As container lines in the eastbound trans-Pacific make their annual sprint to the May 1 finish line to sign service contracts with their customers, victory is within reach. The question is who will declare it and how will it be measured?
For carriers, victory will be declared only if they’re able to win modest increases over the 2012 contract rates, and that’s critical this year because carriers suffered from rates that barely broke even or, worse, lost them money. They responded by attempting to recover their losses by implementing general rate increases for small shippers and cargo consolidators, known as non-vessel-operating common carriers, which tend to operate in the spot market.
The spot rates for NVOs shipping 40-foot containers from Hong Kong to Los Angeles peaked at $2,880 in the week of Aug. 6. The spot rate was as much as $1,000 per FEU higher than the rates some beneficial cargo owners — the big-box retailers, for example — were paying under the annual service contracts they had signed in May 2012.
Some carriers are cautiously optimistic about declaring victory in this year’s negotiations. “Our general read is that while the marketplace remains competitive, we are seeing increases in rates in our contract negotiations,” said Ken O’Brien, senior vice president for the trans-Pacific at APL.
He said APL’s focus in contract negotiations this spring has been to increase contract rates in order to narrow the gap with the spot rates. “While it is still too early to forecast the final outcome of this year’s negotiations, we are optimistic that we will achieve improvements in our 2013 contracting as we work to bring our trans-Pacific pricing back to a compensatory level commensurate with continued investment in the business and a return to our shareholders,” he said.
Industry analysts say shipping lines will fight an uphill battle this year as new capacity enters the trade lane each month. They point to what is happening in the Asia-Europe trade.
Retailers and other large shippers in the trans-Pacific in April were delaying the signing of service contracts because they expected rates to come down just as they have this spring in the Asia-Europe trade, said Ben Hackett, who co-authors the monthly Global Port Tracker publications on the major east-west trade lanes.
Research analyst Alphaliner said Asia-Europe rates this month were the lowest they’ve been in 14 months, and were 46 percent lower than last April.
April is an in-between month in the eastbound Pacific. The pre-Chinese New Year rush is over, and back-to-school and holiday shipments haven’t yet begun. As a result, vessel utilization rates dropped below 80 percent. The normal seasonal trend was aggravated by this year’s unusually long shutdown of factories in Asia for the Lunar New Year celebrations. “Low volume plus high capacity equals low rates,” Hackett said.
Paul Bingham, economic practice leader at Wilbur Smith Associates, noted capacity in the Pacific already has increased 3 percent this year, and is expected to increase further as a steady stream of vessels with capacities of 8,000 to 13,000 20-foot containers are displaced by even larger ships in the Asia-Europe trade and are redeployed in the trans-Pacific.
Given the overcapacity in the Pacific, increasing contract rates this spring will be difficult. “Status quo would be an achievement,” Bingham said.
The direction of freight rates is demonstrated in the spot market, where rates from Asia to both U.S. coasts have been dropping in recent weeks. According to the Shanghai Containerized Freight Index, the spot rate from Asia to the East Coast in the week of April 19 was $3,295 per 40-foot container, down $85, or 2.5 percent, from the previous week.
The spot rate to the West Coast also fell 2.5 percent from the previous week, or $55, to $2,171 per FEU. The current rate to the West Coast is down 10 percent year-over-year, and 2.3 percent below the level seen at the beginning of 2013, according to the Shanghai index.
Declining spot rates in the early spring are common because factories in Asia haven’t geared up production for the busy summer-fall peak shipping season in the eastbound trans-Pacific. How the larger BCOs assess the supply-demand dynamics for the summer-fall period, then, will determine the impact on service contract negotiations.
Carriers this year have announced an upsizing of vessels and initiation of some new services beginning in May, sending a message to the market that capacity will exceed cargo volume growth this year, according to London-based research analyst and consultant Drewry.
Carriers early in the year attempted to control capacity, canceling 53 scheduled weekly departures in the post-Chinese New Year period, Drewry noted.
Carriers, however, soon will cascade large vessels onto the trans-Pacific from the Asia-Europe trade, where they are introducing even larger ships of 15,000 to 18,000 TEUs. Today, the trans-Pacific is “the better place to bring unwanted capacity,” Drewry said.
Although signals on the U.S. economy have been mixed this year, Bingham said growth in eastbound trans-Pacific cargo could outperform the GDP growth because of strength in the housing and automotive sectors. Those are two of the biggest generators of U.S. imports from Asia. “There’s an element of strength with the TEU volumes,” he said.
Retailers, however, are reporting that in their confidential negotiations, most, though not all, carriers are coming to them with contract offers at least as favorable as what they had last year. This is especially true for contracts to the West Coat, where the impact of larger vessels will be felt the most. Carriers are already scrambling to fill the vessels in order to achieve the economies of scale inherent in big ships.
As in the past, the fate of peak-season surcharges in late summer and fall hasn’t been determined. Many large importers are demanding, and are securing, no peak-season surcharge clauses in their contracts. Small and midsize shippers, however, are seeking “mutually agreeable” clauses that state both parties will determine if a peak-season surcharge is warranted by supply and demand.
Smaller shippers know that if vessels are filling up in the peak season and they don’t agree to pay a surcharge, there is always the danger their cargo won’t get on the vessels in a timely manner.