After suffering five straight quarters of financial losses in their global operations, according to Alphaliner, ocean carriers will attempt to negotiate higher service contract rates in 2017 despite lingering overcapacity. They just might pull it off.
However, when it comes to the eastbound trans-Pacific, the largest US trade lane, retailers and other large beneficial cargo owners who sign for rate increases in the contracting season that runs through May 1 will do so for reasons of risk mitigation rather than supply-demand fundamentals. With most economists projecting modest import growth of about 2 to 3 percent this year, and large vessel capacity overhang from 2016, there would appear to be no basis for significant rate hikes in 2017.
The Hanjin Shipping bankruptcy filing on Aug. 31, 2016, and the disruption it caused in the trans-Pacific, sent shock waves through the BCO community. Shippers for weeks could not take delivery of their cargo because Hanjin vessels were arrested in port, or terminals refused to unload Hanjin vessels unless the bankrupt carrier paid the lift fees upfront. Hanjin containers that were carried by other lines in vessel-sharing alliances were impacted, as were the Hanjin containers that were unloaded in the US but refused acceptance by terminal operators for shipment back to Asia.
In this uncertain environment, which is also marked by major changes in vessel-sharing alliances and several high-profile carrier mergers and acquisitions, ensuring that carriers will be in business in the coming year is a more important factor in service contracting than negotiating lower freight rates, said Dean Tracy, managing director of Global Integrated Solutions and former head of international transportation at Lowe’s home improvement stores.
Interviews with carrier and BCO executives in late 2016 revealed that carriers in the eastbound Pacific are targeting service contract rates of $1,500 per 40-foot-equivalent unit container to the West Coast and $2,800 per FEU to the East Coast. Those targeted rates are not out of line in a trade where BCOs in past years regularly signed service contracts for at least $2,000 per FEU to the West Coast and $3,000 to the East Coast.
However, when compared to the service contracts that BCOs signed last year for the contracting season that ran from May 1, 2016, to April 30, 2017, those target rates do appear high. Those record-low service contract rates of $750 per FEU to the West Coast and $1,400 to the East Coast were an instrumental factor in driving the Hanjin bankruptcy, as well as the carrier mergers and acquisitions and the restructuring of vessel-sharing alliances from four weaker groupings to three larger, more powerful alliances.
BCOs who have enjoyed low freight rates since 2010, took note of the consolidation among carriers, and they are getting nervous. “I find the consolidation very worrying for risk mitigation,” said Steve Hughes, vice president of supplier development, government affairs, and logistics at Centric Parts. “I know that my carrier relationships are going to change,” he said, adding that risk mitigation is more important than another year of rock-bottom freight rates.
Supply-demand economics in the global container trades for at least the next two years are not projected to be favorable for large rate increases. Alphaliner’s Tan Hua Joo told The Journal of Commerce in September that despite a record-low capacity increase of 2.9 percent last year, and the Hanjin collapse, which removed 600,000 20-foot-equivalent units of capacity from the global fleet, freight rates remained low by historical standards.
Camille Egloff, managing director of Boston Consulting Group, projected annual growth in demand for the next five years will range from 2 percent at the low end to 4 percent on the high end. While those figures apply to global supply and demand for the container trades, projections for the eastbound Pacific are in the same range.
Basically, economists conclude that the Asia-US trade is mature, with most of the manufacturing outsourcing from North American and European firms to China having run its course. Annual cargo growth projections for the eastbound Pacific are therefore in the 2 to 3 percent range.
The problem that carriers have faced in recent years is partly overcapacity, but also a relentless drive for market share, said Ronald D. Widdows, executive chairman of American Intermodal Management and former APL CEO. “The industry has a capacity challenge because of the large carriers. They grow only if they take share away from other people,” he told the JOC Port Performance North America Conference in Iselin, New Jersey, in December.
Widdows noted that the sudden removal of about 7 percent of capacity in the Pacific with the Hanjin bankruptcy resulted in only a temporary spike in spot rates in September. Other carriers quickly replaced the loss of capacity by deploying single-voyage “extra-loader” ships into the Pacific, and the spot rates began to pull back.
Therefore, if carriers are to reverse the decline in freight rates of recent years, they must change their mindset toward pricing, Widdows said. “The people who operate ships have driven down rates to where they are. You would think desperation would sink in,” he said.
The change in mindset among carriers as well as shippers may be taking place because of fear of driving freight rates so low that other bankruptcies will follow Hanjin, but that is only the start. Following a series of carrier mergers and acquisitions this past year, and yet another one that will take place in 2017 when Maersk Line acquires Hamburg Sud, the number of carrier choices for BCOs continues to shrink.
Also, the restructuring of alliances from four to three will further reduce carrier options for shippers, as Hughes of Centric Parts noted. “I know that my carrier relationships are definitely going to change. Two of my carriers are in the CKYHE Alliance, one is in the Ocean Three, and another was in the G6. All of a sudden, I’m going to have these four of my primary carriers under one alliance. I have to look to choose carriers in other alliances,” Hughes said.
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Source: JOC
