General Rate Increases (GRIs) have been making waves in the shipping industry, particularly in the trans-Pacific market. While carriers have experienced success in pushing spot rates higher, there is a growing concern among shippers that they are being taken advantage of by carriers seeking to maximize profits. Before we dive in, we should note that at the time of writing this article, many contracts for the 2023-24 service have been extended through May 14.
The Power Dynamics
Recently, carriers have been able to exert considerable control over shipping rates due to a combination of factors, including disruptions caused by the pandemic and port congestion. These challenges created an environment in which carriers could dictate terms to shippers, resulting in exorbitant rates under service contracts during the 2022-23 period. Shippers, often facing limited alternatives, were forced to accept these inflated rates, further exacerbating the power imbalance between carriers and shippers.
However, the current situation is witnessing a shift in negotiation dynamics. Shippers have become more cautious and strategic in response to previous experiences of high rates and uncertain market conditions. They have adopted a wait-and-see approach, monitoring spot rates and carrier actions before committing to service contracts. This newfound reluctance on the part of shippers is a testament to their desire to avoid being taken advantage of. According to the Journal of Commerce, the success of trans-Pacific carriers in pushing spot rates higher with their April 15 general rate increase (GRI) is motivating retailers and other importers to sign service contracts for the coming year, although at levels that are significantly lower than a year ago.
Exploitation or Market Forces at Play?
While it is tempting to view the actions of carriers as exploitative, it is essential to consider the broader context of the shipping industry. Carriers operate in a market-driven environment, with rates being influenced by various factors such as supply and demand dynamics, operational costs, and capacity constraints. The recent success of carriers in pushing spot rates higher can be attributed to a combination of increased demand and limited vessel capacity. The rates being locked in are a huge drop from the 2022-23 service contracts signed one year ago amid pandemic-driven supply chain disruption and port congestion, most of which had West Coast rates of $6,000 to $8,000/FEU and East Coast rates at $8,000 to $10,000/FEU.
From the carriers’ perspective, GRIs are an attempt to bring rates in line with fair market value. They argue that the previous rates, driven by exceptional circumstances, were unsustainable and did not reflect the true cost of shipping. By implementing GRIs, carriers aim to restore profitability and ensure the long-term sustainability of their operations. In this view, the GRIs can be seen as a response to market forces rather than intentional exploitation of shippers.
However, shippers argue that the rate adjustments implemented by carriers are disproportionate and fail to account for the significant decrease in spot rates. They contend that carriers are taking advantage of the supply chain disruptions to maximize their profits at the expense of shippers. Shippers highlight the substantial drop in rates from the previous year, which reinforces their perception of carriers seeking to exploit their position of power.
A Call for Balance and Transparency
To address the concerns of shippers, it is crucial to establish a balance between carriers’ profitability and the interests of shippers. This requires enhanced transparency in rate-setting processes, allowing shippers to understand the factors influencing rate adjustments. Moreover, fostering healthy competition in the shipping industry is vital to provide shippers with viable alternatives and prevent carriers from monopolizing the market.
The impact of GRIs on carriers and shippers in the trans-Pacific market is a complex issue. While shippers in many ways feel that they are being taken advantage of, it is important to consider the broader market dynamics at play. Carriers operate in a competitive industry influenced by various factors, and their actions can be seen as a response to market forces rather than deliberate exploitation. Achieving a fair and balanced shipping environment requires increased transparency, healthy competition, and a willingness to collaborate between carriers and shippers to ensure mutual success.