With the vast majority of trans-Pacific eastbound contracts having been completed and signed, it should be time to sit back and relax. Not so fast, my friends, because events and issues are presenting us with more challenges.
Start with those completed and signed trans-Pacific eastbound contracts: They’re not really done because, while there are clauses allowing for fuel surcharges related to the International Maritime Organization’s low-sulfur fuel requirements on Jan. 1, 2020, the real charges aren’t known yet and will have to be negotiated later in the year.
Another curveball was thrown when sanctions against Iran tightened, sending the global price of oil upward. The Organization of Petroleum Exporting Countries has said it can take up the supply slack, but you only have to pass a gas station in the US to notice a spike in prices well in advance of the seasonal summer jump that will follow. This must impact the price of bunker fuel at some point, ahead of the low-sulfur fuel price increase.
The global container shipping market is apparently softening, with forecasts being well below previous predictions. This creates another industry challenge.
In recent weeks, carriers have pulled capacity out of the Asia-Europe market, even as they continue to manage capacity in the trans-Pacific. Will the shipping lines continue to flex schedules and capacity to match the markets, allowing rate stability? Or will they keep the capacity in place and try to attract volume and gain market share through pricing?
The financial reports of the past decade reflect the reality of the latter strategy — have the carriers learned their lesson? One carrier recently noted some internal disagreement over not upgrading and increasing capacity in the Asia-Europe markets with vessels under 7,000 TEU that are not competitive costwise.
It reflects thinking of a longer-term strategy in lieu of current market conditions and managing for profitability, which can be good in some instances, especially for those financially supported by governments.
The combination of the two matters — fuel costs and softening markets — combine to create an environment of great unknowns and challenges for decision makers on both sides of the equation, the sellers and buyers of ocean transport.
While attending a recent industry conference, I heard a lot of concern by beneficial cargo owners (BCOs) on the fuel surcharge issue. Recognizing that the carriers can’t and won’t bear the full burden, shippers are confused by the messages being delivered by carriers as to what the real impact is.
One shipping association had an independent analysis done by a team of experts and issued a white paper circulated at the Trans-Pacific Maritime Conference in March and widely read. But it not only defined its version of the impact ($600 a load on a China-to-US East Coast route), it also said the carrier’s calculations and explanations for them are lacking in consistency, creating great doubt about the veracity of numbers they are reading and hearing about.
Will that abate between now and November, the expected date for the surcharges to take effect? How and why would it? Add to it the softening market; it could affect the decision making by the carriers on what to charge and harden positions of pushback by shippers as they approach the negotiating phase of the surcharge.
Another unfinished piece of business is that of what the Federal Maritime Commission (FMC) will do, if anything, on the issue of demurrage and detention. The FMC recently issued a notice setting out the key points of concern by shippers and now apparently is going to use Innovation Teams to try and address these concerns.
As noted at a recent industry gathering, many shippers are wary that the carriers are using these charges for profit purposes, regardless of the lack of profitability by the carrier industry in the past decade. They point to issues such as the charge levels versus what they believe to be the real costs.
Over the years, they have been told that these charges are punitive to encourage shippers to pick up loads or return equipment in a timely manner. Now they want the charges to reflect costs, but I doubt that is what they want to be the basis for pricing the ocean carrier services — cost.
That’s especially true for US exporters. Logic says that if the carriers have lost $30 billion in the past decade, they aren’t pricing based on cost. If they did, prices would be substantially higher.
The crux of the issue isn’t the charge level; it’s when does it begin to apply? Here again the carriers aren’t consistent with their application, leading to confusion and frustration and the current debate before the FMC. Can the FMC resolve the issue of defining when a charge begins to apply?
Maybe the Innovation Teams can give clarity and have the FMC somehow declare, “This is how you do it.” A lot depends on the makeup of the Innovation Teams, what their objective(s) is, how the FMC will use their input, and what legal grounds they have to stand on to issue an order that all must follow.
So, the dust isn’t settled by a long shot for 2019. These and other critical issues will continue to challenge the industry and its customers, with the outcome far from certain.
Gary Ferrulli is CEO of Global Logistics & Transport Consulting. Contact him at firstname.lastname@example.org.