Ask importers their top concern this year as they wrapped up service contract negotiations with ocean carriers in the eastbound Asia-to-U.S. trade and most will say it is a shortage of vessel space.
Although freight rates, as always, figure heavily in the contract negotiations, especially following the volatile swings in ocean prices over the past two years, importers emphasized that getting space on vessels has been what’s keeping them up at night. With the economy rebounding and consumer demand recovering, retailers and manufacturers say its especially critical in the coming weeks that they have the goods in place to take full advantage.
|“Being able to count on space being there when they need it is the issue,” said Dave Akers, managing director of the Toy Shippers Association, which negotiates service contracts for toy shippers. “Right now, people are paying unbelievable prices to guarantee space. There’s a bidding war going on.”
One could say carriers scored a major victory this year by managing capacity during the normally slack winter months to the point where vessels leaving Asia were overbooked and left some shipments behind. Importers negotiating service contracts recently were only too happy to take a large rate increase if it came with a guarantee of space.
Akers, for one, believes sufficient capacity will be available during the peak shipping months this summer and fall. “Once they get their rate increases, space will open up,” he said.
Frankie Lau, director of marketing at Orient Overseas Container Line, takes a less mercenary view of the supply-demand economics this year in the eastbound Pacific lanes that send waves of goods across North America. Carriers have been telling customers for months that compensatory rates will bring the capacity they need back to the trans-Pacific. If they negotiate mutually agreed rates with ocean carriers, customers should expect quality service and space guarantees in return. “That’s why it’s called a service contract and not a rate contract,” Lau said.
The past year was the most chaotic in recent memory in the largest of U.S. trade lanes as spot rates bounced from less than $1,000 per 40-foot container from Asia to the West Coast last summer, by Drewry Shipping Consultants’ measure, to more than $2,000 per FEU later in the year and into 2010. Finger-pointing over service grew with the fluctuations in rates and service, and shippers, hurrying to beat the general rate increases in the May 1 contracts, brought more containers to Asian ports in April than the carriers could handle.
An old-fashioned bidding war took place for space on some voyages. Bill Woods, managing director and founder of America’s Sales Agency, which represents niche providers in various trade lanes, said he saw some rates of $2,600 to $2,800 to the U.S. West Coast in April.
The Shanghai Containerized Freight Index, created by the Shanghai Shipping Exchange, showed rates in mid-April reaching $2,080 per FEU to the U.S. West Coast and $3,139 to the U.S. East Coast. Drewry’s Container Rate Benchmark, a separate snapshot of average spot rates from Hong Kong to Los Angeles, was at $1,976 per FEU the week of April 26, the highest level in two months and nearly 74 percent more than the same week last year.
Of course, last year was a deeply unusual year, and carriers, and even most shippers, say no one should be basing this year’s discussions on last year’s unique measures.
In this environment, retailers and other importers made space guarantees their priority in the annual negotiations for the eastbound Pacific service contract that set the foundation for business during shipping’s busiest period. “The question was, what is going to be enough of a rate increase to guarantee space on the vessel,” Akers said.
Carriers by late April completed service contract negotiations with many of their largest accounts and were finalizing contracts with small and midsize shippers, as well as non-vessel-operating common carriers. Service contract terms are confidential, but by piecing together previous statements by carriers and the carrier discussion agreement in the eastbound Pacific, known as the Transpacific Stabilization Agreement, educated guesses are possible.
The TSA in a March 22 release said its member lines were seeking rate increases of $800 per FEU to the West Coast and $1,000 on intermodal shipments to inland destinations and all-water services from Asia to the East Coast. That would bring West Coast rates back to the level of late 2008, or about $2,000, which carriers at the time described as “barely compensatory,” the TSA said.
“I believe we will see $2,025 to $2,100 to the West Coast and $3,400 to $3,700 to the East Coast,” Woods said.
Importers emphasize carriers must keep their side of the bargain and provide customers with the vessel space they need at the right time and in the right places. OOCL’s Lau said that is exactly what carriers intend to do. “There is a lot of capacity out there,” he said.
Lau stressed, however, that customers must help by accurately projecting how many shipments they will have on specific trade lanes. Large volume importers can take the lead in helping carriers plan vessel deployments, Lau said. Without such information, carriers will have to resort to the old formula of adding up total volume commitments, dividing the total by 52, and deploying the same level of service virtually each week throughout the year.
“Shippers that understand the carriers’ economics should strive to be the partner they have claimed to be for years,” Woods said.
Many shippers find the environment confusing. Most importers want stable rates, which help them to plan their costs, and they certainly want predictability of vessel capacity.
So importers are expanding the number of carriers they contract with in order to increase the likelihood of securing space on vessels. Some beneficial cargo owners are breaking with tradition and turning some of their cargo over to non-vessel-operating common carriers. Individual NVOs may have contracts and space commitments from more than a dozen carriers.
Cargo owners also are showing more interest in shippers associations, which have relationships with numerous carriers.
In a broad sense, there is plenty of vessel capacity available today, and more vessels are being added to the global fleet each month. According to Paris-based industry analyst ASX- Alphaliner, carriers in the second quarter of this year will add 430,000 TEUs of capacity to global operations.
Sea-Axis, a U.K.-based shipping equipment leasing company, projects the fully operated global container fleet will grow from 11.4 million TEUs of capacity at the end of the first quarter this year to 12.8 million TEUs by the end of 2010, an expansion of 12 percent. By the end of 2011, the fully operated fleet will grow to 14.2 million TEUs, some 25 percent more than the first quarter of this year.
The expansion is partly because many new vessels coming into fleets are 10,000 TEUs and bigger. Lau said the largest ships will be used in Asia-Europe lanes. They will displace vessels in the 6,000- to 8,000-TEU range, and some of those will be deployed in Asia-West Coast services. Vessels of less than 5,000-TEU capacity are deployed in all-water services to the East Coast.
Alphaliner projects a global increase in capacity of 9.6 percent this year. While precise deployments have not been determined for the Pacific, a similar percentage increase is likely.
Carriers estimate that demand in the eastbound Pacific this year will increase 6 to 8 percent. Some industry analysts say a 10 percent increase is possible. So it appears carriers will have no trouble handling the growth in cargo volume anticipated during the busy summer and fall months.
However, the rules of the game have changed this past year as carriers resorted to slow-steaming to reduce fuel consumption and save money — and effectively reducing capacity.
Carriers plan to introduce new, resurrected or upgraded services in the Pacific in the coming months, including additions from the CKYH and New World alliances, China Shipping Container Line, Evergreen Marine and China Ocean Shipping.
Even with the additional capacity, shippers this year will probably not shop around for price or jump carriers for better rates. Rather, they will seek a capacity commitment and then discuss price. “A lot of shippers that jumped from carrier to carrier in the past are paying for it now. Those with a history of loyalty are getting the space,” Akers said.
Contact Bill Mongelluzzo at email@example.com.