US import slot scarcity grants trans-Pac carriers pricing control

US import slot scarcity grants trans-Pac carriers pricing control

Port of Los Angeles.

Space is so tight today in the eastbound Pacific some beneficial cargo owners are paying higher than spot rates to get their shipments on vessels leaving Asia. However, there is a qualifier to that trend shippers should know about. Photo credit: Shutterstock.com.

Ocean carriers today are in total control in the eastbound Pacific, with importers readily paying spot rates in excess of $2,000 per FEU to the West Coast and $3,000 per FEU to the East Coast to secure space on vessels leaving Asia. Carriers are even charging higher-than-normal spot rates to desperate importers with last-minute shipments as vessels this week were booked to as much as 110 percent of capacity, equating to thousands of containers being rolled.

“Some carriers are coming in $200 above spot,” said Kevin Krause, vice president ocean sales at Seko Transportation. “I’ve seen spot rates as high as $2,600 to the West Coast, although I don’t know if anyone is paying that. We’re in the peak of the peak,” he said, indicating that volumes could begin tapering off by late September. “Space is tight. It’s been 110 percent booked out the past couple of days,” he said.

The spot rate to the East Coast this week was $3,102 per FEU, up 0.1 percent from last week, and $2,068 per FEU to the West Coast, down 0.3 percent, according to the Shanghai Containerized Freight Index (SCFI), published under the JOC Shipping & Logistics Pricing Hub. Last week’s SCFI spot rates reflected Aug. 1 general rate increases and emergency bunker fuel surcharges, and were the highest since February 2017.

Another spot rate hike ahead

Seko is informing its customers to expect another rate hike in spot rates on Sept. 1 because carriers have filed their 30-day advance notices. “We’re seeing $1,000 increases and a couple of $900s,” Krause said. While some portion of the rate increases will probably take effect, Krause does not anticipate that carriers will get the full amount.

Carriers are using every tool at their disposal to enforce rate hikes in what looks to be an early but short peak shipping season. “After years of losses, carriers are naturally inclined to maximize revenue through limiting total capacity and shifting available capacity from low-rate fixed contracts to higher spot market rates, all this while trying to give enough space to BCOs [beneficial cargo owners] and fixed-contract business to keep them appeased,” said Michael Klage, solutions director, TOC Logistics.

Carriers are also serious about recovering revenue they left behind during the service contracting season this spring. Carriers earlier this year signaled their intention of pushing rates higher than the average $1,200-1,300 per FEU to the West Coast and $2,200-2,300 per FEU to the East Coast that they charged their steady customers in the 2017-2018 contracts. However, this year’s service contracts ended up about $100 per FEU lower than those rates, and the ability of the carrier industry to show a profit this year is in jeopardy. They therefore appear intent on achieving profitability through spot rate hikes for as long as the peak season lasts.

Vessel capacity is without doubt at a premium today. “The trans-Pacific is experiencing tightness in its eastbound capacity. Sometimes no space means no space,”said Allen Clifford, executive vice president of Mediterranean Shipping Co. Although some shipments are shut out of some voyages at Asian ports, this is not by intention. “We take no pleasure in turning away any client’s cargo. We are in the service business, and we are here to serve our partners,” Clifford said.

Carriers today are benefiting from a burst in shipments by US importers seeking to bring holiday season merchandise into the country before even stiffer Trump administration tariffs take effect, successful efforts to balance supply with demand by announcing suspension of three weekly vessel strings to the West Coast and one to the East Coast, and strong consumer demand. The National Retail Federation on Thursday reported that June sales were up 4.2 percent year over year, and the three-month moving average was 4.4 percent higher.  

'Fast-forwarding' ahead of tariffs is part of the volume surge

Shippers, non-vessel operating common carriers (NVOCCs), and ocean carriers can say with certainty now that fast-forwarding of imports to get ahead of the tariffs is contributing to this summer’s surge in volume. “We have witnessed some of our clients making orders of 25+ containers in a week when they usually ship 10. These are shippers who are consistent year round, not typical peak-season type importers. We have confirmations from some of the suppliers that these spikes are tariff-related,” Klage said.

Carriers also are operating under the philosophy of “get it while you can” because carriers and NVOCCs project that import growth will slow considerably after Golden Week in China, which begins on Oct. 1. Klage said the one-time effect of importers shipping early will come most likely to an end next month “and peak season will end up being ‘in like a lion and out like a lamb.’” He added that if the ordering drops off due to bloated inventory, “the peak season could end very early.”

While it is true that some shipments leaving Asia have been “rolled” to the next voyage because of tight space, it is also true that carriers can often find space at the last minute if the importer is willing to pay a higher spot rate, a peak season surcharge, or an emergency bunker fuel surcharge, another NVOCC said. “They must pay a surcharge in some form,” he said. Many customers today are therefore booking shipments “subject to roll,” which means they do not want to pay surcharges and accept the possibility that they will be rolled. Conversely, importers with hot cargo will voluntarily pay a surcharge to get priority shipments on the vessel, he said.

Some carriers and NVOCCs say there is potentially more capacity available if BCOs would return to the allocations they had with MOL, NYK Line, and “K” Line before they merged on April 1 into Ocean Network Express (ONE). ONE in the first half of 2018 experienced a drop of 2.5 percentage points in market share. CEO Jeremy Nixon confirmed that initially ONE experienced booking and customer service issues because staff was attempting to handle bookings that had been made with the individual lines while at the same time taking new bookings for ONE. Krause said Seko in fact experienced those issues with the merged carrier, but overall ONE “has been good at adhering to the volume commitments.”

Securing truck capacity has also been a struggle for some BCOs since enforcement of the federal electronic logging device mandate took effect on April 1, but savvy shippers and their service providers are generally securing the inland capacity they need. Krause said Thursday he discussed this issue with a national truck broker who said he has been “quite busy.” However, BCOs who identify their shipment needs two to three weeks in advance will give their brokers sufficient time to secure capacity in most markets, Krause said. As with the ocean side, some BCOs are securing truck capacity for last-minute shipments, “but they are paying more,” he said.

Equipment shortages can also be an issue during most peak seasons, and in fact spot shortages are occurring today, but they can be worked out if carriers and BCOs both do their part, Clifford said. “The overall equipment tightness is being exacerbated by some shippers utilizing containers as storage units, choosing to wrack up per diem charges rather than returning boxes to the carrier. This forces an unnecessary shortage in some US areas,” he said.

Ports on both coasts are mostly handling the peak season volumes without experiencing serious or prolonged congestion problems. BCOs are reporting delays of four to five days in Los Angeles-Long Beach, said Bruce Chilton, vice president of trade management at Ascent Global Logistics. Klage agreed that cargo velocity in the largest US port complex has slowed somewhat, although the problem seems to be mostly with shipments leaving Southern California via intermodal rail. “Otherwise, terminal operations do not seem to be the primary choke point in the ocean supply chain,” he said.

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

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