While this scenario is being repeated frequently in an environment of exceptional overcapacity in the trans-Pacific, other beneficial cargo owners are treading carefully to achieve a competitive freight rate without boxing carriers into a corner, fearing they will lash out at BCOs if capacity suddenly tightens later this year.
“I’m concerned,” said Steve Hughes, vice president of supplier development and government affairs logistics at Centric Parts, an auto parts importer in Carson, California. Hughes remembers how carriers in the 2008-09 global recession removed a large amount of capacity from the trade, and when cargo volumes unexpectedly took off in 2010, BCOs had to pay surcharges of $400 and higher just to get on the ships during the peak season.
Hughes said he’s concerned not only about trouble getting his freight on ships if carriers take a large amount of capacity out of the trade, but also about the long-term viability of the lines themselves. Rates have dropped so low that some lines could end up in bankruptcy. He’s also concerned about a reduction in service options if vessel-sharing alliances are shaken up because of mergers and acquisitions occurring in the shipping industry.
As a result, Hughes said he’s not squeezing carriers on rates. “I am not trying to chase the rate to the bottom,” he said. Rather, he’s accepting the market rates at the moment and is locking those rates in for the life of the contract. He doesn’t intend to reopen his contract if rates drop lower, nor does he expect his carriers to hit him with surcharges later this year if capacity tightens.
Industry veterans can’t remember a time when contract rates were as low as they are today. In late March, BCOs reportedly were signing contracts for $1,400 per 40-foot-equivalent container from Asia to the West Coast, and the largest retailers reportedly were signing for $1,100 to $1,200 per FEU.
The rates have been coming down since then, however. According to the Drewry Benchmarking Club Contract Rate Index of April 12, rates on the major east-west trade lanes (Asia-Europe and trans-Pacific) were 20 percent lower than they were at the same time last year, and Drewry predicted further rate declines as the May 1 contracting deadline in the eastbound Pacific approached. Some BCOs in late April reportedly were signing contracts for less than $1,000 per FEU. Carriers generally consider $2,000 per FEU to the West Coast to be a break-even rate.
This development isn’t surprising given where spot rates are. According to the Shanghai Containerized Freight Index, the spot rate for shipping a FEU container from Shanghai to the West Coast sank in March to record lows below $800. Some carriers had filed for a general rate increase effective April 1, and the spot rate indeed jumped to $922 per FEU, but the spot rate slid back 7.9 percent to $849 by the second week of the month.
Spot rates on all-water services from Asia to the East Coast also retreated in March, but recovered a bit on April 1 to $1,787 per FEU. However, the spot rate to the East Coast declined 3.1 percent on April 15 to $1,732, according to the SCFI.
Service contract rates on all-water services have dropped so low that Hughes said he shifted some of his cargo from the West Coast to the East Coast for inland destinations in the Southeast. The ocean freight rate to the East Coast plus the inland transportation cost can be $400 to $500 per FEU less than the ocean rate to the West Coast plus the intermodal rail and drayage cost, he said.
The perils BCOs face in an environment of rapidly declining contract rates were discussed at the JOC’s 16th Annual TPM Conference March 2 in Long Beach. If rates drop too low and some carriers fail, a “serious reduction in capacity” could result and rates could immediately spike, said Andrew Gillespie, director of global logistics at healthcare products importer Ansell. He said he’s protecting his freight by spreading it out over more than one alliance in the event one or more of his carriers fail.
BCOs are concerned about smaller lines’ ability to achieve the economies of scale enjoyed by the biggest lines. The smaller carriers generally don’t deploy the 14,000 twenty-foot-equivalent unit to 18,000 TEU ships that the larger lines operate to the West Coast. The big ships, when fully utilized, offer per-slot costs that are 40 percent to 60 percent lower than smaller vessels.
Some BCOs also are reserving a larger percentage of their freight for non-vessel-operating common carriers that generally book shipments on the spot market. BCOs who used this strategy last year did rather well when spot rates dropped to record lows and were actually lower than the contract rates that some of the biggest retailers had signed for in the spring of 2015.
But there is also risk in this strategy. Spot rates can jump much higher than contract rates during the peak season, and if capacity is especially tight, carriers will impose large surcharges. BCOs who have especially low rates or refuse to pay the surcharges will have their shipments pushed to subsequent voyages, a practice known as rolling.
There is also the danger that as freight rates sink, service levels head in the same direction. This is especially the case when BCOs jump from spot rate to spot rate and carrier to carrier in search of the lowest freight rate. The result can be missed voyages, sloppy handling of shipping documentation and poor service at marine terminals.
For that reason, experienced shippers prefer to have a certain number of core carriers, depending on the volume of freight they ship, and to sign year-long contracts that allow for a minimum of surcharges. Freight rates are generally locked in for the life of the contract, which protects the carrier as well as the customer during times of extreme volatility.
Simon Preisler, director of logistics at paper merchandiser Central National-Gottesman, told TPM 2016 attendees that he sells carriers on the attractiveness of doing business with his company, which has a reputation among carriers for its “loyalty and dependability” as a customer.
Gillespie said he likewise works with a group of core carriers whose service levels are consistent, based on key performance indicators the company shares with carriers, and is loyal to the carriers. Although he’s not averse to trying new lines, Gillespie said he begins each contracting season by approaching his core carriers and telling them the business is theirs to keep, or to lose.
