Having worked for more than 22 years in the shipping industry, much of the time with ocean carriers, Stephen Aldridge understands that freight rates charged to cargo consolidators will rise and fall with market conditions.
However, Aldridge, president of the non-vessel-operating common carrier Encompass Global Logistics, is deeply concerned by today’s market in which NVOs in some cases are paying $600 per 40-foot container more than retailers and direct importers on shipments from Asia to the U.S.
“This has directly impacted our business. It’s a life or death situation,” he said.
According to the Drewry Container Rate Benchmark published each week in The Journal of Commerce, the spot rate charged to NVOs for shipments from Hong Kong to Los Angeles has been at $2,337 per FEU for six consecutive weeks as of May 28. That’s up 62.8 percent from the $1,436 spot rate charged last December.
Retailers and other direct shippers, or beneficial cargo owners, recently signed their annual service contracts with carriers in the eastbound Pacific. The freight rates are confidential, but it is believed that BCOs are paying $1,650 to $2,000 per FEU.
The largest carriers in the eastbound Pacific recently announced their intention to levy a peak-season surcharge of $600 per FEU, effective June 10. While the prospects of carriers enforcing such a large surcharge are questionable, any increase would send the spread between NVO rates and BCO rates even higher — many BCOs have clauses in their contracts prohibiting peak-season surcharges, so the burden would fall largely on intermediaries. “They’re targeting the 3PL/NVO community,” Aldridge said.
Neutral observers agree that under current conditions in the eastbound Pacific, NVOs are paying the higher rates and BCOs, especially large retailers, are not. “NVOs are the ones getting it on the chin,” said Paul Bingham, economics practice leader at WilburSmith Associates.
After cumulatively losing more than $5 billion in their global operations in 2011, shipping lines finally raised rates this year. Carriers represented by the Transpacific Stabilization Agreement implemented a voluntary general rate increase of $400 per FEU on Jan. 1, followed by a $300 per FEU increase on March 15 and a $400 per FEU increase on April 15.
Bingham noted, however, that NVOs enjoyed favorable rates during much of 2011. In fact, the $1,400 rate paid by NVOs last year was lower than what many retailers were paying during the 2011 peak season. That’s because BCOs normally sign annual service contracts that run from May 1 through April 30 of the following year.
Retailers and other importers pledge a certain cargo volume to carriers at a rate that is considered discounted at the time of signing. Under normal market conditions, retailers in fact realize a discount compared to NVOs during busy periods. The spot rate charged to NVOs will fall during the slack winter months, but it will then spike in the summer-fall peak shipping season.
In a normal year, retailers may pay $1,800 per FEU during the winter months when NVOs are paying only $1,400 in the spot market. However, during the peak season, the spot rate could jump to $2,400 or higher. The retailers will still pay their $1,800 contract rate, with a “no peak-season surcharge” clause in their contracts.
That scenario did not play out in 2011. Carriers entered too much vessel capacity into the trans-Pacific, and the spot rate plummeted to $1,400 and stayed there through the peak season.
Why that condition developed is a matter of debate. Carrier executives say NVOs took advantage of the overcapacity and played one shipping line against the other in an effort to drive down rates. NVOs, meanwhile, say some carriers came to them and made unsolicited offers of lower rates, which then spread through the trade.
Bingham said there are probably real-life examples of both arguments being true. The fact remains, though, that carriers have always considered NVOs to be an annoyance, because NVOs make a living by buying vessel space at a discount and selling it to smaller shippers whose volume wouldn’t warrant such a favorable price.
Carriers respond that they invest $150 million to $175 million per mega-ship in their fleets, whereas NVOs are non-asset companies. The normal carrier response to NVO complaints about rate increases is, “Let them build a ship.”
Aldridge responded that many NVOs today are full logistics providers that book cargo, clear it through Customs, arrange for inland transportation and join government security programs such as the Customs-Trade Partnership Against Terrorism. NVOs also book cargo from small importers that carriers do not have the sales and marketing resources to serve.
There are those in the industry that say many retailers and larger shippers will not pay the proposed $600 per FEU peak-season surcharge this month. “There won’t be much of a surcharge at all for BCOs,” said Pat Moffett, vice president of global logistics at Voxx International.
However, supply and demand should dictate what happens with the peak-season surcharges. Carriers so far have done a good job of matching capacity with demand. If carriers manage capacity in the second half of the year, and volumes increase during the peak season as expected, carriers will levy at least one surcharge in June on NVOs, and maybe a second one in the fall.
Some retailers and large shippers may even pay peak-season surcharges under strong market conditions. If a retailer commits a minimum volume of cargo on a monthly or annual basis, and the minimum is exceeded, carriers may bump the rate up on the excess cargo.
Carriers may also deploy a tactic used in the past of increasing capacity only modestly this year by using single-sailing “sweeper ships” to meet demand during the height of the peak season. Sweeper ships normally fill up with NVO cargo that is booked at a premium because the NVOs’ customers are desperate to secure equipment and space during the peak season.