US beneficial cargo owners (BCOs) scrambling to manage their supply chains amid intermodal rail delays and rising truck prices are paying an extra $300 per container under existing contracts with some ocean carriers seeking to recoup their higher costs in the tight surface transport market.

The truck capacity pressure, exacerbated by the federal electronic logging device (ELD) mandate, is trickling down to all modes of inland cargo transportation: railroad, drayage, and transloading and long-haul truckload. Ocean carriers are responding with a mixture of actions consisting of emergency surcharges, raising tariffs, and suspending or restricting store-door deliveries in the United States.

Higher surface transportation costs are also factoring into BCO and carriers’ negotiations of service contracts, which generally run from May to late April. Some carriers are working to reduce their exposure to store-door contracts where they have responsibility for inland moves to and from the port.

Cosco Shipping, for example, told JOC.com that hopefully “a lot of this can be addressed in one-on-one negotiations with our [customer] accounts” rather than a widespread action.

Trucking costs are expected to rise after April 1 when law enforcement will place drivers out of service for failure to operate a working ELD or violating hours-of-service regulations. Daily truck productivity is also expected to drop with ELDs, and when coupled with rail ramp delays, ocean carriers are worried the speed in turning around chassis will slow down, increasing rental charges.

Such additional surcharges are historically uncommon during the slower freight season of February and March. But tightening truck capacity and surging US import volume — up 9.8 to 3.9 million TEU in January and February on a year-over-year basis, according to PIERS — has made this year an anomaly.

“In some cases, carriers have backed out on existing contract business. Others are only declining to quote new door business but servicing existing contracts until contract expiration,” according to TOC Logistics International, an Indianapolis-based third-party logistics provider. 

The response is the culmination of months of rising US trucking prices and tack-on fees arising from meltdowns on the rail ramps in Chicago and Memphis, Tennessee. Scheevel and other transportation executives have pointed to congestion also in Atlanta, Detroit, Houston, and Columbus, Ohio.

Weeks after CMA CGM announced a $300 emergency intermodal fee to recoup some of these costs, Mediterranean Shipping Co. and Hyundai Merchant Marine notified customers they will also assess $300 per container surcharges.

For MSC, the surcharges will apply in some markets, and in others door deliveries will cease until further notice, Laufter International said in a Feb. 27 notice.  HMM will apply the fee on all US door moves but will negotiate on a case-by-case basis.

MOL is restricting door delivery bookings in certain markets but does not plan to institute surcharges, citing the pending merger into the Ocean Network Express  (“K” Line, MOL, and NYK Lines) due to be finalized on April 1.

Maersk Line increased its inland tariff on March 14, two days before the CMA CGM surcharge went into effect. Zim Integrated Shipping Services Co. is taking a similar tactic to Maersk Line, adjusting the tariff structure on an ongoing basis.

Drayage costs are also 25 to 30 percent higher than a year ago, if not more, according to fleet executives and brokers, mirroring the truckload spot market.

“Spot dray rates are often going to the highest bidder, which can quickly drive cost up for ad hoc ‘must move’ freight,” Scheevel said.

“A dray that cost $600 last year is now going for $800 or even sometimes $900 to $950 in certain markets,” added Eddie Santucci, president of Cura Freight, a freight broker.

Meanwhile, train speeds have slowed this winter causing delays and terminal congestion to rise in the Midwest and Southeast. As a result, trucking companies are applying $75 to $150 per hour in detention fees to cover their lost productivity as drivers wait multiple hours during rail yard backups. Demurrage charges are also being applied more frequently by the railroads, according to ocean carriers, one of the domino effects of a network breakdown. Although the amount varies by location and commodity, storage charges on non-refrigerated boxes typically range from $100 to $175 per day after the allotted free time, based on conversations with draymen.

On a door delivery, these incidentals pile up and eventually erode margins on containers moved on a contract rate. The ocean carriers hope the surcharges and restricted service will defray their costs.

MSC applying a two-prong solution to the problem

MSC will cease door deliveries in some locations while maintaining service with a $300 per container surcharge in other markets where its large customers are located and demand is heavy. MSC said the congested markets are in the Midwest and Southeast but would not name specific cities or provide a date for when the surcharges will begin.

"MSC is continuing to conduct door deliveries for shippers in many regions, where market conditions allow this," MSC said in a March 23 statement. "In some congested areas we can only continue to provide these services in a timely way by modifying our tariffs or adding surcharges on certain bookings."

The carrier said it's still offering full port-to-ramp services in the United States. The Geneva-based carrier is also keeping an eye on fleet and driver workforce investments made by major trucking companies, hoping to "see some stabilization in the market situation in the coming months.”

The CMA CGM emergency intermodal surcharges apply in Chicago; Houston; Savannah, Georgia; Memphis, Tennessee; and Columbus, Ohio.

HMM will begin assessing a $300 per container surcharge on April 6 on all door deliveries in the United States.

“The $300 is a protection device against our escalating costs, but we will be very flexible with our customers in markets in which costs have not escalated as much,” said Lawrence Burns, HMM senior vice president of trades. “We just found the one charge would be the best method for us. But if the shipper comes back to us, it’s negotiable on a case-by-case basis based on the market.”

He also identified rail congestion in Norfolk, Virginia, in addition to the Midwest and Southeast, although some of that may be a trickle down effect from Chicago, particularly with CSX Transportation, which runs services between Chicago and the Port of Virginia.

Burns also noted that the ocean carriers purchase truck capacity on a spot basis to fulfill their contract, leaving them exposed to the fluctuations in the market.

“Usually trucking contracts are not for long periods of time. We’re very vulnerable to changing prices by the week or by the month, which are quickly rising” he said.

On Feb. 13, Maersk notified customers that it would increase its inland tariff, citing the truck driver shortage, the ELD mandate, rail ramp congestion, chassis shortages, and more frequently assessed detention, demurrage, and storage fees.

Nevertheless, a Maersk spokesperson told JOC.com that there are no plans to suspend or curtail door delivery services in the United States.

“Furthermore, no congestion surcharges have been issued or are planned for inland services in relation to the current trucking capacity challenges. Maersk Line remains committed to our customers and will continue to act as a partner as we help them navigate the current trucking landscape,” the spokesperson said in a statement.

The increased inland tariff is not a fixed per-container amount but is applied on a customer-by-customer basis based on its terms and conditions with Maersk.

George Goldman, the US president of Zim Integrated Shipping Services Co., said there are not any restrictions or elimination of its door deliveries, and is responding with a strategy similar to Maersk, for now.

“We have put language in our tariff and contracts that address some of the trucking issues and consequent cost issues. Having said that, at this point we have not determined whether or not we will institute a $300 emergency surcharge,” he said.

No easy answers for shippers or logistics providers

There is no one size fits all solution for BCOs, according to TOC Logistics.

“In some cases we have maintained door moves with the carriers. This is usually when a long-term relationship with a ‘preferred trucker’ is in place, so the relationship is between all three parties. In other situations we have terminated the door moves and manage drayage ourselves with own trucking contracts,” Scheevel said. “In both cases costs are increasing, and these are being handled with clients on [a] case-by-case basis to keep cargo flowing.”

He anticipates ocean freight levels to remain on par with 2017 and demand for inland point intermodal and inland door delivery moves will increase even more this year, driving truck rates even higher.

The duration of these surcharges may also be tied to the long-term performance on the rails, not simply truck rates.

“There is a fundamental concern among rail customers that the underlying root cause of these service and accessorial charge-related issues is Class I railroads’ aggressive effort to reduce their operating ratios to impress Wall Street investors and shareholders,” Randall Gordon, CEO of the National Grain and Feed Association, wrote in a March 10 letter to the Surface Transportation Board (STB). “This, in turn, has resulted in the systemic shedding of resources by Class I carriers, including locomotives and crews, that has degraded service to unacceptable levels, and resulted in virtually non-existent surge capacity to meet rail customers’ needs.”

He added these service shortfalls “cannot be explained away by the vagaries of weather.”

On March 12, the Auto Alliance wrote that its members “have not perceived even the semblance of a concerted plan or timeframe to restore effective car service.”

The STB sent letters to the seven major Class I railroads on March 16 to request a service outlook for the rest of this year.

Contact Ari Ashe at ari.ashe@ihsmarkit.com and follow him on Twitter: @ariashe_joc.