Dean Tracy, director of international logistics at Lowe’s, had a devilish time getting his spring and summer merchandise on vessels leaving Asian ports in late January. The busiest time of the year for home improvement retailers was approaching rapidly, but space on vessels was unusually tight.
“It was a nightmare,” Tracy told the annual Georgia Foreign Trade conference in Sea Island, Ga., on Feb. 1.
His frustration reflected the dismay spreading among shippers in recent weeks as they watched shipment after shipment “rolled” to later vessels than scheduled, even after agreeing to carrier rate hikes in January that should have guaranteed them space.
The capacity crunch in Asia likely will end with this week’s Chinese New Year celebration or shortly after. Carriers removed a large chunk of vessel capacity from the trans-Pacific for the winter months, as they do every year, but cargo volume leaving Asia before factories close for the two-week celebration were larger than anticipated.
While the resulting cargo backlogs are a temporary phenomenon, the bedlam at Asian ports could have a lasting impact on importers who will begin service contract negotiations with carriers soon.
Those talks should be more intense than any in recent memory. Carriers are determined to increase freight rates, and the specter of another round of congestion during the summer-fall peak shipping season could convince importers that a repeat of last year’s low freight rates would force carriers to cut capacity again.
Carriers’ rates and profitability plummeted last winter as the recession struck with a vengeance. Ships began leaving Asia half empty, carriers panicked, and spot rates dropped from about $2,000 per FEU to less than $1,000 over a few months.
Carriers this spring will manage capacity closely, returning vessels to service only as demand develops. “We’re not going to make the same mistake twice,” Frank Baragona, president of CMA CGM Americas, told the Georgia conference.
Evidence of that strategy emerged in late January, when the strong demand in the run-up to the Chinese New Year spurred carriers to return nearly 50 idled container ships to service. The week leading up to Feb. 1 represented the first significant decline in idled container ships since November 2008, according to Paris-based consultant and analyst AXS-Alphaliner.
Still, some importers and cargo consolidators accuse carriers of keeping capacity tight in order to push rates up faster and higher than market conditions warrant. When carriers late last summer began pulling capacity out of the Pacific, they note, spot freight rates charged to non-vessel-operating common carriers for shipping a 40-foot container from Hong Kong to Los Angeles doubled to almost $2,000, according to the Drewry Shipping Consultants’ published Container Rate Benchmark.
Retailers and other importers say rate volatility makes it impossible to price their 2010 merchandise as they place orders with Asian factories for the back-to-school and holiday shopping seasons.
Baragona said carriers last year cumulatively lost about $20 billion in their global operations, and they had no choice but to slash capacity to prevent further losses this year. “In the real world, we’re losing money,” he said.
Carriers already have demonstrated their resolve in Asia-Europe lanes, which picked up before Asia-U.S. business did. Carriers implemented eight rate increases in the Asia-Europe trade over the past eight months, Baragona said.
And carriers are not rushing to return capacity to the Pacific. Baragona said some capacity will come back, as it does every spring, but carriers will act cautiously, watching for signs of a sustainable economic recovery, to avoid starting another rate war.
Walter Kemmsies, chief economist at Moffatt and Nichol Engineers, said U.S. businesses have stabilized and are reporting decent profits, and employment should pick up over the next three months. Job growth would spur consumer spending, which accounts for about 70 percent of GDP. Consumer merchandise is the biggest driver of imports from Asia.
Although economists are divided as to how rapidly consumer spending will return, advance bookings in Asia-to-U.S. trans-Pacific lanes are strong into June, so retailers believe the recovery will be relatively robust. In fact, some factories in China say they will reduce the traditional two-week Lunar New Year vacation period to seven to 10 days because orders are so strong.
“The recovery from Chinese New Year will be much faster than last year,” said Frankie Lau, director of marketing at Orient Overseas Container Line.
Therefore, after the customary dip in eastbound freight following the New Year celebration in Asia — a dip that could be far less pronounced this year, considering cargo backlogs — volume could pick up rapidly. That will happen just as importers meet with carriers to negotiate freight rates for their May 1-April 30, 2011, service contracts.
Predicting freight rates is problematic because contract negotiations are confidential and volume discounts vary depending on how much freight a shipper commits. Some shippers that had set their minimum quantity commitments too low got burned last month when space tightened.
And although many contracts called for no rate increases for the life of the agreement, importers that fulfilled their minimum commitments were hit suddenly with an ultimatum: Pay an emergency rate charge of $400 per FEU as of Jan. 15, or your cargo will sit on Asian docks until vessel space frees up. Many importers paid the charge.
If carriers manage capacity successfully into May, service contract rates likely will top $2,000 per FEU to the West Coast and reach at least $3,000 per FEU on intermodal shipments and containers moving on all-water services to the East Coast.
Importers appear resigned to the end of last year’s low rates, but they will make additional service demands on carriers as their rates increase. Tracy of Lowe’s said some carriers acted unacceptably last month by confirming customer bookings but rolling the cargo to subsequent voyages when vessels were overbooked.
Getting carriers to commit to space on a weekly basis is easy, but enforcing the commitments when space is tight is difficult. Carriers rarely agree to pay penalties when they overbook voyages.
The months ahead will therefore be filled with uncertainty as carriers and their customers attempt to develop accurate cargo forecasts and match capacity with demand. Both are seeking the elusive goal of rate predictability.
Contact Bill Mongelluzzo at email@example.com.