Shippers reassess strategy in trans-Pacific negotiations

With West Coast port congestion and container backlogs easing faster than predicted, beneficial cargo owners are reassessing their supply chain strategies for the coming shipping season.  

BCOs that had approached their trans-Pacific contract negotiations with an eye toward shifting more cargo to the East Coast may be looking again at keeping more on the West Coast where vessel overcapacity will continue to keep freight rates low.

“This will lead to an interesting situation as BCOs negotiate their contracts,” said Brian Nemeth, director at AlixPartners’ Hong Kong office. “Shippers are expecting rate to go down because of continuing overcapacity and lower bunker prices, while carriers are entering contract negotiations with the position that ocean rates should go up. What we will see over the next few weeks is how this plays out.”

Some BCOs are still evaluating their long-term strategies and assessing East Coast distribution centers “to see if they want to make changes to their networks to make sure something like this never happens again,” Nemeth said in the JOC Webcast Trans-Pacific Maritime on Thursday.

Shippers are also revisiting which carriers they will use this year as most of the major carriers have joined the four alliances, resulting in the further commoditization of ocean services.  

“When a shipper who historically might have said ‘I love Carrier A or Carrier B’ finds that the two carriers are in the same alliance, he says ‘I need to diversify who my products are moving with and I also want access to the variety of sailing by the different alliances’.”

According to the feedback AlixPartners is getting from its shipper clients, they are opening negotiations with new and different carriers that belong to at least three of the alliances so they can diversify their services among the alliances.

With the trans-Pacific contract negotiating season now in full swing, shippers understand that the global oversupply of vessel capacity will last at least two more years. With deliveries of mega-vessels of up to 21,000 20-foot-equivalent units accounting for an ever-larger proportion of the container fleet, shippers expect to see more cascading of smaller vessels onto the trans-Pacific, which “should contribute to depressed rate levels, so they expect that freight rates should be going down or remaining flat,” Nemeth said .“With the West Coast situation resolved, (spot) rates have started to drop dramatically.”

Shippers are also expecting net reductions in their ocean freight and bunker surcharges as a result of the steep decline in bunker price, which have slid to under $300 per metric ton from $600 per metric ton in July. “Historically, shippers have looked at the BAF and the ocean freight combined bunker rate combined, so they are saying ‘bunker has gone down so my BAF and ocean freight combined should be coming down even if my ocean freight remains the same or even goes up,” he said.

“Carriers are getting welcome respite from bunker prices, but they should not bank on this trend,” Nemeth said. Despite lower fuel prices, carriers won’t speed up their schedules. “Slow-steaming is here to stay,” he said.

After a decade in which the container fleet capacity grew faster than demand for cargo space, liner companies are getting better at using “levers” to offset this overcapacity. These include slow-steaming and skipping port calls “when the finances and the situation don’t make sense,” Nemeth said. In addition, all the major carriers have joined together in alliances. He expects Zim Lines, the only major carrier that is not yet part of an alliance, to join one of them after it has completed its restructuring.

By joining alliances carriers are better able to manage capacity levels. As a result, service strings have become longer with more port calls. Shippers cannot depend on maintaining steady transit time because carriers in alliances continue to manipulate schedules, sailings and transit times.

“Although carriers are still facing choppy waters, their finances are stabilizing,” Nemeth said. Total carrier revenue continues to slide, but EBITDA is improving thanks to cost-cutting measures. He said the slide in carrier revenues is distorted by the fact that many carriers are disposing of non-core assets, such as their logistics and port divisions. Carriers are using the sales to reduce their overall debt. “Overall what we are seeing is that carriers are really getting focused on their core business and on cash generation and they have adapted to the environment of focusing on costs.”

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