Lou Smyrlis

The Arctic has been described as a world made beautiful, treacherous and bountiful by ice. But today that ice is melting and as it does so commercial interests are looking northward.

Because of global warming, scientists estimate the Arctic could be ice-free in the summer in about three years .The Northwest Passage was free of ice in 2007 for the first time in modern history.

The melting ice could pave the way for new shipping channels and road and rail access to the Arctic’s vast store of natural riches. In this issue our marine shipping specialist, Leo Ryan, offers his first report in a two-part series about shipping on the Arctic frontier. Over the next two issues of CT&L we will examine the opportunities, the challenges, the issues and the players involved in this most challenging of new shipping frontiers.

Canada is among several northern countries scrambling to lay claims to Arctic seabeds and develop commercial plans for the region. (Under the U.N. Convention on the Law of the Sea, countries bordering the Arctic can assert ownership of natural resources up to 200 miles off their coasts.) Last month the Canadian government met near Ottawa with four countries with Arctic coastlines -- Russia, Norway, Denmark and the United States -- and discussed pressing issues related to developing the region.

The as yet unexploited opportunities in the area are many. For example, Tom Paterson, vice-president, owned fleet & business development at Fednav, sees tremendous potential in the central Arctic region around Izok Lake, 350 kms north of Yellowknife, where big gold, zinc and copper deposits have been discovered. Of the Canadian companies involved in commercial shipping in the Arctic, Fednav is widely recognized as the pioneer of conquering the ice-dominated waters and is the focus of one our reports.

The Arctic has been open to oil and gas drilling for many years, but was considered too expensive to develop. But higher oil prices and dwindling supplies of oil may change that in the future. We could hit a peak in current world oil extraction between 2020 and 2030. In 20 years the world’s focus for new sources for oil development could be centred on the offshore deposits of the Arctic and Far East seas, according to many experts. The Arctic seas possess from 90 to 250 billion tons of oil equivalent, according to Professor Vladimir Kontorovich from the Russian Academy of Science.

Plans for transporting the Arctic riches are already being drawn up. Norwegian and Finnish transport authorities have started a study of the needs for development of an Arctic train connection from Rovaniemi in Finland to Kirkenes or Skibotn in Norway with connection to Sweden and Russia. Another study shows that there could be a market for up to 40 daily trains from Finland to the Barents Sea coast to transport iron ore, oil and gas.

Nor are countries with Arctic territory the only ones showing keen interest. As the world's largest shipping nation, China has expressed a strong interest in the shipping routes being opened by the melting sea-ice. For example, liquefied natural gas from the Barents Sea could be sent to Shanghai through Russia's Northern Sea Route; luxury German cars could go straight "over the top"; while Chinese goods headed for the eastern U.S. could use the Northwest Passage.

But remember this is a world that ice has made both beautiful and treacherous. The challenges to developing a viable transportation infrastructure in the Arctic are at least as large as the dreams of doing so.

For example, as Paterson himself attests, getting at deposits of gold, zinc and copper near Izok Lake would involve, among other things, hundred of millions of dollars in investments in an all-weather road connecting with a deepsea port to be built at Bathurst Inlet.

Moreover the prospect of the Northwest Passage becoming the next Panama Canal (connecting the Atlantic and Pacific Oceans) has to contend with the reality of the passage remaining plagued with the unpredictable presence of iceberg bits and growlers (a low-lying mass of floe ice not easily seen by approaching vessels owing to its dark indigo colour).

And there are also territorial issues and considerable environmental concerns that remain to be addressed. We’ll discuss those in our next issue. In the mean time, enjoy our first report about shipping on the frontier.

In recent weeks I've had the opportunity to discuss some of the most pressing issues in transportation with some of the most respected minds in transportation and warehousing. I would like to share those conversations with you over the next few blogs.

First up is a two-part blog with Mark Seymour, head of the Kriska Transportation and a former chairman of the Ontario Trucking Association.

Q: Most people in trucking would say that the best thing about 2009 is that it’s over. Yet I’m sure there are some good things to come out of the recession. How is Kriska a better company today by surviving the challenges of 2009?

Seymour: We are more efficient because we’ve had to be. As good as anyone thought they were, they’ve had to find new and better ways to get things done. From that perspective I would say we are better. We are better at identifying costs and waste and pulling it out of the system. But there just wasn’t that much waste in the system to be able to give back to the magnitude that we have in terms of rates. When we pull out of this, those are valuable lessons that we can’t forget but we’ve got certain things we have to address, such as wages. Driving a truck is a very challenging job with a lot of regulation and a lot of time away from home and eventually in order to retain and attract people to this industry we have to address pay. It has been nothing but contracting the last couple of years because it represents such a significant portion of our costs. For most TL carriers, wages represent 30-40% of our cost base thus the reason for the pressure there.

Q: How will the efficiencies you’ve gained impact your dealings with shippers?

Seymour: There will come a day soon as the economy picks up when capacity will be tight again and it will be hard to find reliable, competitively priced and stable carriers. Efficiency and quality should be important to customers because if you have aligned yourself with anything less, you are putting your product to market at risk.

Q: How will the trucking industry that emerges from the recession be significantly different than the one that entered the recession?

Seymour: I hope before anybody gets in a growth mode again they are going to be in a repair mode first. I would hope there will be a limit to capacity growth in favor of repairing the balance sheet damage that has been done the last couple of years. There has been a lot of damage done and I think it will take years to repair. In a stable year you get a 5% rate increase in TL. We’ve experienced a contraction in pricing in the TL market between 15% and 25% over the past 24 months, exclusive of surcharges. We didn’t have that much to play with and give back yet we did. Five percent increases compounded over the next three years are only going to take us back to where we started. We have to take the initiative to address this problem. Shippers are not going to address this issue for us. We all have to get serious about doing it; it has to happen.

Q: How do you get solidarity in an industry of 10,000 carriers embroiled in cut-throat competition?

Seymour: I don’t know how you get solidarity but the issues have to be addressed. The market always prevails and sorts out its weakness. This will get fixed because it simply can’t continue. There is a lot of desperation in the market right now amongst carriers for volume and shippers are taking advantage of that. You can’t blame them. The convergence of the two makes for very interesting times. It’s a buyer’s market. The shippers will take all that we will give and we seem to be willing to give more than we have available. It’s really crazy. We have to start educating shippers that this is not sustainable. We require a certain amount of income to operate responsible, sustainable businesses. As an industry our operating ratios at the best of times have been in the mid to low 90s for the best operators. How can we give back 15-25% and have it be sustainable? You can’t. Worse, some are trying to stretch out payment terms. We’re not banks. We pay fuel and wages every 7-14 days and that’s 75-80% of our operating cost. We need to be paid faster, not slower.

Q: How will this impact the shipper-carrier relationship going forward?

Seymour: Shippers need carriers and the opposite is also very true. No one wins when you continue to grind one another. It may have short term benefits and it may appear to be saving money but it’s not a good long term strategy. We all know that. Shippers are trying to capitalize so intently on this desperation in the market they are bidding the business every time they think they can take another cut out of it. How are we supposed to operate our business with strategy and continued investment when the relationships with customers are potentially coming and going? You can’t. At the end of the day, we all want to give our customers what they want and pay for. In order to provide that, we have to build long term relationships and strategy together. Not one year at a time. That’s managing chaos, not partnering.