Trans-Pacific shippers shouldn't let emotion trump logic in contract talks

Trans-Pacific shippers shouldn't let emotion trump logic in contract talks

Trans-Pacific shippers, still sore from U.S. West Coast port congestion, frustrated with schedule reliability and seeing no end to overcapacity draining spot rates, might be tempted to put the squeeze on carriers during annual contract negotiations. They should resist.

It’s in shippers’ best interest to ignore the egging on of some commentators and not let emotion trump common sense. Yes, carriers seriously misjudged demand when ordering mega-ships.

Their decision to partner with competitors via shipping alliances — expansive vessel-sharing agreements — to fill their vessels has contributed to poor port productivity. The lack of remorse from carriers or longshoremen for the supply chain disruption and millions of dollars lost through the 2014-15 West Coast showdown still stings some shippers.

But blame won’t improve the environment. Shippers thinking this is “the greatest time of year to ‘cut carriers’ heads off’ ” should remember that the day will come when carriers hold more power and, because they have long memories, they’ll recall the shippers who were without mercy when they were reeling, said Chas Deller, a partner in 10XOceanSolutions, a consulting company that advises shippers in their carrier relationships.

“That’s great short-term thinking,” quipped Deller, referring to shippers looking to give carriers a hair cut on annual contracts.

The short-term risk is that shippers gain bottom-of-the-barrel rates and find service to match. That last-minute booking, for example, just won’t be possible, and when containers need to be rolled, those low-paying customers will find their containers left at the docks, half a dozen shippers told JOC.com on the condition of anonymity. Shippers don’t want to be the highest-paying customer, nor do they want to be the lowest-paying customer, because benefits from being the latter begin shrinking after the ink on the contract dries.

Instead, shippers should go back to the basics: utilizing good data to forecast what they’ll need to move over the next 12 months. Deller advises that shippers look at import demand by port pair, commodity, equipment type and sailing frequency. They should fix base rates for 12 months and insist on terms that include no general rate increases. They should allow bunker adjustment factors to fluctuate quarterly and negotiate for the best possible free time, Deller added.

They also must be mindful of the coming shakeup in alliances. With the creation of China Cosco Shipping and CMA CGM set to acquire APL this year, there’s no sense in booking business with more than one carrier within each alliance.

It’s difficult, however, to determine how the alliances will evolve. CMA CGM and China Cosco reportedly are trying to forge a new vessel-sharing alliance that could include Evergreen Line and OOCL and, in the process, shake up three of the four major east-west carrier groupings, according to Alphaliner.

CMA CGM is a partner with China Shipping and United Arab Shipping Co. in the Ocean Three Alliance. Cosco is part of the CKYHE along with “K” Line, Yang Ming, Hanjin Shipping and Evergreen. APL and OOCL are in the G6 along with Hapag-Lloyd, Hyundai Merchant Marine, NYK Line and MOL.

If CMA CGM, China Cosco, Evergreen and OOCL forge a new alliance, it would challenge the 2M Alliance of Maersk Line and Mediterranean Shipping Co., the world’s two largest container carriers, and would distance the new alliance from weaker members of other alliances, Alphaliner said.

Speculation is rampant that Hanjin will merge with fellow South Korean carrier Hyundai, which is pleading for discounts from the owners of its chartered-in fleet, saying it’s near collapse. Hanjin lost $160 million in the fourth quarter and owes $494 million in debt this year.

Even so, shippers shouldn’t wait for the alliance structure to shake out before sending out requests for proposals to carriers. “Don’t wait for (carriers) to come to you,” Deller said. Get info on transit times, new sailings through Panama Canal and let them when you expect new contracts to take effect.

Deller recommends shippers contract for 70 percent of their volume with traditional carriers. Place the rest with a non-vessel-operating common carrier that has space on liners and that you don’t have a formal contract with and a carrier you want to test out. Some shippers have found success with having an NVOCC option for each major trade so they can play the spot market and secure additional capacity when needed.

Shippers can get a discount on their contracts by signing a weekly blocked-space deal with a carrier, guaranteeing the liner has “X” amount of cargo from them at each determined port, said Bill Woods, managing director of America’s Sales Agency and a former carrier executive. The exception deal would be the two weeks for Lunar New Year, which in 2017 will start in late January. Shippers would have a 10 percent margin of error on guaranteed cargo and be subject to a penalty if they fall afoul of that.

Once the contract is in place for 90 days, shippers should measure on-time performance, container availability and terminal turnaround times, Deller said.

Unsubstantial low rates are short- and long-term detriments for shippers. In the short term, ailing carriers will cut investments in personnel, equipment and information technology, pulling down service. Ultimately, some of those carriers could shut down, reducing shippers’ options and market competition.

“Long term-relationships,” Deller said, “go through the good and bad times.”

Mark Szakonyi is executive editor of JOC.com. Contact him at mark.szakonyi@joc.com and follow him on Twitter: @szakony_joc.

Comments

Not a bad strategy by Deller although some might debate on 70% committed at rate levels - unless the carriers truly lose their way in the negotiations. The supply/demand ratios seem to favor the demand side, meaning spot rates will be the more attractive alternative for a good portion of the year. Then it's a matter of deciding if there will ever be a peak season again, really tight space, rolling of cargoes. Ships like the Benjamin Franklin may be sending a subliminal message - or a true slap in the head.