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Asia-US annual contract talks lag amid inland pressures

Containers stacked at a port.

Annual service contract negotiations between US importers from Asia and ocean carriers are moving slower than in past cycles. Beneficial cargo owners are holding out for lower rates, to offset rising supply chain costs elsewhere, but they may be disappointed by their efforts. Photo credit: Shutterstock.com.

Annual service contract negotiations between US importers from Asia and ocean carriers are moving slower than in past cycles because many beneficial cargo owners (BCOs) are holding out for lower rates. Early progress reports suggest East Coast rates are under downward pressure because of overcapacity, while most BCOs see the cost of inland transportation increasing.

Ocean carriers, however, are generally maintaining the rates in their 2017-2018 West Coast contracts, where overcapacity is not an issue, according to interviews with five BCOs, five carriers, three non-vessel-operating common carriers (NVOCCs), two former carrier executives, and a consultant to BCOs. For the cycle from May 1, 2017, to April 30, 2018, contract rates to the West Coast had settled in the range of $1,200 to $1,300 per FEU to the West Coast and about $2,300 per FEU to the East Coast.

“Carriers are coming in with more conservative bids than last year,” a major retailer told JOC.com, noting that bunker fuel prices are lifting all-in rates, but overall rates are tracking flat from last year.

BCOs are seeking to limit their risk from port congestion, truck capacity shortages, and equipment dislocations, but they may be disappointed in these efforts. “There is no way to guarantee capacity,” an executive at a Southern California drayage firm said. “Capacity is tight now, and it will get extremely tight as we move forward.”

Inland capacity scramble

Carriers’ attempts to include $300 emergency truck fees are becoming a sticking point, a logistics manager for a fast food restaurant chain told JOC.com. “How do you measure how tight trucking capacity is?” the logistics manager asked. “I don’t want to give them a blank check” by allowing emergency truck fees. The US importer added requests for proposals when three carriers that are not part of its portfolio came back with competitive CY (port-to-port) rates but refused to take on door deliveries directly to the importer’s warehouse.

The capacity shortage is forcing drayage rates higher. “A dray that cost $600 last year is now going for $800 or even sometimes $900 to $950 in certain markets,” said Eddie Santucci, president of Cura Freight, a freight broker.

Steve Hughes, a consultant to importers in the automotive aftermarket, said rate hikes that reflect the increased cost of inland transportation in today’s tight trucking market are not surprising.

“They really don’t have a lot of choice,” he said, adding that truckers have been struggling for years in the competitive port drayage market. “BCOs are sympathetic to the truckers,” he said.

Similarly, BCOs this past year have contended with chassis shortages at some of the major gateways, as well as with increases in equipment rental rates. An executive at one of the three major intermodal equipment providers said larger retailers continue to insist that chassis be included as part of their all-in rate, but “across the board, nothing has changed.”

Carriers that offer an all-in ocean and drayage rate to import distribution warehouses and rail ramps are raising those bundled rates to reflect the higher inland costs, and they say they are receiving little if any pushback from shippers. Some carriers are not stopping there, however. They also insist on escalator clauses that would recognize spikes in trucking rates during the peak season. “If we get a higher rate to start, that’s fine, but we’re not locking it in for a year. If the inland rate goes up another 10 percent, we’ll go up again,” the vice president at an ocean carrier said.

A coffee importer said carriers are either charging a premium for door moves to encourage BCOs to take possession of shipments at marine terminals, or they are getting out of store door altogether because “they can’t control the inland move.”

The problem, as another carrier executive explained, is that the inland transportation move — impacted this winter by truck shortages, port and inland rail congestion, equipment dislocations, intermodal rail disruptions, and possibly a trade war going forward — has created so much uncertainty in the supply chain that offering customers an all-in rate that will last for a year is not possible, except for the largest BCOs that have pricing power. Even then, he said, “If we could get out of store-door pricing, we would.”

In response to rising inland transportation costs, at least six ocean carriers have increased their inland tariffs or announced plans to do so. Some have announced surcharges or are considering them. However, a carrier executive pointed out that surcharges are less effective than increasing the service contract rates because larger BCOs usually have no-surcharge clauses in their contracts.

Reflecting on ocean shipping rates versus landside costs over the past 20 years, it is obvious that with today’s direct-to-consumer shipping, the increased logistics costs are due to escalating trucking costs, significantly higher real estate prices, and also increased wages for warehouse workers, said Scott Weiss, vice president of business development at Port Logistics Group, which provides gateway logistics services.

“All of the costs have gone up, but the ocean rate increases are almost nothing compared to the other buckets,” he said.

Slower negotiations

As far as ocean shipping rates are concerned, service contract negotiations are proceeding slower than in past years because BCOs are holding out for the best possible rate. “We’re lagging a bit this year,” the transportation vice president at an importer of home furnishings said. “We started in early March, and haven’t even gotten our first response back,” he said.

There is a general feeling among BCOs that the May 1 deadline will come and go with a number of contracts still outstanding. A shipping executive said that for contracts that have not been concluded by May 1, if last year’s rate is compensatory, it will most likely be extended until the new contract is signed. If not, carriers will resist extending last year’s contract.

Cosco told Alphaliner that contracting this year is indeed progressing at a slower pace, due in part to BCO concerns over what might happen if the United States and China get into a trade war. However, for contracts that have been concluded, “the freight rates are basically unchanged from last year,” Cosco stated.

Carriers historically begin negotiations in early spring with their largest customers, known as champion accounts. Those rates for the large retailers are usually the lowest contract rates available. Carriers and BCOs say a few major service contracts have been signed so far, and these should set the floor for freight rates this contracting season.

Carriers are now turning to the midsize shippers and will probably sign contracts for a couple of hundred dollars higher than the champion accounts. They will then wrap up negotiations with small shippers and NVOCCs at even higher rates.

Some NVOCCs in recent years have attempted to push their negotiations up earlier in the cycle, said David Bennett, president of the Americas at Globe Express Services. Larger NVOCCs control a critical mass of cargo and could strategically place this cargo for the benefit of their customers and the carriers, he said.

With predictions for another year of excess capacity in the trans-Pacific, many BCOs are holding back on signing contracts, hoping that carriers will come in with bargain rates. A shipping executive said this strategy most likely will succeed on all-water services to the East Coast because of excess capacity. On West Coast services, where supply and demand are better balanced, smaller importers could end up paying a premium of $50 to $100 over last year’s rates, he said.  

Given the direction in which service contracting is heading, and the downward pressure on spot rates following Lunar New Year, carriers and BCOs predict that except for the largest retailers, contract rates for midsize shippers will settle in at about $1,100 to $1,200 per FEU to the West Coast, with the smaller importers paying $50 to $100 more than that. East Coast rates for most small to midsize shippers are trending as low as $1,750 to $1,850 per FEU. Another shipping line executive disputed that East Coast rates will drop that low. “There are a lot of $2,000-plus quotes. There’s nothing I really know below $1,900,” he said. Definitions vary by carrier, but, generally, small shippers commit fewer than 1,000 TEU in their contracts; midsize shippers, 1,000 to 5,000 TEU; and large shippers, more than 5,000 TEU.

The spot rate market at present is working to the advantage of carriers. Although rates post-Lunar New Year dipped below the psychologically important levels of $1,000 to the West Coast and $2,000 to the East Coast, they bounced back after factories in Asia ramped up for production of spring and summer merchandise. The West Coast rate in the week ending April 6 was $1,128 per FEU, and the East Coast rate was $2,150, according to the Shanghai Containerized Freight Index, which is published on JOC.com under the Shipping & Logistics Pricing Hub.

Although carriers appear resigned to accept the West Coast rates because they are trending at or slightly above last year’s level, they are disappointed by the East Coast contract rates, which they feel must be kept above $2,000 per FEU. “The ax fight is on the East Coast. The rates are really disappointing,” a carrier executive said. Carriers the past year have greatly upsized the vessels in all-water services. Capacity to East Coast ports in the first nine weeks this year surged 23.9 percent year over year, according to SeaIntel Maritime Analysis.

Some carriers are drawing a line in the sand and will not accept rates that are lower than last year’s rates. Another carrier executive said he hears talk of $1,200 per FEU rates to the West Coast and sub-$2,000 rates to the East Coast, “but that’s coming mostly from shippers. We’re not biting on those rates,” he said.

ELD’s ocean reach

Nevertheless, while carriers and shippers are making progress on ocean rates, there is still a good deal of uncertainty on how landside charges will fit into the all-inclusive rates. Conversations with BCOs and carriers indicate that the emphasis so far this spring has been on dealing with logistics issues, including terminal congestion, excessive wait times at terminal gates, a possibly severe shortage of truck capacity later this year, detention and demurrage charges, and the ability of inland infrastructure to handle growing freight volumes. “It’s everywhere, across the board,” the top logistics executive at a home improvement chain said.

Truck capacity is possibly the biggest issue facing BCOs this year. Truck capacity is already tight following the soft implementation in December of the federal law requiring electronic logging devices (ELDs) on trucks. This safety requirement is intended to prevent drivers from exceeding hours-of-service limitations. For many truckers, however, the full force of the law kicked in on April 1 with enforcement of the $1,000-plus penalty provisions in the regulation.

The ELD requirement caused some drivers to leave the industry but is also reducing total effective trucking capacity because the on-duty hours formerly reported by truckers who fudged on their manual logs are now electronically recorded. The net result is a driver shortage that is bad now and expected to grow worse during the busy summer-autumn peak shipping months. BCOs are well aware of the capacity limitations that await them this coming peak season, so they are insisting that if they are going to pay higher drayage rates, they must be assured the capacity will be there when they need it, the logistics director at the home improvements importer said.

BCOs are also becoming increasingly concerned about congestion at marine terminals, which reduces effective driving time for their truckers and can result in additional charges for late pickup of containers, known as demurrage.

Fred Johring, president of Golden State Express in Southern California, said that as his customers enter contract negotiations with shipping lines, he is informing them which terminals in Los Angeles-Long Beach have consistently long wait times. “They’re paying more attention on this issue,” he said.

This is especially true when shippers, in their service contracts, nominate the truckers they want ocean carriers to use. If truckers tell carriers and BCOs they refuse to call at certain terminals, or will do so only at a premium rate, most are responding to the trucker demands, Johring said.

Truckers are also reminding their customers that congestion at marine terminals compromises their ability to take delivery of containers during the free days that are allotted before demurrage penalties are charged. Although BCOs are technically responsible for reimbursing truckers that must pay the demurrage fees before they are allowed re-entry to the terminals, the process is time-consuming and generates additional administrative costs for truckers. A trucking executive with operations on the West and East coasts said the larger drayage companies are telling BCOs they will no longer get involved and may turn down moves at terminals with consistent congestion problems.

Harbor trucking companies that in the past were consistent price-takers because of excess drayage capacity have newfound pricing power. With today’s truck capacity crunch and the even more difficult times projected as the peak season approaches, truckers who raise their rates “are not seeing as much pushback as before,” Johring said.

Terminal congestion and the increasing costs involved in harbor drayage are fairly well understood now by all parties in the supply chain. Lawrence Burns, senior vice president of trade and sales at Hyundai America Shipping Agency, said that especially in cases where BCO customers nominate their preferred truckers in their service contracts, “carriers are more amenable to working with the truckers.”

Carriers and BCOs realize the pressures drayage operators face in attracting and keeping drivers, and no one wants to experience a capacity shortage during peak season, so increasing drayage rates are being reflected in service contracts.

Truckers are also speaking up on excessive wait times at marine terminals, and they regularly charge wait fees with little resistance from customers, or they are turning down future calls at those terminals. Burns said that is happening now at the largest gateways of Los Angeles-Long Beach and New York-New Jersey.

This year is the first time in the careers of industry veterans where landside concerns are more important than waterside issues. “We’ve developed the economics of the ocean side,” Burns said, “but once the container hits the land, it’s a whole different story,” he said.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.

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