“Calling it a bloodbath is being kind. This season was worse than 2009,” said Steve Hughes, vice president of supplier development, government affairs and logistics at Carson, California-based auto parts importer Centric Parts. “The initial rates given by some carriers were so low that we were happy when the balance of our carriers agreed to match. We did this to try to maintain long-term relationships with our carriers.”
In a sign of just how bad the market is, a non-vessel-operating common carrier offered Centric Parts even lower base rates than the container lines. The NVO’s hybrid models allow Centric Parts and others to switch to spot rate pricing when they fall below agreed-upon contract rates.
Informal discussions with carriers and beneficial cargo owners reveal that trans-Pacific service contracts for the largest retailers dropped below $750 per 40-foot container to the West Coast and $1,500 per FEU to the East Coast for the season that runs from May 1, 2016, through April 30, 2017. Those previously unheard-of rates in the busiest U.S. trade lane have likely hit bottom, industry analysts believe. Historically, contract rates were in the range of $1,800 to $2,000 per FEU to the West Coast and about $3,000 on all-water services to the East Coast.
An executive with a large Asian carrier said he’s seen some rates to the West Coast as low as $700 per FEU for large retailers, and as low as $1,400 to the East Coast. Generally, though, most BCOs signed for about $800 or higher per FEU to the West Coast and closer to $1,600 to the East Coast.
“It’s been ugly for sure,” an executive at a major container line said. “With fuel prices starting to rise, it’s going to be a rough year for many carriers.” But some carriers with more stable balance sheets and good standing in major vessel-sharing agreements have been able to increase their volumes from existing shippers as well as attract new ones concerned that some ocean lines might not be around next year or will be in such dire straits that they won’t be in position to honor contracts.
Carriers this summer are expected to announce large general rate increases for the peak shipping season. Given carriers’ inability over the past two years to sustain GRIs, however, the rates are expected to hold for only a few weeks during the peak season. Carriers in past years tried this “$1,000 special,” an East Coast NVOCC said, but it never worked.
Industry analysts, however, believe any increases in spot rates over the coming months will hold through the peak season. They don’t anticipate spot rates to retreat to the lows of earlier this year because capacity won’t increase significantly in 2016.
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For home decor and gift retailer Demdaco, this year’s contract negotiations went beyond just pricing. “The market was depressed, so it wasn’t an issue of getting lower rates,” Logistics Manager Philip Lunceford said. Instead, the focus was more on making sure carriers could deliver on service promises. The company, for example, analyzed carriers’ import and export balance to gauge how they managed their programs.
“We look for synergies, where we can help provide the carrier with what it needs to deliver,” said Lunceford, noting that Demdaco’s distribution center at the Logistics Park Kansas City Intermodal Facility can provide much-needed empty containers for exports of agricultural products. Demdaco also has allowed carriers to ship its goods in non-operating refrigerated containers to help with match-backing.
The largest BCOs typically sign service contracts with “no GRI” clauses, so they will be sheltered somewhat from any large peak-season GRIs. Smaller shippers and many non-vessel-operating common carriers, however, likely will have to agree to temporary rate increases this summer and fall if they want to secure vessel space when holiday-season shipments peak
Shippers in this year’s negotiations were far more focused on contract wording, or “protecting their butts,” than in past years, said Chas Deller, a partner in 10XOceanSolutions, which advises shippers in their carrier relationships. Shippers came into negotiations armed with more information on reliability and reluctant to contract with carriers struggling financially.
Shippers also pushed back on clauses penalizing them for not honoring volume commitments and secured non-performance penalties of $25 per 20-foot-equivalent unit, rather than $250 per TEU, he said. With consolidation bearing down on the industry and some carriers showing signs of sinking, Deller encouraged shippers to secure clauses allowing them to cancel contracts if ports of origin and destination, transit times, routing and alliance membership changed. In addition to advising his shipper customers to refuse GRIs as well as peak-season and other surcharges, Deller — a former vice president of ocean freight procurement at third-party logistics provider UTi Worldwide — suggested they let the bunker adjustment factor float, even if there are little signs that bunker fuel will jump over the coming year.
After this year, however, carriers will enjoy a respite from the frantic pace of capacity expansion that took place the past several years. The 8.5 percent increase in global capacity in 2015 will give way this year to a 3.9 percent increase, according to industry analyst Alphaliner. When idled capacity is taken into consideration, the global fleet today is at the same level as last July, it said.
The unanswered question remains how much eastbound traffic will increase this year. Mario Moreno, senior economist of IHS Maritime & Trade, is bullish on U.S. imports. After reporting strong first-quarter growth in volumes, he raised his forecast for 2016 U.S. containerized import growth to 7 percent from 5.3 percent. But Ben Hackett, who publishes the monthly Global Port Tracker with the National Retail Federation, said he sees only 1 percent growth under his most optimistic scenario.
“When the worm turns, rates will spike the other way, almost in retaliation,” said shipping line veteran Ed Zaninelli, president of Griffin Creek Consulting.
With supply-demand economics this year being somewhat more favorable than in 2015, Zaninelli expects freight rates during the peak season to reach $2,000 per FEU to the West Coast and remain there for a bit. The rates likely will pull back during the winter, but they won’t go as low as they did in late 2015 and early 2016, he said.
A JOC survey of 43 BCOs this month shows that virtually every importer in the 2016-2017 service contracting season experienced some degree of discount from last year’s contracts, with 49 percent reporting reductions of 10 to 30 percent and 35 percent reporting 30 to 50 percent reductions in contract rates. Only 7 percent of the respondents said their contract rates remained unchanged or edged higher.
That’s only part of the giveaway carriers engaged in this contracting season. Now that BCOs must pay for the rental of chassis, which can cost $25 to $30 a day in high-volume ports such as Los Angeles-Long Beach and New York-New Jersey, they are demanding that carriers pick up some of the added costs they experience for holding onto chassis when the free-time period expires. Nearly 50 percent of the respondents in the JOC survey said carriers agreed to give them five to 10 days or more in additional free time.
A Southern California trucker said larger BCOs became “spoiled” over the many years that shipping lines gave them as many as 20 to 30 days of free chassis use when the carrier owned the assets. Now those same retailers are pressing carriers to absorb the cost for at least 10 days of free time. The East Coast NVO said this new strategy plays havoc with truckers’ cash flow. The equipment providers bill the truckers for the chassis usage, and the truckers then must bill the ocean carriers “who pay at 75 to 90 days.”
With the lowest contract rates on record, spot rates currently at near-record lows and extended free time for chassis, Zaninelli said carriers again will lose billions of dollars combined this year. London-based research analyst and consulting company Drewry predicts carriers will lose $6 billion to $10 billion in 2016. Indeed, most carriers that reported first-quarter earnings showed losses.
In a normal industry, these types of business practices would lead to painful bankruptcies, but ocean shipping isn’t a normal industry because a number of nations offer whatever assistance necessary to keep their carriers afloat so their export industries will be assured of capacity when it’s needed. “Bankruptcies don’t seem to be in style,” said Hackett, pointing to struggling South Korean carrier Hyundai Merchant Marine, which continues to be propped up by its financial backers.
Today’s common practice of joining vessel-sharing alliances also insulates carriers from the worst of their overcapacity issues, because weaker lines can purchase space on ships operated by other alliance members, he said.
Although supply exceeds demand in the major east-west trade lanes, carriers have so many big ships on hand that they’ll continue to increase the size of their vessels in the North American trades. Carrier deployments already announced for the 2016 peak season show several upgrades to strings using 13,000- to 14,000-TEU vessels to the West Coast.
The long-awaited project to add a third set of large locks at the Panama Canal will be completed this month, and carrier deployments include a number of services using vessels of less than 5,000 TEUs being replaced by ships in the 8,000-TEU range on all-water services from Asia to the East Coast, according to Alphaliner.
It remains to be seen what the net increase in capacity to East Coast ports will be because some of the upgrades will result in two services with smaller ships being replaced by one weekly service with vessels twice the size. Some all-water services also will shift from the Suez Canal route to the Panama Canal.
Even when bigger ships are deployed through the Panama Canal this summer, BCOs don’t anticipate a huge shift of market share to East Coast ports. A shipper of seasonal merchandise said much of the diversion away from the West Coast took place after the 2002 labor disruptions on the West Coast, so all-water services with larger vessels will serve the East Coast distribution centers with incremental growth.
A shipper of higher-value home merchandise explained that the 10-day to two-week longer transit times to the East Coast add inventory carrying costs as well as truck costs to the shipments destined for locations in the mid-South and Midwest, so it’s still cheaper and faster to serve those locations from the West Coast. Some 75 percent of the BCOs who responded to the JOC survey said their new contracts don’t call for additional East Coast routings this year.
Another development appears to be a war of attrition in which a handful of large carriers with cost-efficient mega-vessels are seeking to expand their market share, despite rock-bottom freight rates, at the expense of the smallest lines that tend to have smaller vessels with higher per-unit operating costs. Still, Hackett noted, even the larger lines suffer in this scenario because they’re unable to fill their big ships and therefore achieve the economies of scale they should be enjoying.
Cargo interests also suffer in the current environment because carriers of all sizes have simply stopped investing in service, Zaninelli said. Carriers that traditionally spent money on training and other service enhancements have stopped doing so, resulting in an industry characterized as a “middling” range of service providers, he said. “I’ve been told that by 50 customers,” he said. “Service is way off from what it should be.”
