Shipping lines in the eastbound Pacific have been congratulating themselves for successfully implementing a series of general rate increases this year. It now costs a non-vessel-operating common carrier about $2,700 to import a 40-foot container from China to Los Angeles. Although carriers are making money eastbound, though, they’re giving it away westbound.
It costs about $150 to $180 to ship a 40-foot container from the West Coast to a base port in China. Want to ship grain from Chicago to Los Angeles on intermodal rail and on to China? That will cost about $1,100 per FEU, less than the cost of the intermodal rail move to the West Coast. The price for shipping a container of grain to China on an all-water service from the East Coast is about $550.
Come on, folks. That’s no way to run a shipping line. Vessels sail in both directions. You can’t expect to show a round-trip profit if you’re losing hundreds of dollars on every container you carry westbound.
The key to the carriers’ success in implementing rate increases in the busier eastbound trade has been their ability to manage capacity. When capacity and demand are roughly in balance, carriers are usually able to charge compensatory rates. The problem in the trans-Pacific is that eastbound trade volume is about twice the volume westbound. Because carriers deploy capacity based on eastbound volumes, they usually have excess capacity in the westbound direction.
That equation will change soon. The peak season in the eastbound Pacific will end next month when the holiday merchandise has arrived in the United States. At the same time, the peak season westbound will start to kick in. Agricultural products and other U.S. exports to Asia build in intensity in late fall and peak in the winter months.
Carriers each winter remove capacity to match the lower demand in the eastbound direction. This should give them the mental and emotional fortitude to implement GRIs westbound, providing they give proper direction to their regional sales offices. Some carriers reportedly have given their regional offices pricing authority. This is a recipe for disaster because the regional offices will be more concerned about volume than profits.
U.S. exporters, of course, don’t want to see westbound rates go through the roof. At the same time, they don’t want carriers to remove so much capacity from the Pacific that vessel space and equipment will be insufficient to meet demand. Most exporters seek a balance. They admit that today’s rates are at a dangerous level. Exporters will accept reasonable rate hikes as long as their competitors pay the same amount.
Yes, U.S. exports are mostly commodities, and the profit margin on commodities is thin, but even a container of wastepaper can afford to pay more than a $150 freight rate to China.