Peak season scramble for US-Asia slots intensifies

Peak season scramble for US-Asia slots intensifies

Port of Los Angeles.

Ocean carriers are enjoying rare pricing power, which is being propelled by three factors. But the impact of their decisions on customer relationships with beneficial cargo owners and truckers remains to be seen. Photo credit: Shutterstock.com.

US importers, large and small, are struggling more than usual this peak season to get their cargo on vessels leaving Asia, in some cases paying $400 to $600 above already inflated spot rates because ships are overbooked, causing thousands of containers to be rolled weekly.   

The spot rate to the East Coast this week surged another $215 to $3,317 per FEU, and the West Coast rate, although up only $18 to $2,086 per FEU, is still about $900 above service contract rates, according to the Shanghai Containerized Freight Index (SCFI) published on the JOC Shipping & Logistics Pricing Hub.

The eagerness of carriers to capitalize upon an early surge in cargo resulting from importers’ panic over Trump administration tariffs, typhoons in Asia, and a calculated reduction in capacity, is fraying relationships with customers. It’s virtually impossible for beneficial cargo owners (BCOs) and trucking companies to plan their pickup and delivery schedules with any degree of accuracy, thanks to trans-Pacific reliability hitting as low as 35 percent, rail delays, and chassis dislocations.

Carriers enjoy pricing power

From the ocean carriers’ perspective, they are doing what they are doing because they enjoy rare pricing power, and they are attempting to return to profitable rate levels after disappointing service contract signings in May. Carriers entered the contracting season with hopes for meaningful price increases, but instead they ended up signing contracts in the range of $1,100 to $1,200 per FEU to the West Coast and $2,100 to $2,200 per FEU to the East Coast, which is actually about $100 lower than last year’s service contract rates to both coasts.

Carriers, facing higher bunker fuel costs that pulled many of them into the red in the second quarter, are also coming off years off losses, with last year being the first in six that the industry made a profit ($7 billion).

“Carriers are taking an opportunistic approach. It’s disappointing how they’re managing this,” a non-vessel operating common carrier (NVOCC) said. “I expect enormous volatility the next four weeks,” he said, adding that hundreds of containers will miss their intended voyages and will be “rolled” to the next week. Carriers, meanwhile, say space on vessels leaving Asia is indeed at a premium, and they resist rolling cargo because they are in the service business.

The spot rate to the West Coast has risen steadily from $1,194 per FEU on June 22 to $2,086 on Friday. The East Coast rate has increased even faster, from $2,181 per FEU on June 22 to $3,317, according to the SCFI.

Higher bunker prices also factor into the elevated spot rates. The average price per metric ton of IFO 380 bunker fuel was $445.17 as of Monday, Aug. 13, an increase of 44 percent from August 2017, according to IHS Markit data. The price is up 19.4 percent from April, which is when prices began to climb.

BCOs and NVOCCs are fairly certain that much of the spike of cargo is due to importers moving shipments up, even if their merchandise is not specifically targeted by the tariffs, because of overall uncertainty in US trade policy today. “They’re not taking any chances,” said David Bennett, president of the Americas at Globe Express Services. Even if the finished product is not subject to tariffs, levies on aluminum and steel used to manufacture the product are already showing up in increased import prices on some products, he said.

Bennett said an unusual chain of events led to tight capacity this peak shipping season. Carrier alliances in June began to announce service cuts because they had low expectations for the peak season. Carriers canceled three weekly services to the West Coast, reducing weekly capacity by close to 7 percent, and one to the East Coast, reducing capacity about 1.6 percent.

At the same time, the saber rattling between the United States and China over tariffs and counter tariffs resulted in unusually strong US imports early in the summer. Imports in July 2018 increased 8.7 percent year over year, compared with a 6.1 percent increase in 2017, according to PIERS, a JOC.com sister product. Year-to-date, imports are up 5.1 percent, although that is down from 6.2 percent growth in the first seven months of 2017. Roughly half of US-China containerized trade is exposed to tariffs.

Therefore, to a degree, many of the cargo rolls in July and August have been legitimate because vessels have been regularly overbooked to 110 percent or higher. “We’re seeing roll pools grow. I’m even seeing double rolls [shipments missing two consecutive voyages],” Bennett said. In addition to tight space on vessels leaving Asia, some equipment shortages in Asia are emerging. He said 45-foot containers are in short supply, and carriers prefer to turn them on the coast, so some are refusing to book 45-foot containers inland. In fact, some carriers want containers of all sizes to be transloaded at the ports and are refusing inland shipments, according to an industry consultant.

BCOs and NVOCCs say carriers are resorting to all types of tactics to get customers to pay higher rates to ensure their shipments will not be rolled. “They are reaping the benefits of the short supply [self-imposed] of available space, and prioritizing the shipping of cargo that people are willing to pay these increases for,” said the director of operations of a footwear importer.

One strategy that involves BCOs as well as NVOCCs is for a carrier to establish a weekly quota for a customer based upon the annual minimum quantity commitment divided by 52. In busy times such as this, an importer’s weekly commitment figured in that way may equal 10 containers. However, due to fast-forwarding shipments, the importer may ask for 15 slots a week. The carrier will provide 10 slots at the service contract rate of about $1,200 per FEU, and then offer the remaining five slots at the current spot rate ($3,317 to the East Coast and $2,086 to the West Coast), plus an additional $400. If the customer refuses, those slots are sold to an even more-anxious shipper.

The logistics director at a large national retailer said even big-box retailers with large annual service contracts are paying high rates to get their additional shipments loaded. “If you negotiated a dirt-bottom rate, you’ll get rolled because someone else will pay a premium,” he said.

Although some BCOs and NVOCCs are shocked by these tactics, a veteran shipping/NVOCC executive said history shows they shouldn’t be. Tight space, unexpected spikes in cargo volume, uncertainties due to longshore contract negotiations, or the Hanjin bankruptcy two years ago caused similar disruptions in 2004, 2010, 2014, and 2016, he said. “If you’re paying $1,200 to the West Coast when the spot is over $2,000, you’ll get rolled,” he said.

Impact of early shipping on late peak season

Since no one is sure how much volume was shipped early this year, opinions vary as to what impact the early shipping will have for the back end of the peak season in mid-September through October. The trade is bracing for another round of general rate increases on Sept. 1 as carriers have filed the required 30-day advance notice of $900-1,000 per FEU rate hike. Although rates are unlikely to increase that much, some portion of the proposed increase will stick if cargo rolling in Asia continues.

It is uncertain if imports will decline significantly in late September-October. A Maersk Line executive said he is not seeing an unusual inventory buildup so far this summer, and he expects volumes to remain strong into autumn. However, if the tariff war with China continues, US imports from China could take a 4 percent hit, Maersk said Friday during its second-quarter earnings call. The veteran NVOCC, like other NVOCCs and BCOs, is thinking that imports will probably remain strong only into mid-September, and could then could “end rather quickly.”

Oct. 1, the beginning of Golden Week in Asia, is seen by some NVOCCs as a possible final peak as importers make a big push before factories close for a week. Although carriers have not announced any “blank sailings” after Oct. 1 for the trans-Pacific, they have for the Asia-Europe trade. Failure to implement blank sailings, coupled with a noticeable drop in imports, could spark a rapid deterioration in rates this autumn.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.

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Comments

The Shanghai typhoon and carrier congestion are definitely impacting schedules, but we have not experienced impact to rates.