2012 Trans-Pacific Service Contracts Squeeze NVOs

Non-vessel-operating common carriers generally have it good: Non- or light-asset based, agile in responding to customers’ needs and often consistently profitable, their presence in the market has increased even in heavy beneficial cargo owner markets such as the U.S., where shippers often choose to deal directly with carriers to ensure access to capacity.

But every so often NVOs are reminded of who’s boss in the trans-Pacific, the largest U.S. trade lane. While carriers are normally the punching bags of the industry, ridiculed for regularly losing money despite their antitrust immunity, it’s undeniable that carriers are the ultimate providers and controllers of capacity. That’s one reason NVOs are loath to openly criticize carriers, lest they find themselves cut off from the capacity they need to earn a living.

And, in a BCO-centric market such as the trans-Pacific, where NVOs have made gains (they handled
32.8 percent of U.S. import container trade last year, according to a recent report from JOC sister company PIERS) but have yet to establish themselves with anything approaching the dominance they have long enjoyed in Asia-Europe, market vicissitudes occasionally turn against them.

The result could be a rollback of the gains NVOs made with BCOs following the early-2010 capacity squeeze, when many BCOs sought out NVOs for capacity when they couldn’t obtain it directly from the carriers. That’s what is happening now.

The current squeeze on NVOs isn’t part of any grand design by carriers — 20 years ago, there was an open NVO-carrier rivalry, but less so today — but more a result of how the recently concluded 2012 service contract season played out and how that’s spilling into the post-service contract, pre-peak season period the market is in now.

Sources say the following scenario played out this year: So-called early-bird contracts signed late in 2011 or early this year between carriers and BCOs reflected the depressed market at the time; yet to occur was the early year rally in rates that — thanks to successful general rate increases on
Jan. 1, March 15 and April 15 — took the trans-Pacific eastbound spot rate for a 40-foot container up nearly 75 percent, from $1,400 to roughly $2,400 today, according to the Shanghai Containerized Freight Index.

Those early contract rates and the low spot rate environment they reflected weren’t enough to pull carriers out of unprofitable territory in the trans-Pacific. Early contracts that sources said were renewed for less than $2,000 per FEU contributed to huge first quarter losses reported by carriers: NOL, $254 million; Hyundai Merchant Marine, $177 million; Hanjin Shipping, $208 million; Maersk Line, $599 million.

As the market improved through the spring, BCO contracts signed later in the contracting cycle were higher than the early-bird rates, but still not in profit-making territory for carriers.

That’s why, with ships from Asia to the U.S. sailing near capacity, carriers are pressing the advantage, largely at the expense of NVOs, which typically sign contracts after the BCOs and in some cases have reportedly not signed their contracts yet.

The $600-per-FEU peak-season surcharge carriers announced on May 8 — the largest initial PSS objective in recent years, according to the Transpacific Stabilization Agreement — reinforces the idea that carriers see an opening to drive revenue higher. As Jefferies shipping analyst Johnson Leung wrote last week: “We think the (trans-Pacific) contracts barely break even this year unless carriers manage to increase their spot exposure or implement the PSS for the coming peak season between June and October.”

Although it’s uncertain how realistic a full implementation of the $600 surcharge will be, some carriers, including Maersk, the largest, are signaling they believe the run-up in rates in major trade lanes such as the trans-Pacific will hold. Maersk last week noted an “expectation that the improvement in freight rates since March will continue.”

Yet, as always in container shipping, it’s possible things could turn out badly for the carriers, and that will occur in this scenario if peak-season volumes to the U.S. disappoint.

That’s the key for the NVOs; how they fare will hang on the strength of the market, specifically whether peak-season volumes will support new Asia-North American capacity such as the MOL-Evergreen SVS (South China/Vietnam-U.S. Southeast Coast) Suez service announced last week, with Norfolk as the first inbound port call.

Some are suggesting the market will be weak and that spot rates already reflect this, offering an opening to NVOs. According to a veteran logistics director for a large retailer, “There is no peak in June at all. I don’t see any upward activity until mid-July … and then it is lighter than the norm in the retail market.”

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him on Twitter at twitter.com/PeterTirschwell.
 

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