.

Tom Williams, group vice president of consumer products for BNSF, said overall intermodal volumes are up in the mid-single-digit range this year, which he said is about the seasonal norm.

“We are not seeing a trend that suggests overall that the peak season is earlier this year,” Williams said.

But demand for ocean containers is creating a “shift between what moves intact in ocean containers and what gets transloaded in domestic containers.” He said there is increasingly tight demand for shifting 20- and 40-foot containers into domestic 53-foot containers for intermodal rail.  

“Transloading is really busy right now,” Williams said.

While e-commerce was expected to chiefly benefit trucking, Williams said intermodal rail also is playing an important role as more containers move to inland fulfillment and distribution centers. New analytic and tracking tools also are providing e-commerce vendors better tracking capability for intermodal rail.

“Intermodal is a very good solution for evolving supply chain needs,” Williams said. “The proliferation of e-commerce in retail might be seen as a headwind for intermodal, but intermodal is every bit as effective as it is for brick and mortar.”

In response to growing intermodal demand from e-commerce, BNSF is adding hub capacity in Southern California, which remains the epicenter for Asian imports into the United States. BNSF also is looking at container-handling technology such as what OOCL installed at its Long Beach terminal.

It’s not too late to hear what the experts had to say during American Shippers’ webinar, “Navigating New Realities: Peak Shipping Season Intermodal Outlook.” Replay the webinar here (https://www.americanshipper.com/main/checkemailinxpo.aspx?fdid=802f8d24-ddad-413c-af49-389a1d09f129?source=Slider).

Container shipping dysfunction delivers US peak season chaos

  Higher than usual fuel prices and tit-for-tat tariffs have exacerbated the chaos on the eastbound trans-Pacific this peak season, but the problem started earlier this year, and there is one causal factor as the source of the problem. (Above: A container ship approaches the Port of Los Angeles.)

Higher than usual fuel prices and tit-for-tat tariffs have exacerbated the chaos on the eastbound trans-Pacific this peak season, but the problem started earlier this year, and there is one causal factor as the source of the problem. (Above: A container ship approaches the Port of Los Angeles.)

by Mark Szakonyi, Executive Editor of JOC.com

This isn’t working. Higher-than-usual fuel prices and tit-for-tat tariffs have exacerbated the chaos on the eastbound trans-Pacific this peak season, but the real blame falls at the feet of the container shipping industry.

Capacity is so scarce on the eastbound trans-Pacific that US importers from Asia, both large and small, have to pay in some cases $400 to $600 above already higher-than-usual rates to get space on ships. Thousands of containers are being rolled, as ocean carriers prioritize higher paying spot cargo — more than $2,000 per FEU to the US West Coast and $3,000 to the East Coast — in favor of lower-priced contracted cargo. And some shippers complain that their minimum quantity commitments, or MQCs, aren’t being honored.

Things aren’t much better on the landside. Trans-Pacific reliability is hitting as low as 35 percent and, coupled with rail delays and chassis accessibility issues, it’s virtually impossible for beneficial cargo owners (BCOs) and trucking companies to plan their pickup and delivery schedules with any degree of accuracy.

This is the price the industry pays for its inability to reach a level of stability where container lines can make enough money from rates to cover their operating costs, much less turn a profit. In return, BCOs would theoretically receive the level of service they need to ensure their store shelves are stocked and manufacturing inputs delivered so they don’t have to carry unneeded inventory.

Peak-season woes were sown in the spring

The seeds of peak-season woes were sown in the spring when carriers entered the contracting season with hopes for meaningful price increases in annual service contracts. Instead, they left negotiating tables with contracts running from May 2018 through April 2019 generally in the range of $1,100 to $1,200 per FEU to the West Coast and $2,100 to $2,200 per FEU to the East Coast, a $100 decrease on both routes compared with how contracts ended the year prior.

Then bunker prices started to climb in April, with the August 2018 average price per metric ton of IFO 380 up 19 percent from April, 44 percent higher than in August 2017. The rise in fuel prices caught carriers unaware, with some working to recoup additional costs not captured through the bunker fuel adjustment via emergency fuel surcharges.

With their largest operating cost up even higher, a reluctance to pay even more to speed up ships, and concerns about a tariff impact, carriers reworked their trans-Pacific networks, resulting in a reduction of capacity to the West Coast by close to 7 percent and 1.6 percent to the East Coast.

At the same time, US importers concerned about the next round of potential tariffs began rushing their peak-season shipments earlier only to meet the reality of having fewer slots available. Carriers’ sympathy of their plight goes so far. Carriers’ frustration with how contracting ended lingered, and they are still eating higher bunker fuel prices, which, coupled with lower than usual rates, pulled several carriers to a loss in the second quarter. Those losses sting even more after the container shipping industry was showing signs of a recovery,

having made a profit ($7 billion) in 2017, for the first time in six years.

Carriers — now managing capacity ‘in a disruptive way?’

“Current capacity and demand are being manipulated by carriers to force price increases they were unable to get commercially,” said Mark Laufer, president and CEO of Laufer Group International. “Given the likely downturn in economic activity from [the fourth quarter] due to the negative effects of tariffs, it is hard to see how rates will be sustainable over the long run.”

Laufer added that amid the threat of an economic slowdown, the only option for carriers is to manage capacity “in a disruptive way to achieve any kind of compensatory rates,” and that holds particularly true as they face higher trucking and bunker fuel costs.

“Sometimes no space means no space,” said Allen Clifford, executive vice president of Mediterranean Shipping Co. Although some shipments are shut out of some voyages at Asian ports, this is not by intention. “We take no pleasure in turning away any client’s cargo. We are in the service business, and we are here to serve our partners,” Clifford said.

Amid these glaring signs of industry dysfunction, there is a creeping realization that shippers will have to pay more beyond just higher bunker adjustment factors. Encouragingly, there are real signs in the market of carriers delivering better service for higher prices and of shippers and carriers agreeing to enforceable contracts.

In the inaugural sailing of its expedited trans-Pacific service guaranteeing chassis availability, APL said 70 percent of the local cargo discharged at the Eagle Marine Service terminal in Los Angeles was available for pickup within four hours of unloading and the rest of the cargo was available by day-end.

The chaos endured by US importers this peak season will also encourage more of them to check out the New York Shipping Exchange (NYSHEX) to guarantee that their cargo will ship for the sailing they booked — with the carrier facing a penalty if it fails to do so. Conversely, shippers face a fine if they fail to deliver the cargo they booked via the platform. To meet that demand, Maersk Line for the first time is offering slots on NYSHEX for eastbound trans-Pacific sailings. These are small but positive steps.