Half a loaf in the trans-Pacific
Journal of Commerce
Monday, April 12, 2004
By: BILL MONGELLUZZO

Trans-Pacific shippers and carriers are at the peak of their annual contract-negotiation season, and the trend is clear. Carriers in the heavy-volume Asia-to-U.S. trade are signing deals with major customers for rate increases of about $100 to $200 per 40-foot container, according to multiple importers who have already signed contracts. Carrier executives with several lines did not dispute those figures. When they are finished with the retailers and other large shippers, carriers will focus on smaller shippers where they intend to get a general rate increase of $300 to $400.

"It's the old story - pay your bills with the big guys, get your gravy from the little guys," said Art Hollenbach, a footwear consultant who has negotiated ocean shipping contracts for shoe importers.

As shippers and carriers rush to meet the May 1 deadline for signing contracts in the largest U.S. trade lane, they are taking a decidedly different approach than they did the past two years.

In 2002, carriers feared they'd have too much capacity, so they contracted with their major accounts early on for large discounts. As it turned out, the carriers miscalculated. Containerized imports from Asia actually increased 19 percent that year. Ships were full, and carriers kicked themselves for having offered such large discounts.

Last year's picture was the opposite. This time, shippers believed there would be a capacity crunch, so they signed up early for rate increases of $700 or higher. Cargo volumes increased about nine percent in 2003. Vessel space and equipment were plentiful and shipments rarely were delayed in Asia. Importers felt they overpaid for ocean transportation.

Last year was a good one for ocean carriers, which enjoyed across-the-board profitability for the first time since 2000. The thinking among carriers this year is that they can be profitable again if they retain their market share and bump their rates up slightly. Carriers continue to say publicly that they need increases of $450 per FEU to the West Coast and $600 to the East Coast - about 20 percent for many shippers. But shippers that are in the thick of negotiations say the lines are being much more "reasonable" and are seeking only modest rate hikes.

Equipment availability may turn out to be a more important issue in 2004 than freight rates. A global shortage of steel is making it difficult for container manufacturers in Asia to fulfill orders from shipping lines. "I believe we will see an equipment shortage in the peak season," said Brian Conrad, deputy executive director of the Transpacific Stabilization Agreement, the discussion group of 14 of the largest carriers in the eastbound Pacific.

Carriers have jumped on this issue in contract negotiations, warning shippers they'd better secure commitments for equipment availability now before it is too late. The implication is that carrier commitments for equipment availability can be secured for a price.

Concern is also building about the availability of intermodal service from the West Coast. Union Pacific Rail-road began experiencing crew shortages last year and is behind schedule in its efforts to replace thousands of workers who took early retirement in 2003. The problem intensified in recent weeks, with average train speeds down 2 mph and service declines reported throughout the UP system. Early this month, the railroad shifted some shipments to truck to meet time-definite delivery commitments.

If rail intermodal service from the West Coast deteriorates further during the summer-fall peak season, carriers will probably not be in a position to shift much of their business to all-water services to the East Coast. The global charter market for vessels that can transit the Panama Canal is the tightest it has been in years, and charter rates have reached stratospheric levels of $18,000 to $30,000 per day for vessels in the 1,500-to-3,000-TEU range.

Carriers are struggling to charter enough vessels for additional all-water services. Rates for single-voyage "sweeper" ships, which carriers have used to alleviate peak demands in previous years could be so costly that it may not be worth taking on extra vessels for the peak season.

These uncertainties are making it difficult for shippers to develop a strategy for the peak season. Shippers are adamantly resisting the carriers' proposed $400 peak-season surcharge to run from June 15 until Oct. 31. That strategy proved successful last year when cargo volumes failed to spike in the fall and carriers lowered their surcharges to $150 or less.

On the other hand, importers of holiday-season merchandise cannot afford to be squeezed out by equipment shortages or a breakdown in intermodal service from the West Coast. They may want to reduce their risk by agreeing to a peak-season surcharge in order to secure a carrier commitment of equipment and space.

An equipment shortage can work to the advantage of efficient import-ers, especially those that ship port-to-port. Carriers value accounts that can empty their containers on the West Coast, transload their merchandise into domestic equipment and return the empty marine containers to the shipping line in two or three days. Those shippers are usually able to secure preferred rates, and carriers will value them even more if an equipment shortage develops.

Public posturing on freight rates is likely to continue for the remainder of the contracting season. Carriers reported that vessels leaving Asia in March and early April were operating at close to capacity, and they attempted to press that advantage by projecting that space would be especially tight in the summer-fall peak season.

Triangle Network, a third-party logistics provider with warehouses on both coasts, agreed that March was unusually busy. "This spring is strong, probably our strongest spring ever," said Cliff Katab, director of marketing. Most of the cargo was typical spring and summer merchandise, he said, with peak-season shipments still several months away.

Shippers and carriers continue to disagree about the supply-demand economics of the trade. Shippers point to projections for a 10 percent increase in vessel capacity this year as indicating that space will once again be plentiful. Trade Horizons, published by the Port Import/Export Reporting Service, a sister company of the Journal of Commerce, currently calls for a 4 percent increase in containerized imports from Asia.

Other forecasters are more bullish. John Fossey, director of container shipping research at Drewry Shipping Consultants in London, forecasts growth in demand at 8.5 to 10 percent this year, with an annualized slot utilization rate of 83.5 percent. Fossey said supply and demand will be in balance this year, a view that carriers support. Vessel space will be tight during the peak season, with utilization rates of at least 90 percent, he said. Drewry considers a 90-percent utilization rate as indicting ships are full because stowage, stability and other considerations mean that a ship's actual capacity is always less than its listed capacity.

Rate-setting is more fluid today than it was before May 1, 1999, when the Ocean Shipping Reform Act took effect and began a new era of confidential contracting in the U.S. trades. Carriers are now customizing their contracts to fit the needs of shippers, offering competitive port-to-port rates but also premium rates for value-added services that some shippers require.

Rates also fluctuate widely throughout the trans-Pacific as service offerings expand and port calls are added. For example, carriers have increased their direct service offerings from the rapidly growing Vietnam market. In the process, they are dropping surcharges that applied when Vietnam was more difficult to reach. As a result, shippers are reporting their total costs from Vietnam are actually lower this year than they were in the past.