Rating Pacific Rates

Rating Pacific Rates

Ocean customers in the eastbound Pacific aren’t batting an eye over carrier intentions to increase freight rates by $400 per 40-foot container to the West Coast and $600 to inland and East Coast destinations.

However, companies that import consumer merchandise from Asia told carriers they better not surprise them with add-ons and multiple peak-season surcharges throughout the year. “Carriers told us about the increases, but they can’t add five or six more, or we won’t be able to lock down our landed costs,” said Pat Moffett, vice president of global logistics at Audiovox.

The Transpacific Stabilization Agreement, a discussion agreement representing 15 carriers, announced on Nov. 19 its voluntary guidelines for 2011-2012 service contracts, most of which take effect on May 1. In addition to the base freight rate increases, the TSA recommended a $400 peak-season surcharge from June 15 to Nov. 30, 2011, and an “improved collection” of floating bunker charges, inland fuel charges, Panama Canal and Alameda Corridor surcharges and other fixed accessorial charges.

In a normal year, the recommended base rate increases would be considered a modest proposal, but 2010 has not been a normal year, and the kind of grudging acceptance of the higher base rates reflects the high tensions that have spread through international trade over the past two years.

The container shipping industry began the year more than $15 billion in the red because of the global trade recession of 2009. To stop the bleeding, carriers slashed capacity in the trans-Pacific by about 10 percent and implemented the cost-saving strategy of slow-steaming, effectively cutting capacity another 15 to 20 percent.

Retailers, with inventories slashed to the bone, began to rapidly rebuild stocks in early 2010, and a resurgent U.S. economy, with a kick-start federal stimulus spending, raised shipper confidence. As a result, imports from Asia soared more than 15 percent, leading to deep shortages of vessel space and equipment.

Carriers this year responded with a series of rate increases and surcharges. Customers compounded the problem by bidding up the price of vessel space and equipment, driving the Drewry Shipping Consultants spot rate from Hong Kong to Los Angeles to about $2,800 per FEU by August. The spot rate had dropped below $900 per FEU in the depth of the recession in August 2009.

Shipping lines attempted to secure a second peak-season surcharge this fall, but by then imports from Asia had peaked and were starting to edge lower. Freight rates declined as well, dropping to about $2,100 per FEU by mid-November, according to the Drewry measure.

Freight rates are expected to drift lower in the coming weeks as the trade enters the slow season in the eastbound Pacific. Rates may bump upward in January, however, because Chinese New Year in 2011 will be earlier than normal. Factories will fast-forward deliveries before they close for more than a week beginning Feb. 3 for the celebration.

Carriers appear to be taking a measured approach to freight rate increases for next year’s service contracts. The price increases of 2010 in the trans-Pacific and other busy trade lanes are projected to produce an industrywide profit of about $5 billion this year, according to Drewry. As long as rates don’t crash during the slow winter months, the proposed rate increases would ensure carrier profitability in the coming year.

Supply-demand economics in the eastbound Pacific will determine whether the carriers can raise their rates. The TSA said imports from Asia in 2010 would increase about 12 percent. The TSA projects further growth of 6 to 9 percent in 2011.

If there is a problem, it will develop on the supply side. Trans-Pacific capacity increased 18.6 percent in 2010, according to Paris-based AXS Alphaliner, and will increase about 10 percent in 2011.

Carriers have yet to announce their winter deployment schedules, although observers do not anticipate a wholesale slashing of capacity. Customers expect carriers will remain nimble, removing vessels when cargo volume drops, such as during the Lunar New Year, but returning the capacity when volume grows. “That’s a good business decision,” Moffett said.

Importers probably will not balk at a single, measured rate increase in 2011 contracts, but they will resist a series of rate increases and multiple surcharges, said Dave Akers, managing director of the Toy Shippers Association. “The real issue is add-ons and surcharges, a second peak-season surcharge on top of a peak-season surcharge. That’s what I’m talking about,” Akers said.

Contact Bill Mongelluzzo at bmongelluzzo@joc.com.