Ocean carriers in the Asia-to-U.S. trade lane, it seems, finally get it. Although pricing has been erratic throughout the year, with a sudden increase in freight rates typically followed by a quick dip, the overall trend has been on the upside.
Carriers have managed the economic forces against them — capacity that is increasing faster than demand — through a combination of dramatically reducing vessel sailing speeds and taking advantage of trade conditions and labor developments to raise rates.
In short, carriers have a handle on pricing in the import trade from Asia.
Most of the action is occurring in the spot market. The spot rate for shipping a 40-foot container from Hong Kong to Los Angeles at the beginning of the year was $1,435, according to the Drewry Container Rate Benchmark. Carriers generally consider rates below $2,000 per FEU to be non-compensatory.
Emboldened by a stronger-than-expected increase in cargo before factories in Asia closed for the annual Chinese New Year celebration, carriers implemented a general rate increase in January. The increase worked, so carriers followed throughout the spring and summer months with additional hikes until the spot rate hit a record $2,880 per FEU in the week of Aug. 6.
Brian Conrad, executive administrator of the Transpacific Stabilization Agreement, a discussion group of the major carriers in the trade, said carriers demonstrated the resolve that eluded them in the past because of a combination of favorable trade conditions and a need to crawl out of the “black hole” they dug themselves into in late 2011.
With their financial condition worsening as rates dropped dramatically in the fourth quarter of 2011, shipping lines placed economic recovery above market share, Conrad noted. “This was a general change in the mentality of the carriers,” he said.
Carriers also made operational changes that reduced the effective capacity of the global container fleet, assisting their efforts to raise rates. Although the global container shipping fleet grew 6.6 percent over the preceding 12 months, effective capacity increased only 3.2 percent because carriers adopted super-slow-steaming, accelerated the scrapping of older vessels and returned chartered vessels to the owners, according to research analyst Alphaliner.
Shipping lines leveraged this strategy to implement a half-dozen general rate increases or peak-season surcharges since Jan. 1. “Carriers have done pretty well with the GRIs,” said Paul Bingham, economics practice leader at Wilbur Smith Associates.
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Carriers, he said, responded quickly to the threat of labor actions on the East Coast when contract negotiations between the International Longshoremen’s Association and waterfront employers broke down on Aug. 22. With the existing contract set to expire on Sept. 30, a number of carriers filed the required 30-day notice for a rate increase, which they labeled a congestion surcharge to address any port congestion that might occur on the East or West coasts.
Fear of a port shutdown had an immediate impact on cargo routing. Vessel utilization in all-water services from Asia to the East Coast via the Panama Canal was 93 percent in August, according to TSA spokesman Niels Erich. Utilization in all-water services through the Suez Canal was 92 percent. By late August, the utilization rates dropped below 90 percent on the Panama route and 87 percent on the Suez route.
A spike in cargo to the West Coast could result in full vessels in October, and possible rolling of shipments to subsequent voyages. Vessel utilization rates in August averaged 92 percent to the Pacific Northwest and 96 percent to Southern California, but by early September, vessels were approaching full utilization.
Although vessel capacity to the West Coast could be challenged, the ports are fluid and have excess capacity at their marine terminals. “As far as the port is concerned, we are prepared,” said Mike DiBernardo, director of business development at the Port of Los Angeles, the largest U.S. container port. If necessary, marine terminals could quickly increase the number of night and weekend gates they offer, he said. Intermodal rail and trucking capacity in the harbor area appear to be adequate, he added.
Importers reacted to a potential work stoppage at East and Gulf Coast ports in a variety of ways. Large retailers that use a “four-corners” logistics strategy began to divert some shipments to West Coast ports during the summer. These large importers have import distribution centers in the Northeast, South Atlantic, Pacific Northwest and Southern California, so shifting time-sensitive freight from an all-water East Coast service to a West Coast routing is relatively easy.
Smaller shippers usually do not have that luxury. Ray McGuire, vice president of supply chain strategy at non-vessel-operating common carrier TBB Global Logistics, said rerouting of cargo for small and midsize importers on the East Coast can be complex and costly, given the work that must be done to coordinate shipments with ocean carriers, harbor trucking companies and railroads.
“If it looks like the shutdown will be of short duration, it is sometimes better to send the freight all-water to the East Coast and sit it out,” McGuire said. Cargo interests have learned to adapt to the volatile pricing developments. Although general rate increases caused prices to jump one month, reductions also followed “fairly quickly,” McGuire said. TBB Global Logistics was able to respond by passing on rate reductions to its shipper clients, he said.
The current pricing strategy in which rapid rate increases are imposed primarily on NVOs rather than on large beneficial cargo owners has made it quite difficult for NVOs. “The smaller NVOs are taking 95 percent of all the hits,” said Bill Woods, owner of commercial sales agent and consultant America’s Sales Agency in Charlestown, R.I.
Carriers also were successful in implementing peak-season surcharges, although in some cases they adjusted the base rate before adding the surcharge, he said.
NVOs play the spot market. When rates drop, they may end up paying less to book freight than the much larger beneficial cargo owners that operate under contract. This year, however, BCOs that negotiated annual service contracts in the winter and spring locked in favorable service contract rates.
The year began with a generally pessimistic view of trade prospects in the eastbound Pacific. Retailers and other large importers capitalized on these conditions by locking in rates that today appear to be underpriced for market conditions. Many of the rates are set for the year, Conrad said, although contracts vary widely. Some contracts allow for rate changes upon mutually agreeable terms, and some contracts may lock the rate in until June or July and allow for peak-season surcharges.
NVOs, however, believe carriers went overboard by relying upon smaller shippers and third-party service providers to return them to profitability. “Carriers are afraid to breach their contracts with BCOs,” said Steve Aldridge, president of Hong Kong-based NVO Encompass Global Logistics. NVO rates increased so much, so fast that in some cases NVOs had to turn down bookings to avoid losing money on the shipments.
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“This behavior shows a total lack of concern for a market segment that gives them 45 to 50 percent of their cargo,” Aldridge said.
Carrier pricing and capacity deployment strategies for the slack season beginning in November are still cloudy because of the uncertainties surrounding the ILA contract negotiations.
In past years, cargo volumes declined noticeably once holiday merchandise was shipped, and carriers lowered their rates in an attempt to protect market share. This year, East Coast port statistics indicate some importers shipped earlier than usual to beat the Sept. 30 ILA contract expiration date. July numbers at East Coast ports were strong, but they dropped off in late August, and West Coast volumes picked up.
If shipments are delayed beyond the normal October peak, volumes may remain strong into November. Carriers likely would respond by keeping their rates high, and by delaying implementation of their winter deployment schedules.
Even with the series of GRIs earlier this year, however, rates are not compensatory, Conrad said. In many cases, carriers captured only a portion of the announced rate increases, he noted. If they had achieved full GRIs, spot rates would be more than $3,000 per FEU, he said.