After securing some of the lowest trans-Pacific contract rates ever, U.S. importers are feeling tinges of anxiety, and with good reason. Logistics directors who may have looked like heroes in delivering trans-Pacific contract rates of $700 or slightly higher per 40-foot container for the year beginning May 1, down from $1,300 or higher last year, are instead warning their chief financial officers that the good times may be short-lived. If they’re not, they should be. As JOC.com Executive Editor Mark Szakonyi writes, a double whammy of much higher rates and rolled cargo in Asia soon may be on the way.
That’s by no means a certainty, of course, and there are plenty of reasons to doubt the idea that a sharp reversal in the container market is on the way. For one thing, growth is headed in the wrong direction, which will impact container trade growth. The International Monetary Fund in June cut its U.S. growth forecast from 2.4 to 2.2 percent, another harbinger after its economists earlier lowered their global GDP forecast from 3.4 to 3.2 percent.
The U.K.’s Brexit vote, meanwhile, threatens to dampen containerized trade further. Following the surprise outcome of the June 23 referendum, IHS cut its eurozone GDP forecast from 1.7 percent to 1.4 percent for 2016 and from 1.8 to 0.9 percent growth for 2017. The supply-demand gap in containers will continue into 2016, with a forecast 3.6 percent capacity growth against a 1.3 percent demand growth globally, according to Alphaliner. “The risk of an economic slowdown in Europe could have a bigger impact on the container ship sector, and a corresponding fall in global container trade volumes would only worsen the current supply-demand gap,” Alphaliner said on June 28.
The anticipated further slowing of demand may force container carriers to exercise the capacity discipline their airline counterparts have shown but they themselves have sorely lacked. Services are being pulled and the idle fleet is rising. Rates in some markets like China to Brazil have surged.
“The tide starts turning from now on,” Bjorn Klippel, CEO of Mannheim, Germany-based TIM Consult, told JOC.com. “When we look back to the market development a number of years from now, we will say it was the time when the (rate ebb) tide turned.”
Part of the reason is survival. At $700 per container, carriers aren’t making money. Shippers know this, and it doesn’t bring them comfort. They didn’t ask for these rates. During the recent negotiations, some simply asked carriers for their best offer and were astounded at what came back.
But what were they supposed to do? Tell the carriers they were willing to pay more and in doing so make them uncompetitive with their peers who were being quoted the same rates? Of course not. The rates were enshrined in contracts and locked in. The trouble is it’s not necessarily a guarantee of space, especially if a shipper tenders its full contracted volume.
“We have locked in very low prices, but once the carriers create an artificial space shortage by taking ships out of the trade lanes, they will be able to demand higher prices from the (non-vessel-operating common carriers) and smaller importers, and will then favor those shipments at the expense of mine,” a major U.S. retail importer told JOC.com. “Therefore, unless I also agree to higher prices, I will have a hard time getting space.”
Though the analogy only goes so far, this was what happened in 2010 when an unexpected surge in demand from restocking slammed into pared back supply, precipitating a spike in rates that forced shippers to beg NVOCCs for much higher-priced space. Today there is less chance of a spike in demand, but it’s not impossible. Having overestimated trans-Pacific growth, carriers are pulling back on capacity so if the market were to turn, a squeeze would be on.
This is why logistics directors are wise to downplay any lasting benefits from whatever rate reductions they achieved in the current contract. Not only could next year’s rates be higher, but it may be that even the current rates can’t be annualized if capacity tightens and shippers are forced into the spot market. When logistics directors lose the confidence of their senior management, it’s often over issues such as rates that are too good to be true and the potential for supply chain disruption if the market were to suddenly change.