A growing number of shippers on the eastbound trans-Pacific have renegotiated rates in existing service contracts to reflect a market that has softened markedly over the past three months, JOC.com has learned.
The contract rate reductions, which sources have told JOC.com are mostly running through the April 30 expiry of current deals, are a signal that some shippers largely prefer service continuity with existing carriers over a more chaotic approach of fishing for rates in the spot market.
Importers are locking in rates that are far below the $6,000 to $8,000 per FEU, or higher, that they negotiated last spring. Shippers say some carriers who earlier this year refused to increase their space allotments are coming back to them with offers of more space at rates which, although higher than the current spot rate of about $2,000 per FEU to the West Coast, are steeply discounted from the rates they signed for last May.
“We have renegotiated every contract we have,” the logistics manager at an importer in the automotive sector told JOC.com this week. “They [carriers] know no one is going to ship with them at those higher rates.”
In a poll of about 300 of its customers in the major east-west trade lanes three weeks ago, rate index platform Xeneta found only 4 percent of respondents said they were sticking with their current long-term contracts. The “ultra-large majority” of shippers already have negotiated lower contract rates or are in the process of doing so, Michael Braun, vice president of customer solutions at Xeneta, told JOC.com Wednesday.
The Shanghai to Los Angeles spot rate last week was $2,069 per FEU, 3 percent lower than the previous week and down 79 percent year over year, according to the Drewry World Container Index. Importers and forwarders told JOC.com there are spot rates even lower than that.
Braun said the average eastbound trans-Pacific spot rate on the Xeneta platform is about $1,700 per FEU to the West Coast, although he doesn’t expect spot rates to go any lower. “The bottom of the trans-Pac has been reached,” he said.
A carrier executive said most shippers are keen to avoid an all-out rate war that would end up fraying relationships they worked hard to establish with their core carriers during the COVID experience of the past two years.
“If anything, they [customers] learned that if rates go too low it’s not good for anyone,” the source said. “Let’s keep the rates halfway normal.”
Carriers over the past three months attempted to prevent a freefall in spot rates by canceling, or blanking, sailings in the trans-Pacific. In October, 811,902 TEU, or 29.3 percent of the total capacity in the Asia-US trade lane, was removed through blank sailings. That compares with the 23.6 percent of capacity that was removed in October 2021, 6.5 percent in October 2020 and 12.2 percent in pre-pandemic October 2019, according to Sea-Intelligence Maritime Analysis.
With many of their existing service contracts having been renegotiated, carriers and their customers are beginning to look ahead to the 2023-24 contracts that will take effect on May 1. But they caution that the discussions are preliminary in nature and will not get serious until the new year.
Carriers and shippers are seeking greater clarity on the impact of inflation and high interest rates on consumer spending, the easing of port and inland supply chain bottlenecks, and the outcome of West Coast longshore labor negotiations. They also want to get a better idea of the supply-demand economics in the trans-Pacific capacity as older vessels are removed from service due to tighter international environmental regulations even as carriers add new vessels to their fleets beginning in the second half of 2023.
“From the carriers’ perspective, they are hesitant to move too early on rates,” said Lawrence Burns, president of Lawrence Burns Consulting and former senior vice president of trade and sales at carrier HMM.
From the shippers’ perspective, “No one knows yet how to plan for next year,” said Jack Chang, a logistics consultant and former managing director at forwarder JUSDA. “I think that at [JOC’s] TPM, there will be a lot of action. We’ll bring it all out into the open.”
Several sources said shippers and carriers will look to the JOC’s TPM23 Feb. 26-March 1 in Long Beach, which typically attracts more than 2,000 industry participants, for greater clarity into supply and demand forecasts in the largest US trade lane.