Rising Costs Could Make Some Markets Inoperable
November 27, 2012 
The cotton and textile industries are facing numerous challenges, but few of them are as difficult to address as getting cotton from Point A to Point B. Not only is the sector subject to cotton price swings, it’s dramatically affected by other variables, such as the cost of oil and the availability of containers.
Worst of all, in some of the world’s top-producing countries such and China and Brazil, the cotton is grown thousands of kilometers from the ports. This problem is often compounded by a lack of reliable infrastructure.
Put all of those factors together and you’ll find that the cost of getting fiber from the farm to the nearest port often exceeds the cost of shipping the cotton to the other side of the world.
Fortunately, experts from two of the top logistics companies in the world – Ruben Piva, vice president of Navytrans, and Les Lewis, vice president of Cotton Operations and the Western Region for Mallory Alexander – have ideas about possible solutions.
1 How has the extreme market volatility we’ve seen over the last 3-4 years affected the logistics sector?
Piva: Considering the aforementioned market conditions, logistics has faced a very delicate situation in recent years. In particular, there has been very strong pressure for shipping goods at the right time and with the right forms – a challenge, considering the complex documentation requirements that need to be sorted out amongst the different shipping companies. There is no margin for error due to the substantial difference in the price of the goods at the time of loading, compared to their value when the contracts were negotiated.
Lewis: The high-priced sales put intense pressure on the U.S. cotton shipper and the logistics supply chain. Once Letters of Credit were opened, they typically had a short window to be executed. Shortage of equipment and interior warehouse delays were the biggest factors. In addition, vessel space was tight and the rolling of cargo became a nightmare for the shipper. In markets where cotton is not sold on a Letter of Credit, the buyer makes a down payment to the seller, perhaps 20%, and the balance is paid on arrival. In many of these cases, however, the buyer chose not to pay the high price and laid down on the sale. This left the cotton shipper in a precarious position, as he found himself with product on the water, but no home for it – leaving diversions and Free Trade Zones as the expensive solution options.
2 There are some logistical challenges that don’t appear to be easy to solve any time in the near future (for example, lack of infrastructure and huge distances between the areas of production and the ports). What are a few of the most pressing issues and how can those situations be improved?
Piva: Places like Argentina, Brazil and Paraguay present different logistical scenarios, given their geographic and topographic conditions. Those conditions, as well as the long distances from production areas to ports, cannot be changed, of course. We do, however, think that private investment, more and better stuffing facilities, and warehousing located near the main ports would enable all parties to better overcome these logistical challenges. Higher-quality infrastructure would speed up operations, making it much easier to deliver goods to the ports. In other words, we need the process to become much more precise. Predictability and efficiency are key factors for lowering operational costs.
Lewis: The lack of containers in the interior growing regions causes delays. The shipment must wait for equipment to become available or be moved to a consolidation or port warehouse where containers are in good supply. This problem won’t go away any time soon, as ocean carriers are restricting container imports to large markets. In addition, vessel delays and their sliding port and document cutoff dates create a timing issue when people are forced to book 30 to 45 days in advance due to tight vessel space and/or delays at the origin warehouse. This is why many exporters reposition their cargo to a port.
3 Do you foresee any shifts in global trade patterns over the next 3-5 years that could impact the logistics sector? What changes could be coming – to the cotton industry itself, or any other industry –that will affect the movement of fiber around the globe?
Piva: Both the current financial crisis in global markets – with its impact on the shipping industry in particular – and fluctuations in oil prices have, of course, direct consequences in the logistics sector. These could negatively affect the shipping lines and severely damage those that seem more vulnerable to these factors and can’t manage to adapt on time to new conditions. As a result, the less profitable traffic could be omitted, directly affecting certain markets by making them inoperable or economically untenable.
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