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Costs add up for shippers

From big fuel surcharges and terminal fees to taxes, the price of sending cargo over the sea is increasing

By Alan Yonan Jr.

LAST UPDATED: 1:57 a.m. HST, Dec 26, 2010

The cost of shipping goods to Hawaii from the mainland will jump again next month, continuing an upward trend that has far outstripped the pace of inflation in recent years.

Increases in ocean freight rates, terminal handling costs, fuel surcharges and government fees add up to a 50 percent jump in the price of shipping a container of produce to Hawaii from California since 2003. That compares with a 27 percent increase in Honolulu's consumer price index during the same period.

The increase explains why in many cases goods cost much more in Hawaii than on the mainland, and highlights Hawaii's dependence on shipping. An estimated 80 percent of what is consumed in Hawaii is imported, and 98 percent of that comes by sea.

For Maui-based wholesaler VIP Foodservice, the increases mean that for some low-cost items, like hinged Styrofoam trays, shipping costs can exceed the cost of the goods being shipped, said Steve Smith, the company's vice president for purchasing. VIP passes along the higher costs to its grocery store and hotel customers who in turn pass them along to consumers, Smith said.

"For all the consumer goods that are brought in, the costs will be passed along to the consumer," said Smith, whose company uses Matson Navigation Co., the state's leading shipping company.

Both Matson and competitor Horizon Lines recently announced identical increases in their shipping rates effective Jan. 2. The shippers will raise their ocean freight charge, or base rate, by an average of 3.8 percent. The rate varies depending on the items being shipped. The terminal handling charge, which is a flat rate, will increase by 19.4 percent.

In addition to the higher ocean freight and terminal handling charges levied by the shipping companies, Smith's company has been hit by several new charges imposed by the state in recent years, including an invasive species inspection fee and a general excise tax on any goods that move interisland after arriving from the mainland, Smith said.

"It's not just Matson; it's the state. They know how to add on costs every which way. There are so many hidden taxes, and this is one of them," Smith said of the general excise tax.

For its part, Matson said the sharpest increases in the cost of shipping are tied to two areas outside its control: terminal handling costs and fuel prices.

The fuel surcharge, which is adjusted periodically to match increases and decreases in fuel prices, has risen to 21.75 percent of the base rate, up from 6 percent in 2003. For a container of produce shipped to Hawaii from the mainland the surcharge stands at $999, compared with $240 in 2003, Matson said. Horizon Lines did not return calls or e-mails seeking comment for this story.

Matson and Horizon, following the lead of other shipping companies, began in 2003 breaking out the terminal handling charge as a separate line item on customers' bills. The charge, which started at $200 per container in 2003, will climb to $1,075 on Jan. 2.

Terminal handling charges cover various on-shore costs, including cranes and other equipment, and the salaries of stevedores who load and unload containers from ships. The charges usually are paid by the shipping companies to third-party terminal operators. Matson said part of the reason for the steep increases in the terminal handling charge is that it covers a larger share of costs that previously were included in the base rate.

Matson has increased the handling charge more than fivefold since 2003. By comparison, the base rate for a container of produce is up 14.9 percent to $4,592 during the same period. Matson uses revenue from the base rate to pay for things like new ships and employee's salaries. The company said it has spent more than $600 million since 2003 on four new ships, equipment and other improvements.

Dave Hoppes, Matson's vice president for ocean services, said the terminal handling charge was separated from the base rate so customers could see more clearly what they were paying for.

"Those costs in large part are out of our control. We wanted to be more transparent, which in the long run is a good thing," he said.

"We could choose to raise the base rate instead. But what we've been doing is pulling some of those terminal costs out and making them a separate charge," Hoppes said.

Currently, 40 percent of the terminal handling costs are recovered by Matson through the terminal handling charge. The other 60 percent of the costs are still covered by the base rate. Eventually, all the terminal handling costs will be included in the terminal handling charge, he said.

There also has been a significant structural change in the Hawaii shipping business over the past 30 years that has pushed costs up: sharp declines in the sugar and pineapple industries.

Containers bringing household goods from the West Coast used to go back full of pineapple and raw sugar, providing an efficient use of cargo space. But with the decline in those agricultural products, many containers now go back to California empty. As a result, the companies shipping goods end up subsidizing the cost of the empty containers.

"In 1979 for every three westbound containers we had one eastbound container. The ratio is now about 10-to-1," Hoppes said. "As agriculture has waned the trade has become increasingly one-way," Hoppes said.

Rising costs are also hitting the interisland shipping market. Young Bros. sought approval from state regulators last week to raise rates by an average of 24 percent next year. It would be the sixth increase in seven years.

Young Bros., which is regulated by the Public Utilities Commission, said the hike was needed to provide the company a reasonable profit as cargo volumes decline and competition from Pasha Hawaii Transport Lines is expected to soon end the monopoly Young Bros. has held for decades.

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