What a difference four months can make. When 2012 dawned, a sense of doom prevailed in the containing shipping industry. Spot container rates in the critical Asia-to-U.S. trade were hovering near their 52-week lows, down more than 25.4 percent year-over-year with the slowest shipping season ahead. Dire predictions of overcapacity pervaded, wrought by an armada of new mega-ships due for 2012 delivery and near-universal forecasts of stagnant economic and trade growth.
Fast-forward to spring, when the dark winter turns to a spirit of renewal. For ocean carriers desperate to make money this year after losing a collective $6.5 billion in 2011, the outlook has brightened.
Those plodding, non-compensatory rates of 2011 went on a tear, soaring nearly 70 percent between December and mid-April in the trade from Hong Kong to Los Angeles, to $2,405 per 40-foot container.
Carriers intend to capitalize on the good times in the eastbound Pacific while they can. Although they appear to have weathered the storm, they know freight rates could plummet in the fourth quarter, and no carrier can afford another year stained in red ink.
For economist Ben Hackett, who publishes the monthly Global Port Tracker with the National Retail Federation, that’s the only explanation for carriers’ ability to increase their spot rates three times since Jan. 1.
The spot rates, charged to cargo consolidators known as non-vessel-operating common carriers, often set the benchmark for retailers and other direct cargo owners who ship most of their freight under annual contracts that typically take effect on May 1.
Carriers represented by the discussion group known as the Transpacific Stabilization Agreement announced general rate increases on Jan. 1, March 15 and April 15, a rare feat during the slack season in the world’s busiest trade lane. The spot rate from Hong Kong to Los Angeles increased 27 percent to $1,832 per FEU on Jan. 1. It increased 13.6 percent to $2,013 on March 15 and another 20 percent to $2,405 on April 15, according to Drewry, the London-based consultant and analyst that tracks pricing in its weekly Container Rate Benchmark. Rates are now running more than 30 percent above year-earlier levels.
Carriers wanted to increase the eastbound rate at least another $400 per FEU in the new service contracts that took effect last week, but it hasn’t been easy because those contracts cover large and midsize importers who carry more clout than NVOs.
In the eastbound Pacific, beneficial cargo owners generally commit significant cargo volumes to their carriers for the coming year in exchange for a lower freight rate than lower-volume NVOs pay.
Many NVOs play the spot market. When spot market rates drop — and they dropped precipitously throughout 2011 — NVOs negotiate deep discounts from carriers that are anxious to fill their ships or are simply chasing cash.
However, if spot rates increase — when capacity tightens or when carriers demonstrate the type of unusual resolve they’ve shown this year — beneficial cargo owners enjoy the lower rates they locked into their contracts, and NVOs take it on the chin.
The interesting dynamics taking place this spring have created an environment in which some importers and NVOs are taking large increases while many retailers were offered moderate increases.
Shippers that this past year paid what carriers consider to be reasonable rates have been signing contracts this spring with modest increases, said Dave Akers, managing director of the Toy Shippers Association. Given the high cost of oil, carriers also faced little resistance from most importers in pressing for floating bunker fuel surcharges.
As spring negotiations began, importers and NVOs that had been paying about $1,400 per FEU — scraping the bottom by historical standards — were hit with higher rate increases. “If you had a $1,400 rate, you’re definitely not getting that rate this year,” said Ray McGuire, vice president of supply chain strategy at TBB Global Logistics, a New Freedom, Pa.-based NVO.
Most carriers entered the spring contract season with a target rate in mind. While it is impossible to determine precise rates because they vary from carrier to carrier and service contracts are confidential, carriers generally are said to be seeking a port-to-port rate of about $2,000 to the West Coast.
In reality, few beneficial cargo owners are signing contracts for that amount, although $1,800 appears to be achievable. Carriers hope to bump up the rate to $2,000 per FEU with surcharges during the peak shipping season.
Some shippers, especially bigger ones, insist on a “no peak-season surcharge” clause in their contracts. Smaller shippers usually can’t avoid the surcharge, so they accept a modest base rate increase and gamble that overcapacity in the fall will prevent carriers from implementing the fee.
Shippers who take this risk in the Asia-to-Europe trade likely will succeed this year because a slew of new capacity is scheduled for delivery. According to Drewry, 59 new vessels capable of carrying 10,000 20-foot container units or more are scheduled to enter the global fleet this year. Most of those vessels will enter service in the second half of the year, and almost all of them will be deployed in the Asia-Europe trade.
That will result in a cascading phenomenon in which the mega-ships bump 6,000- to 8,000-TEU vessels to the trans-Pacific. Because that shift won’t be complete until the last few months of the year, the Asia-Europe trade will bear the brunt of the capacity spike, with the trans-Pacific in better balance until the peak season begins to wane, Hackett said.
Journal of Commerce Economist Mario O. Moreno predicts U.S. imports from Asia will increase about 3 percent this year, an improvement over 2011’s tepid 1 percent growth.
Industry analyst Alphaliner sees trans-Pacific capacity increasing about 6 percent over 2011. Although twice the projected increase in demand, much of the cargo volume increase comes in the peak months between July and October. Peak-season volumes can be as much as 20 percent higher than earlier in the year.
Carriers are banking on a busy spring and fall to help them enforce a peak-season surcharge as vessel space tightens. “They’ll sell space at a premium as they did in 2010,” Akers said.
This year will be different because the International Longshoremen’s Association is negotiating a new contract for East and Gulf Coast dockworkers. ILA President Harold Daggett shocked attendees at The Journal of Commerce’s TPM container shipping conference in early March when he laid down a list of demands employers must meet to avoid a job action by longshoremen.
Negotiations began in April, and employers and the ILA quickly attempted to quell shipper fears by saying initial talks were positive. Still, East Coast-based importers want to see demonstrable progress in the negotiations. If negotiations drag on inconclusively into June, cargo interests likely will begin to divert some shipments to the West Coast to establish a relationship with their carriers in that trade. That could give West Coast ports a bigger peak season than usual. The ILA contract expires on Sept. 30.
As of late April, about 40 percent of the service contracts in the eastbound trans-Pacific had been signed, TSA spokesman Niels Erich said. Although not a large number, individual importers are signing more, but smaller, contracts with more carriers than they dealt with in the past, according to carriers.
In other words, importers are committing lower volumes to more carriers to ensure they have access to sufficient vessel capacity during the peak season.
Although cargo interests aren’t complaining about the port-to-port rates in this year’s service contracts, they are concerned about the higher rates carriers are charging to inland destinations. “It’s the inland move that kills you,” said Hayden Swofford, independent administrator of the Pacific Northwest-Asia Shippers Association. Railroads are in firm control of the intermodal portion of the move from the West Coast to inland destinations, and railroads in recent years have increased their rates.
Some carriers also appear to be disengaging from short truck hauls in the western region. A port-to-port rate may be reasonable, but McGuire said the trucking portion of the so-called store-door rate to a warehouse appears to be unreasonably high.
In a year so crucial to carrier health, managing capacity will determine freight rates — and some carriers’ fate — industry analysts told TPM attendees. Because import volumes are expected to be higher than last year, carriers could return at least to break-even rates, considered to be $2,000 per FEU, this peak season if they refrain from saturating the trade with new capacity. That’s a big if — and signs emerged that the resolve they showed in the spring may be fraying. Alphaliner reported last week that carriers reactivated more than 293,000 TEUs of idled capacity in the past month.
Still, volumes also are picking up. U.S. imports increased 7.3 percent year-over-year in March after falling 5.9 percent during the post-Chinese New Year lull in February, according to JOC sister company PIERS.
In the end, the extent to which carriers bring those big, new ships on line will tell the story. Although carriers want to increase the size of their vessels to benefit from lower per-unit carrying costs, the mega-ships deliver a favorable return on investment only if they are operated at high utilization rates. Introducing too many big ships too quickly will jettison any hopes for a peak-season surcharge — and perhaps any hope for carrier profits this year.