With the impact of the coronavirus disease 2019 (COVID-19) muddying volume forecasts for US importers of Asia-sourced goods, some have been granted several additional weeks to hammer out new service contracts beyond the May 1 deadline. Other cargo owners have already wrapped up negotiations with their core carriers.
This year’s negotiations of trans-Pacific service contracts have been more amicable than in previous years, as conversations with four beneficial cargo owners (BCOs), two carriers, four forwarders, and four industry consultants have revealed. That’s because both carriers and their customers face significant challenges forecasting consumer demand and oil prices for contracts that will run through April 30, 2021, and neither side seems to be pressing for an advantage.
Also, BCOs and non-vessel operating common carriers (NVOs) are concerned more about stability in uncertain economic times than in securing the lowest possible freight rate. “This could have been a legitimate opportunity to drive rates lower,” David Bennett, president of the Americas at Globe Express Services, told JOC.com Friday. “BCOs don’t want to drive carriers out of business. They’re acting very responsibly,” he said.
Trade uncertainties in an environment of plunging consumer demand due to the coronavirus seem to be mitigating potentially contentious issues such as freight rates, a carrier’s failure to fulfill its service commitments, the customer’s failure to meet its minimum quantity commitment (MQC), and contract extensions.
Trans-Pacific carriers have doubled down on cutting capacity on the trans-Pacific trade as US imports from Asia in March fell to the lowest point in seven years. In the period from February to mid-June, carriers have canceled or plan to blank 150 sailings to the West Coast and 65 sailings to the East Coast, according to Sea-Intelligence Maritime Consulting.
The customer’s MQC is a key component in determining the ocean freight rate, but given the inability of many BCOs and NVOs to accurately forecast what their import volumes will be later this year, carriers are telling customers to go with their best estimates now, and any shortfalls can be addressed as greater clarity in demand emerges.
“Usually what happens is as long as you stay with the same carrier, they’ll let that slide,” Dan Gardner, president of the transportation consulting firm Trade Facilitators Inc., told JOC.com this week.
Dean Tracy, executive vice president and chief operating officer at third-party logistics firm RCS Logistics, advised BCOs that they consider linking any MQC shortfalls they may experience with the carrier’s failure to fulfil its space commitments due to blank sailings.
“They can say, ‘If you have blank sailings, those come off of my MQC requirement,’” Tracy said.
The fuel factor
The consensus among BCOs and NVOs is that the average all-inclusive service contract rate, including ocean transportation and fuel, in new contracts will be slightly higher than in the contracts that will expire on April 30.
But considering the number of cargo owners that still have to finalize service contracts, it’s too soon to determine how carriers and cargo owners will end this negotiating session. The 2019-20 service contract rates were generally $1,400 to $1,550 per FEU to the West Coast and about $2,450 to $2,600 per FEU to the East Coast, according to multiple conversations with carriers, NVOs, cargo owners, and consultants.
The all-inclusive service contract rates being negotiated this spring include the ocean transportation component, which will remain the same for the life of the contract, and the bunker fuel component, which will float up or down based largely upon the previous quarter’s price of fuel at the major bunkering ports in Asia, Europe, and North America.
It is therefore conceivable that given the freefall in oil prices that began last month — low- and high-sulfur fuel prices are down approximately 45 percent in major bunkering hubs since early March — the all-in rate in today’s contract will be adjusted downward in July based on the price of oil in the second quarter, the director of global logistics at a retailer told JOC.com Friday.
Because of declining oil prices, the spread between the low-cost high-sulfur bunker fuel vessels used to burn, and the higher-cost low-sulfur fuel oil (LSFO) mandated by the International Maritime Organization’s global LSFO requirement in effect since Jan. 1, has narrowed considerably. For example, the very-low sulfur fuel oil (VLSFO)-high-sulfur fuel oil (HSFO) spread in Rotterdam, at $111 in early March, had collapsed to just $38 as of April 16. That shrinking spread has helped to prevent significantly higher all-in freight rates.
“Clearly, the rates aren’t moving significantly up or down,” Bennett said.
Cloudy demand forecasting
In past contract negotiations, carriers and their customers would look to import projections for the back-to-school shipments that would move in May and June as a barometer of what consumer demand would be in the second half of the year. This year, back-to-school projections are as difficult to make as are projections for the peak-season holiday merchandise that will begin to move in August, said an industry consultant and former logistics manager for a large retailer.
The source said retailers this year will follow past purchase order procedures for supplies that can be used at home or at school, such as pens, notebooks, stationary, and calculators. However, the retailers are holding off as long as possible on ordering backpacks, apparel, and other items that would be needed only if schools reopen on schedule in late summer, he said.
Carriers in the second half of the year are expected to continue using blank sailings to manage capacity in an attempt to meet, but not exceed import volumes in order to establish a floor under freight rates should demand fail to meet projections.
Conversely, if demand should suddenly spike, carriers will fill their vessels with the highest-paying freight available. “Capacity will go to the higher revenue,” Tracy said.