Trans-Pacific Lines’ New Rate Strategy: Will It Hold?

Shipping lines in the eastbound trans-Pacific have a sound strategy for negotiating viable service contracts with beneficial cargo owners as they enter the new year. It remains to be seen if they can implement their plan.

The Transpacific Stabilization Agreement, which represents 15 of the largest carriers in the U.S. import trade from Asia, last week announced proposed rate increases of $600 per 40-foot container on shipments to the West Coast and inland coastal state destinations, and $800 per FEU to all other destinations, effective Jan. 15.

The effort to implement rate increases early in 2013 demonstrates that carriers learned a lesson in late 2011 and early 2012, when they negotiated contracts with some retailers and other cargo interests at unnecessarily low rates. As TSA Executive Administrator Brian Conrad explained, cargo volumes during the winter months were weak and freight rates were declining, so the service contracts reflected market conditions at the moment.

As savvy importers know, cargo volumes and freight rates rise as the year progresses, and carriers’ leverage in contract negotiations increases with the improving market conditions. So, importers who signed contracts early last year locked in favorable rates for the ensuing 12 months.

The TSA carriers hope to avoid the “early signers” trap this year with a pre-emptive general rate increase. Most service contracts in the eastbound Pacific run from May 1 to April 30 of the following year. Those contracts are negotiated in late spring.

Pat Moffett, vice president of global logistics at electronics company Voxx International, doesn’t fault the TSA carriers for trying to lock in rate increases early next year, but he said history has shown that carriers get anxious when cargo volumes don’t immediately materialize. “Importers know this and they wait until carriers cave in,” Moffett said.

Lars Jensen, CEO of Copenhagen-based research analyst SeaIntel, told The Journal of Commerce earlier this month that 2013, like 2012, will be marked by rate volatility, with periods of rate erosion followed by steep rate hikes.

Freight rates in early 2012 were low, but carriers were able to reverse the downward trend by summer. The average rate in the global container trades peaked at $2,590 per FEU in the summer of 2012, according to theDrewry/Cleartrade Composite World Container Index. Rates then went into a steady decline, dropping 66 percent to an average of $1,706 per FEU by Dec. 6.

Carriers exerted somewhat more discipline in the eastbound Pacific this year. The Drewry spot rate for shipping a 40-foot container from Hong Kong to Los Angeles peaked at $2,880 per FEU on Aug. 6, and declined gradually to $2,168 on Dec. 10, a drop of 24.7 percent.

Rate cycles seem to be getting more compressed, Jensen said, so he believes two full business cycles are possible in 2013. He sees the following scenario developing: Carriers pull capacity, rates rise, carriers realize how much capacity is idle, they reintroduce capacity into the trade, and rates drop. Then the cycle repeats itself.

External factors also could play a role in rate movements. Last year, many importers shipped early because theInternational Longshoremen’s Association contract at East and Gulf Coast ports was set to expire on Sept. 30 and ILA President Harold Daggett talked openly about the potential for a strike.

As the deadline approached, employers and the ILA agreed to extend the contract until Dec. 29. With that deadline looming, and Daggett again predicting a strike, importers are getting nervous. They also are looking ahead to Feb. 10 and the Chinese New Year celebration when many factories in Asia will shut down for a week or longer.

In this environment of uncertainty, some carriers may seek to implement a congestion surcharge in the event East Coast ports are shut down or a flood of diverted cargo hits West Coast ports. Other carriers may prefer general rate increases, which tend to be more permanent than surcharges, Moffett speculated.

Continued uncertainty over the fiscal cliff negotiations in Washington adds another complicating factor to an already confusing environment, so carriers in the weeks ahead may succeed in negotiating rate increases in early 2013.

Those increases, however, could erode as a steady supply of new vessels enters the major eat-west trade lanes, Jensen noted. Global container capacity is scheduled to increase 9.8 percent in 2013, versus a projected increase of 4 to 6 percent in container volume, according to the consulting firm and research analyst Alphaliner.

The TSA’s Conrad, however, noted there is a noticeable difference between the listed capacity of vessels and the effective, or actual capacity. In times of potential overcapacity, carriers attempt to mitigate capacity increases through vessel-sharing arrangements, slow-steaming and accelerated scrapping of older vessels, he said.

Although these uncertainties point to another year of rate volatility, Conrad believes carriers learned a painful lesson this past year. If they are able to achieve at least a portion of their proposed rate increases in early 2013, they will at least start the year headed in the right direction, he said.




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