As importers weather some of the most brutal conditions in years in the eastbound trans-Pacific trade — merchandise is missing store delivery windows and carriers either are enforcing the letter of contracts or in some cases disregarding the agreements entirely — Wall Street is cheering on carriers for making the tough decisions needed to repair their financial houses.
Share prices are up, and analysts attribute the gains partly to a positive economic outlook. But more important to the market is a unity of purpose among carriers not usually seen from an industry that often leaves high-level meetings heading in opposite directions both literally and figuratively.
“We have been positive on container shipping for the past nine to 12 months, and we reiterate that view, because carriers are exercising discipline not only in pricing but capacity,” Tom Kim, head of Asia transportation research for Goldman Sachs, said in an interview following a speech at the Second Annual Journal of Commerce Breakbulk Asia event in Singapore last week. “The determination from the carriers has been remarkable. They are determined to stem the tide of losses and start recouping the losses from last year.”
Kim seems unconcerned about the much-discussed capacity overhang, one that includes large volumes of idled capacity waiting in the wings and orders for new ships waiting at shipyards. “There is capacity out there, but supply-demand will likely positively surprise, giving carriers the ability to raise pricing,” he said.
Accomplishing the gains seems to be coming at a cost to customers, with trust and relationships thrown to the wind and retailers reporting delays so widespread that some say privately they have missed store delivery dates and lost revenue, although it’s unclear how much. It may be one reason air freight carriers saw such a mini-boom in the fourth quarter: Retailers simply can no longer tolerate the longer-than-expected lead times and missed deliveries.
In some cases, shippers say, carriers are turning their backs on signed agreements. In other cases, some carriers are acting under the letter of the contract. If shippers have reached their minimum quantity commitment, for example, carriers reportedly are invoking clauses allowing them to renegotiate rates. If shippers haven’t reached their commitment, carriers reportedly are committing only enough space to satisify the remaining commitment terms. Now, blame for this can be spread around equally, but the question of the impact this situation may have on supply chains remains.
The head of logistics for one large retailer, speaking on condition of anonymity, said last week the company’s contracted space for the winter shipping season from some key China origin points has been cut sharply, in some cases reduced by half and without advanced notice by the primary carriers in those lanes. That’s forced the company to search for space on other carriers at higher prices.
“Our best case is all of these rejected shipments roll a week,” he said. Roughly 55 percent of shipments may miss scheduled sailings but likely will be placed on later ships and will be only marginally behind schedule, he said. Forty-five percent, however, will be more than a week late, and 15 percent of the total number “is so late that it is going to miss its DC due dates.”
That may mean accelerating shipments using pricier or other options once the goods hit the U.S. port.
Capacity and service, of course, are subject to supply and demand. But what is happening in the Pacific these days is undermining faith in contracts. “We get it; rates are not sustainable,” the logistics director said, “but both sides did agree that these were rates that we could live with for a year, so whatever those rates were, we counted on that service being there when we need it. So right now, the faith in the meaningfulness of a contract has ebbed. When carriers have offered to give more capacity (after cutting it) in exchange for a new contract, what belief do I have that you will carry my freight?”
Some shippers may consider two-year contracts or other creative approaches to reign in rate volatility. But, the shipper said, “The actions this past month really throw those conversations out the window for now. Why talk about a multiyear contract? Look at what carriers are doing now when we have a year-long contract.”
The result is the worst scenario for a retailer: Goods aren’t on store shelves when they need to be, hurting revenue and customer satisfaction. “We’re faced with a hard decision — what is our confidence that this product will make it in time? If it’s not going to make it in time, we have to quickly change our ad strategy and potentially our store merchandising plan,” the retail logistics director said.
Anyone watching this chaos has to wonder if it will lead to a realignment of shippers and carriers once the pain of this season passes.
“Carriers that have approached the fallout from this artificial scarcity rationally and in a supportive manner, those are the ones I want to do business with,” the logistics executive said. “For those who made reactive decisions or blindsided their customers, there is going to be a sense of having been mistreated.”
Peter Tirschwell is senior vice president of strategy at UBM Global Trade. He can be contacted a firstname.lastname@example.org.