Excess Cargo Capacity Expected to Hamper Shipper's 2018-2019 Service Contract Rates

As carriers and shippers in the eastbound Pacific begin annual service contract negotiations, carriers' reluctance to reduce capacity to meet demand threatens their ability to increase prices and build on the slight momentum they achieved in the 2017 to 2018 contracts.

In the normally slack months of November and December, carriers did not pull capacity from the Pacific, and this could weaken their leverage in the new year.

Beneficial cargo owners (BCOs) are actually bracing for modest service contract increases of about 5 percent this spring. A survey found more than 50 percent of the shippers who responded expect their rates to increase at least 1 to 10 percent in the contracts that will generally run from May 1 through April 30, 2019.

Excess capacity, the difference between nominal capacity offered and container volumes moved, reached 1.1 million TEU in the eastbound Pacific. Vessel utilization in the fourth quarter of 2017 was 80.9 percent, significantly below the 87.7 percent recorded in the same quarter the year prior (2016).

This excess capacity has continually deflated spot rates heading into February. Through Friday of last week (Feb. 16), the West Coast spot rate was $1,486 per FEU, down 24.3 percent from $1,964 per FEU last February. The East Coast rate was $2,775 per FEU, down 19.7 percent from $3,456 in the same week last year, according to the Shanghai Containerized Freight Index.

Service contract rates between carriers and their customers are confidential, but the West Coast rate in the 2017 to 2018 contracts ranged from about $1,200 to $1,400 per FEU, depending upon the volume of freight committed. The East Coast service contract rates were about $2,300 to $2,400 per FEU. Ed Zaninelli, president of Griffin Creek Consulting and former Orient Overseas Container Line executive, said last year's service contract rates were unimpressive. In the past, West Coast rates of about $1,800 per FEU and East Coast rates around $2,800 "used to be good," he said. Service contract rates for steady customers are normally lower than spot rates during peak shipping months.

According to PIERS, US containerized imports last year increased about 6 percent, which was stronger than in recent years. Shippers in the survey expect another good year, with more than 50 percent indicating they expect to increase their import volume 1 to 10 percent. Global capacity and demand are both expected to increase about 5 to 6 percent in 2018, according to various industry analysts, although about 80 percent of the new capacity will enter the global fleet from January through July, the month before the peak season begins.

The bottom line for importers in the eastern half of the United States is that it is turning into a buyer's market. "Carriers' East Coast services are in trouble rate-wise," Zaninelli said. He added that matching last year's service contract rates of about $2,300 to $2,400 per FEU might be difficult for carriers. West Coast services will also deal with overcapacity, and Zaninelli said a $100-per-FEU increase might be all the carriers can get.

Source: Journal of Commerce