Pacific lines face a difficult sell

Pacific lines face a difficult sell

Large importers and national retailers are still kicking themselves for agreeing last spring to rate increases of as much as 40 percent to guarantee space during a peak season that has yet to materialize in the eastbound Pacific trade. So when carrier sales representatives approach their customers in the coming months with planned new increases of about 20 percent, they can expect a cool reception.

"I caution them to be cautious. There are a lot of unhappy customers out there," said Barry Horowitz, president of CMS Consulting Services LLC. Horowitz is a former carrier executive, and later was director of international transportation at Nike Inc. Most recently he was in supply-chain management at Danzas AEI in London.

The Transpacific Stabilization Agreement, a discussion group that represents 14 of the largest eastbound Pacific carriers, met in Kuala Lumpur on Sept. 19 to establish a proposed rate agenda for the 2004 shipping season.

The TSA's voluntary rate guidelines for May 2004 through April 2005 are: $450 per FEU to West Coast ports and for local delivery near the ports; $600 for all-water service from Asia to East Coast ports; $600 on intermodal shipments to inland U.S. destinations; and a $400 peak-season surcharge. The proposed rate increases would represent about a 20 percent increase in port-to-port charges of $2,100 to $2,200 that big importers now typically pay. Smaller importers pay $200 to $300 per FEU more.

The traditional mentality among shippers is that rates rise only when ships are full. Therefore, even though capacity utilization in the eastbound Pacific this summer has been greater than 90 percent, importers cannot accept the fact that they are paying 40 percent more than last fall when ships were full.

The increases proposed for next year won't sit well with international transportation managers at large retailers and other importers. They're still taking heat from their bosses for agreeing to $700 per-FEU rate increases for 2003, and won't be eager to accept an additional 20 percent increase. Some importers are already pressuring carriers to amend this year's contracts to reduce rates for the slack shipping season that usually begins in November.

Carriers, however, say they need higher rates to generate profits needed to ensure good service. Pacific carriers say they lost a total of $1 billion in 2001 because of the weak U.S. economy and flat imports. In early 2002 the lines thought imports from Asia would remain weak, so they lowered their rates even further, only to be surprised by an overall 15 percent increase in imports last year.

This year, shipping lines have demonstrated remarkable solidarity, refusing to lower their rates even though capacity has been plentiful. In the past, rate wars were common when cargo volumes did not meet expectations.

Having demonstrated their ability to stand firm on rates in a disappointing market this year, the lines are confident they can carry this momentum into next year. They base their confidence on current supply-demand projections, which call for both demand and capacity in the eastbound Pacific to increase about 6 percent next year.

Economist Anirvan Banerjee of the Economic Cycle Research Institute in New York looks for solid growth in imports from Asia next year. He said Bush administration tax cuts and a favorable monetary policy by the Federal Reserve have given a "tremendous stimulus" to the U.S. economy that should begin to be felt in the fourth quarter this year and carry on into next year.

Furthermore, the relentless shift of production from Europe, Latin America and the U.S. to China will continue unabated next year. That would mean that even modest growth in consumer spending will translate to steady growth in imports from Asia, increasing demand for space on ships.

Carriers have another important reason to stick together on rate increases next year. Shipping lines have on order about 75 ships with a capacity of 8,000 TEUs or more.

Some of these behemoths will enter service next year, but most won't be delivered until 2005 or 2006. Ship lines believe they have only one more year of capacity utilization rates above 90 percent before the influx of new tonnage causes utilization rates to fall - and freight rates with them.

Shipping lines normally deploy their largest vessels in the Asia-Europe trade, where carriers also are seeking large rate increases. The Far East Freight Conference, which includes most of the lines that are also members of the TSA, on Sept. 18 announced proposed rate increases of $550 per TEU, or $1,100 per FEU, to be phased in from Jan. 1 to July 1, 2004, for shipments from Asia to Europe. An additional increase is planned for Oct. 1, 2004.

Although shipping lines in the eastbound Pacific are likely to push for the full $450 increase to West Coast ports and $600 to East Coast ports, importers surmise that carriers may resort to tried and proven tactics that will allow both carriers and shippers to save face.

For example, rate erosion is expected during the winter months as capacity utilization drops back into the 80 to 85 percent range. Even though the contract rates are ostensibly locked in until April 30, 2004, carriers may offer their customers discounts of $200 or more during the slack season. They will then sign contracts with importers for the full $450 increase, based on the discounted rate in effect from November to April.

That will allow carriers as a group to boast in 2004 that they negotiated contracts with the full rate increase. Meanwhile, traffic managers at importers and retailers will be able to report to their superiors that, in reality, they are only paying a $250 rate increase compared with the rates

that were in effect in the summer of 2003.

The proposed $400 peak-season surcharge for 2004, however, could be in real jeopardy, especially if the peak season this year is a bust and if consumer spending during the holidays is lackluster. Importers will argue that peak-season surcharges no longer have any meaning because cargo volumes in the summer and fall are not appreciably higher than during the rest of the year.