With vessels leaving Asia already near or at capacity, beneficial cargo owners (BCOs) expect that an increasing number of shipments will be rolled to subsequent voyages and freight rates will jump dramatically by late September.
“It’s tight. This year we’re back to the old-school peaks we grew up with,” Patrick Halloran, director, global logistics at Cardinal Health, an importer of pharmaceuticals and medical products, told JOC.com. “I think this one is demand-driven,” he said.
Some importers this peak season admit they have been lured into a sense of complacency by lackluster freight rates in the spot market. Spot rates have been stuck in a narrow range of around $1,500 per 40-foot equivalent unit container to the West Coast and $2,400 per FEU to the East Coast throughout the always busy month of August. Last week spot rates from Shanghai actually dropped 7 percent to both coasts from the previous week, according to the Shanghai Containerized Freight Index published under the Market Data Hub on JOC.com.
That is expected to change soon as demand in the eastbound Pacific finally catches up with vessel capacity. Conditions are expected to get dicey in the last couple of weeks of September as factories in China rush to get their shipments out before closing in early October for the annual Golden Week holiday. A carrier executive this week said the anticipated demand for vessel space in late September “is already reflected in the forecast we receive from our customers.”
Despite relatively strong growth in US containerized imports of more than 6 percent so far this year, an overhang in capacity has limited carriers this summer to sporadic general rate increases, which evaporated in subsequent weeks. “Cargo volumes this summer do feel very strong, and our sense is that almost all carriers’ utilizations are very high,” said Kenneth O’Brien, chief operating officer at Gemini Shippers Association. IHS Markit senior economist Mario Moreno projects 2017 growth of 6.6 percent in US containerized imports.
However, BCOs report that so far this summer there has been little rolling of cargo in Asia. Until that happens, the pressure is not there on BCOs and non-vessel-operating common carriers (NVOs) to pay higher rates to get their shipments on the vessels. The first signs that changes are occurring surfaced the past couple of weeks, with some BCOs experiencing a delay in getting carriers to accept their bookings.
“I have not experienced ‘true’ rolls to date. What I am experiencing is the carriers delaying the acceptance of the booking. They are waiting to confirm bookings, thus avoiding rolls. The reason they are waiting is to accept the higher-paying containers,” a BCO said. He added that it is taking 14 to 17 days to get on a vessel now, compared to four to seven days last year at this time.
This means some carriers are playing the spot market. As space tightens, carriers will put on hold acceptance of some bookings, often from customers that have signed service contracts with rates that are below the spot rates. Carriers then shop the slots to BCOs and NVOs who are willing to pay the higher spot market rates. “It’s a game carriers play,” said one executive with a chuckle.
However, a former carrier executive noted that these same lines during the slack season take a beating when they must lower their rates below service-contract levels in order to attract cargo. Furthermore, carriers forever deal with bookings that are made by BCOs who do not actually deliver the cargo. “Fifteen to 20 percent are phantom bookings,” he said.
Carrier pricing and yield management can be quite complex given the peaks and valleys that occur every year, all year, in liner shipping. At the foundation of carrier pricing is the break-even rate,which varies slightly from line to line given their cost structure, size of vessels, debt repayments and need for capital to reinvest in assets. The former carrier executive listed break-even at $1,300-$1,400 per FEU to the West Coast. Carriers argue the break-even rate is closer to $1,700-$1,800, when factoring in the cost of repositioning the containers to Asia.
Service contracts for the 2017-18 season that began May 1 ranged from about $1,000 to $1,100 per FEU for the largest retailers, to about $1,200 to $1,300 for the smaller BCOs. Therefore, when the spot market is at $1,500 and is showing signs of going higher, carriers will book as many shipments as they can under the spot rates.
This is certainly the case, for example, for contract customers that commit to 10 containers per week, but during the peak season book 20 or more. Any booking above 10 containers is almost certainly going to pay the higher spot rate.
BCOs and carriers agree that the best strategy is for carriers and their customers to establish and maintain a close working relationship that levels as much as possible the effects of the natural peaks and valleys during the annual shipping cycle. “While space is very tight, we have found that our carrier partners have and continue to honor their contractual relationships with Gemini Shippers Group and our member companies,” O’Brien said.
In addition to dealing with the normal seasonal fluctuations in supply and demand in the eastbound Pacific, BCOs are coping with the uncertainties surrounding the devastating Hurricane Harvey, which is disrupting logistics supply chains in the US Gulf, weather events in Hong Kong and Singapore, and yet another Chinese government policy development involving environmental restrictions.
Importers report that China has been shutting down or at least pressuring dozens of old, polluting factories to slash production. This is forcing importers to find new suppliers, or if that is not possible, to wait and see if the current initiative is temporary. If it should suddenly be lifted, and production ramps back up, Chinese ports and carriers could get hit with a spike in cargo that overwhelms them.
Although there are no specific numbers available, some carriers are quietly deploying “extra-loader” ships to meet growing demand. This could relieve some of the pressure on spot rates. However, vessel space is expected to be quite tight in the pre-Chinese Golden Week period in late September. Conditions are expected to remain tight through October. Carriers are therefore urging BCOs to work closely with their service providers to prepare for cargo rolling and rate spikes for the remainder of the peak season.
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