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Smooth Trans-Pacific Contract Rate Negotiations As Carriers/Shippers Seek Stability

Container carriers and their customers say they are within two to three weeks of wrapping up their eastbound trans-Pacific service contracts at rates that are approximately equal to 2019-20 levels as imports from Asia continue to decline amid the COVID-19 pandemic. That means both parties appear to have successfully navigated potentially contentious issues involving uncertainties in cargo forecasting, freight rates, and volatile oil prices. More broadly, the consolidation of major carriers and cargo owners' gradual prioritization of service commitments over price in recent years has provided the backdrop for more constructive service contract talks.   "Shippers are looking for stability in the current environment," Uffe Ostergaard, president of Hapag-Lloyd America, told the Journal of Commerce. "They don't want to see too many things shuffle around in their supply chain, and with the high level of uncertainty and volatility, most rely on established partnerships."   The COVID-19 crisis probably added a sense of urgency to this year's negotiations, Ostergaard acknowledged. "There is a little more of a 'get on with it' attitude," he said. "I think more freight procurement people see that the market is much more stable now. There are fewer players [carriers] than before...and drawn-out negotiations don't pay off like they used to four or five years ago."   

And despite unprecedented travel disruptions caused by the coronavirus disease 2019 (COVID-19), which made face-to-face carrier-shipper negotiations close to impossible, the process this year was mostly trouble-free. Among the executives from six ocean carriers, seven non-vessel operating common carriers (NVOs), seven beneficial cargo owners (BCOs), and four consultants that spoke to the Journal of Commerce, the general consensus was that all-inclusive freight rates from Asia are $1,300 to $1,400 per FEU to the West Coast and about $2,300 to $2,400 per FEU to the East Coast. However, as happens in most contract years, there are some outliers. An executive from one carrier, for example, said its rates are $100 to $200 per FEU higher than those quoted by most sources. As in previous years, typical annual container contracts will run from May 1 through April 30, 2021. By comparison, the freight rates in the 2019-20 contracts that expired last week were about $1,400 to $1,550 per FEU to the West Coast and $2,400 to $2,550 to the East Coast. The 2019-20 rates were about $200 to $300 higher than those in the 2018-19 service contracts. In comparing this year's contract rates with last year's, the administrator of a shippers' association said the base rate "hasn't changed much from last year." When it comes to the bunker fuel component, each carrier is handling it slightly differently, he added. Due primarily to COVID-19, this season's contract negotiations were marked by uncertainty about the volume of imports from Asia through the end of the year, which includes the all-important peak season that runs from August through October. Volume commitments from BCOs, known as MQCs (minimum quantity commitments), form the basis of the freight rate. The largest retailers commit the largest volumes, and their rates are therefore lower than mid-to-small size BCOs and NVOs. With unemployment claims in the US exceeding 30 million, and even those consumers who are fully employed purchasing primarily essential goods, retailers have already cut way back on orders for summer and fall merchandise. As a result, some retailers and direct importers fell short of the volume commitments that were in the 2019-20 service contracts. But it appears that most carriers refrained from charging penalties for the unshipped containers. This uncertainty has resulted in carriers signing contracts with NVOs earlier in the negotiating process than in past years. Carriers normally sign contracts with the top few retailers first, then with mid-sized BCOs, and then with small BCOs and NVOs. Some carriers negotiated with NVOs and signed the contracts earlier than usual because "they seem to have a better read on the market," said a carrier executive. Because NVOs have contracts with a number of BCOs across different product lines, they have a broader view of the trans-Pacific than BCOs with limited product lines may have.   Also, some BCOs are increasing the portion of their annual volume that they normally reserve for NVOs. That often occurs in times of uncertainty because NVOs generally have a broad range of contracts that include most of the major carriers in each trade lane, so they are usually able to provide capacity even when one or more carriers blank sailings in a particular week. "We do well in mayhem," an NVO executive told JOC.com. Another uncertainty that carriers, BCOs, and NVOs are dealing with given current times is that imports today must be analyzed on a product-by-product and shipper-by-shipper basis, said Christian Sur, executive vice president at Unique Logistics International. Large retail chains and online retailers that sell essential and non-essential merchandise, such as Walmart and Amazon, are consistently shipping large volumes, he said. However, cargo volumes destined for furniture retailers, clothing stores and other retailers that handle "nice-to-have" but not "gotta-have" imports are struggling in the COVID-19 environment, a former logistics director at a national retailer said. Carriers have responded to the ups and downs of the marketplace by canceling more than 200 sailings so far this year. An NVO noted that these blank sailings have kept spot rates in the eastbound trans-Pacific from plummeting as they did during the 2008-09 recession. Spot rates to the West Coast in 2009 plummeted as low as $800 per FEU, the source noted, whereas so far this year the spot rate has been consistently above $1,500. The spot rate from Shanghai to Los Angeles last week was $1,724, which was 12.8 percent higher than the previous week and 9.9 percent higher than May 1, 2019, according to the Shanghai Containerized Freight Index (SCFI). "If it weren't for the blanks, the carriers would be operating at 50 percent utilization," the NVO said.

Source: Journal of Commerce

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