Trans-Pacific lines launch new pricing approach as costs mount

Trans-Pacific lines launch new pricing approach as costs mount

HONG KONG — Carriers on the trans-Pacific have unveiled a bold new pricing approach to the 2015-16 contract season that will establish minimum rate levels and improve the bunker fuel cost recovery mechanism.

Member lines of the Transpacific Stabilization Agreement (TSA) said they were facing significant cost and operational challenges on the Asia-U.S. trade as they manage inland rail and truck capacity shortages, and sharply higher mandated fuel costs beginning in 2015.

“Carriers feel an urgent need in the current market environment to view pricing differently,” said TSA executive administrator Brian Conrad.

Among the changes adopted by TSA’s 15 member lines: Contract rate objectives for 2015-16 rather than scheduled general rate increases (GRIs) from varying baseline levels; rates for 20-foot and high-cube 40-foot containers that more fully reflect cost impacts in loading and handling; full recovery of rising intermodal costs due to inland transport capacity and congestion issues; a revised bunker surcharge formula more accurately reflecting current vessel size and fuel consumption; and recovery of low sulfur fuel costs as tighter emissions standards take effect in January 2015 for vessels operating in North American coastal waters.

“Rate minimums are an effort to better reflect actual costs of service, rather than simply recommending a specific increase to whatever baseline rate is in the tariff based on short-term supply-demand conditions,” Conrad said. 

“Rates will continue to fluctuate with the market according to origin-destination pairs, service requirements, routing and so on, but a common base guideline is essential for lines to maintain basic service levels and, beyond that, expand their offerings based on customers’ needs.”

The TSA is recommending that its members seek to conclude 2015-16 contract rates at levels at or above $2,000 per FEU to the West Coast and $3,500 to the East Coast from all North Asia ports.  For Southeast Asia, the objective will be to achieve rates at or above $2,150 to the West Coast and $3,650 to the East Coast. Intermodal base rates will vary by destination, but as an example the TSA is proposing 2015 CY rates to Chicago-area ramps to be at least $3,900 from North Asia and $4,050 for Southeast Asia.

Some are pushing back on the changes, saying that it's no small change for the TSA to aim at specific rate levels rather than rate increases as it has done for many years. "The latest message from the TSA, in setting objectives for minimum rate levels on major lanes for next year's (trans-Pacific eastbound) season, seems beyond their intended scope," said Pete Renault, global director of NVO services for OIA Global based in Portland, Oregon.  

Member lines last month announced a push for the 10th general rate increase in 10 months as Asia-U.S. spot rates continue to fall. The TSA filed intentions for a $600 per 40-foot container general rate increase, effective Oct. 15, on all cargo from all origins and destinations earlier this month. The TSA began a rate restoration program in January, aiming to raise cumulative rates by $300 per 40-foot container unit by the end of the year.

The string of GRI pushes reflect a volatile market of fluctuating demand and general overcapacity. While carriers have relied on GRIs to push spot rates, their impact has been limited, with rates slipping several week after the initial pricing bump.

Minimum rates for other equipment sizes have also been revised upwards. Base rates for 20-foot containers (TEU) will be assessed at 90 percent of FEU rates. High-cube FEU base rates will be charged a premium of at least $50 over the 40-foot standard rate for the West Coast and $100 over the 40-foot rate for all other destinations. 

The TSA said these changes reflect the greater cost impacts from the handling of different container sizes as load and discharge patterns in port become increasingly complex and time-sensitive.

Also being adjusted are bunker fuel surcharges. New MARPOL sulfur oxide emission rules take effect on January 1 2015, which the TSA said was expected to add hundreds of millions of dollars in additional financial impact to carriers. The new recommended contract rates will have a low sulfur fuel cost recovery component, which would be announced in the next several weeks. 

“We are studying the various fuel components very closely,” Conrad said. “The stricter 0.1 percent emissions mandate, requiring a shift to costlier marine gas oil (MGO), is of special concern because it will hit the trade all at once and no one can predict just yet where prices will settle. That in turn makes it difficult to adapt our existing formula, but we expect to have a clearer picture closer to January 1, in time to announce a charge with the necessary advance notice.”

Maersk Line has announced low-sulfur surcharges of up to $160 per 20-foot container on the North Atlantic and lesser amounts on other trade routes to offset the cost of complying with regulations requiring ships to switch to cleaner fuels in 2015. 

All vessels sailing through so-called Emission Control Areas ― the Baltic Sea, the English Channel, the North Sea and 200 nautical miles from the American and Canadian coasts ― must switch to fuel with a sulfur content of 0.1 percent on Jan. 1 from the current 1.0 percent limit as the U.S. and the European Union adopt an International Maritime Organization regulation.

Maersk Line said recently its annual fuel bill will increase by $200 million based on the current $270 per ton higher cost of low-sulfur marine gas oil compared with heavy fuel oil.

Contact Greg Knowler at gknowler@joc.com and follow him on Twitter: @greg_knowler.

Comments

Is it just me or does this sound a lot like violating antitrust laws through the use of 3rd party?