Risk for Shippers?

Risk for Shippers?

A sudden sharp upward turn in ocean container shipping freight rates that started late in 2011 is catching the industry’s attention as the new year gets under way. But is it a “dead cat bounce” — defined in Wikipedia as “a small, brief recovery … derived from the idea that even a dead cat will bounce if it falls from a great height” — or something that might suggest a turnaround from the declining rate environment that dominated 2011 and led to $5.2 billion in carrier losses, according to a recent Drewry estimate?

The bounce is attributable to two factors: what appears to be a largely successful implementation of Jan. 1 rate increases on spot (not contracted) cargo and a volume surge prior to a very early Chinese New Year that will begin on Jan. 23 and last through early February. But whether it is short term or sustainable beyond Chinese New Year is an open question whose answer even the carriers aren’t willing to predict.

2012 “started well for the carriers as they were able to achieve some meaningful improvements in their rate levels, helped by strong year-end and pre-Lunar New Year demand,” said Brian Conrad, executive administrator of the Transpacific Stabilization Agreement. “At this stage, cargo volumes look as though they will continue strong through the Lunar New Year, but at this time there is still not a very clear picture as to the post-Lunar New Year period, though it is hoped that any slowdown in volumes will be not be too deep and will be short-lived.”

The near-term expectation is not for a sustained volume bounce, but that could change as the year gets under way, especially in the trans-Pacific if the U.S. economy continues to pick up steam. Such a picture could be augmented in the carriers’ favor by an aggressive winter deployment that could emerge out of current discussions among the partners in revamped carrier alliances.

But to a handful of shippers and those who consult to them on ocean matters, whom I reached out to for this column, expectations for a trans-Pacific environment weighted heavily in the carriers’ favor appears remote. At the same time, they and others caution rates may have bottomed out, and that it would be unwise for shippers to hold back too much volume from service contracts, many of which renew on May 1, in expectation that rates could see further erosion this year.

“My advice going into this year, into May 1, is if I could lock in current or slightly lower rates, say zero to negative-5 percent, then you would take that deal and increase the capacity commitment to the carrier. If shippers want to risk being a bit too greedy and don’t want to commit capacity, they have a much higher risk of getting burned, because there is more risk on the upside than there is on the downside,” said Ed Sands, a former logistics director and now global practice leader for the procurement outsourcing consultant ICG Commerce.

Most shippers negotiated no-increase clauses in current contracts and so have been unaffected by the recent run-up in spot rates. Others see the scenario along similar lines to Sands, that is, for a flat year rate-wise: “Our baseline expectation is for an average freight rate on the main east-west trades roughly equal to 2011 when seen over the full year — hence we expect the freight rates to have bottomed out,” said Lars Jensen, CEO of SeaIntel Maritime Analysis.

However, there isn’t much sentiment at the moment for a breakout on the upside rate-wise. Given the linkages between spot and contracted cargo, a rally in rates this winter and spring would seem to be a pre-condition for carriers to implement increases in contracted cargo as of May. 1. As one shipper put it last week, “Our hopes are to keep rates flat to last year when negotiating our new contracts beginning May 1.”

The question of volume in the trans-Pacific is an important one, given the possibility that carriers will take further measures to reduce capacity in the first quarter of the year.

As Sands said, “Are the carriers going to come out post-Lunar New Year with a whole new set of capacity restrictions for the year, or continue to slug it out in the market chasing share? My guess is they will come out with some capacity restrictions. They have to; they can’t run at 80 percent utilization throughout the year because they will lose billions more. But will that move the needle on rates? I would say the answer is no, but they likely won’t decline any further.”

It will be interesting to look back a year from now and see what actually happened, because like in 2011, when the year began a lot more optimistically for carriers than it ended, surprises can happen.

Peter Tirschwell is senior vice president for strategy at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him at twitter.com/PeterTirschwell.

Correction: An earlier version of this column misstated Ed Sands' title.