The main goal for many U.S. importers entering negotiations this spring with carriers in eastbound trans-Pacific lanes was to prevent a repeat of the spike in freight rates that occurred in last year’s service contracts.
Importers that signed contracts by the May 1 deadline this year got pretty much what they wanted, according to interviews with carrier and shipper representatives that suggest importers and container lines were coming to an uneasy equilibrium on service even as operators on both sides were undertaking efforts to fundamentally alter the annual agreements. The base freight rate in the 2011-12 service contracts is no higher than it was in last year’s contracts, and in some cases it’s lower. However, carriers worked harder than ever to include bunker fuel surcharges as a separate line item in the contracts.
After two years of sharp swings in rates and capacity, contract negotiations setting the stage for this year’s peak shipping season took place in an environment where vessel capacity largely matches market demand, and equipment is generally available. This is in marked contrast to the environment during the 2010-11 service contract negotiations, when vessel space and containers were in short supply.
It also marks the first period of seeming stability in North America’s busiest trade lane since 2008, following two years that saw rates and volume dive to historic lows followed by a sharp recovery in demand that strongly outpaced ocean capacity.
As a result, ocean carriers in this year’s negotiations have no leverage on freight rates. At the same time, global oil prices rocketed upward this spring and have sustained prices of well more than $100, in part because of political unrest in the Middle East. Carriers this spring are paying about $650 a ton for bunker fuel, up from $230 a ton in early 2010.
The message most carriers had for their customers was this: We’ll be flexible with the base freight rate, but you have to help us with the bunker. Even carriers that in the past never insisted on bunker surcharges made fuel the foundation of their negotiating strategy this year.
In this environment, shippers and carriers acknowledge, many contracts completed in recent weeks resulted in base freight rates flat or down slightly from what the importers were paying last fall. The real action came with bunker surcharges.
Some carriers added a fuel surcharge to a reduced base rate, bringing the total charge even with the 2010 rate. Others kept the base rate flat and added a modest bunker charge for a slight increase in the total rate. Other carriers insisted on a floating bunker surcharge based on a mutually agreed upon index.
Contract negotiations are confidential, but one certainty is that contract signings have been very slow this spring. By the May 1 deadline, the number of contracts that were signed was “close to 30 percent,” said Niels Erich, spokesman for the carrier discussion group the Transpacific Stabilization Agreement. Several contracts had to be extended beyond May 1.
As the dust settles, carriers and shippers say eastbound rates are generally in the range of $1,750 to $1,825 to West Coast ports and $3,125 to $3,250 for all-water services to the East Coast. That was roughly in line with what carriers were getting on the spot market this spring, but well behind the peak season rates last fall.
Sidebar: Rail, Intermodal Rates Seen Firming.
Going into negotiations this spring, it was clear customers didn’t like what happened last year when carriers leveraged tight capacity and equipment availability to get multiple rate increases. Shippers entered negotiations this spring with the attitude that they were going to “punish us,” in the words of one shipping executive. Some shippers went so far as to move their business to other carriers, placing their carriers of last year into the “penalty box” for this round of negotiations.
Although they were able to raise their rates in the winter and spring of 2010, supply caught up with demand as the year progressed, and by last fall’s peak shipping season, rates had actually come down from their high point of the year.
This roller-coaster ride was reflected in the spot rate index published by Drewry Shipping Consultants in London. The rate reflects what cargo consolidators are paying each week to ship a 40-foot container from Hong Kong to Los Angeles. The spot rate peaked last August at about $2,800 per FEU, and by November it had dropped to about $2,100. By April 4, 2011, the spot rate was down to $1,693, which became the starting point for negotiations in this year’s contracts. By May 2, it had recouped about 15 percent, and stood at $1,953.
The Shanghai Containerized Freight Index from the Shanghai Shipping Exchange has followed a similar track, with rates to the U.S. West Coast down nearly 15 percent since the start of the year to about $1,732 at the end of April.
Several carriers bristle at the spot rate reports, saying the price measures don’t reflect real pricing in a business dominated by contracted capacity. But financial reports from several carriers this spring have pointed to a weakening rate environment. APL’s average revenue per FEU in its global networks fell in six of eight months leading up to the carrier’s April reporting period and reached its lowest point in a year in April, off 3.7 percent since the start of the year.
The sharp swings are pushing some carriers and shippers to consider longer-term contracts, with rates based on an index to create what CMA CGM terms a Market Adjustment Factor in multiyear contracts the carrier has taken to some of its largest customers. (see sidebar, page 12)
The degree of carrier flexibility on the base freight rate depends on the trade lane, said Dave Akers, managing director of the Toy Shippers Association. In a lane where there is plenty of capacity, such as South China to Los Angeles-Long Beach, carriers certainly are flexible. That trade lane has seen a steady increase in vessel size, with 8,000-TEU ships increasingly common. Also, a half-dozen niche carriers, which operate only in that trade lane, entered the trade lanes this past year with smaller vessels.
But vessels in all-water services to the East Coast seem to always be operating near capacity. “Our people and our agents in Asia tell us the ships are coming out 100 percent full,” said John Wheeler, director of trade development at the Georgia Ports Authority. Carriers this year announced only one new all-water service.
With capacity up only slightly from last year in all-water services, toy shippers have found carriers to be less flexible on rates in this trade lane, Akers said, and cargo volume is likely to pick up as the peak season approaches. “Our book of business is better than last year,” he said.
Carriers are also less flexible in negotiating intermodal through rates from West Coast ports to inland destinations via rail. The inland portion of the move can add $1,200 or more to the port-to-port rate. Carriers say the railroads are exhibiting virtually no flexibility on their intermodal rates. Railroads also assess, and collect, full diesel surcharges for their services, so carriers say they have to pass these inland rates on to customers.
Ocean carriers are generally insisting upon a peak-season surcharge in this year’s contracts, but they are finding it difficult to get the full surcharge of $400 the TSA suggested in its guidelines late last year, said Pat Moffett, vice president of global logistics at Audiovox.
If cargo volume increases 6 to 9 percent this year, as most industry analysts predict, vessel space will tighten in late summer and carriers will likely get peak-season surcharges of around $200, shippers indicate. Industry analyst Alphaliner indicated trans-Pacific capacity would increase almost
10 percent this year.
Sidebar: Truck Pricing Steps Up.
But worries over inland equipment appear to have subsided. Several carriers late last year announced with great fanfare that they no longer would provide chassis free of charge to their customers. However, importers and retailers say most lines aren’t following through on their announcements. Few raised the subject in contract negotiations.
Issues such as chassis highlight the wide gap between the transportation modes. In their world of highly fractured and lively competition, ocean carriers every year have grand plans for rate increases and surcharges, but they are only able to put their plans into effect if market conditions are extremely favorable.
With only two Class I western and two eastern railroads, however, rail carriers largely dictate rail rates and surcharges, and shipping lines must either accept the increases or discontinue intermodal services if they don’t like the rates on certain routes.
And carriers in the express business likewise seem to have more pricing power than ocean carriers. UPS last month said its domestic yield, or average revenue package, grew 5 percent in the first quarter over the same quarter last year, virtually identical to the price increase the parcel carrier announced for 2011 and the strongest yield UPS has reported since 2008.
Contact Bill Mongelluzzo at email@example.com.