It’s been said low ocean freight rates can’t induce demand. Consumers either want their extra-large flat-screen TVs or they don’t, and the price of such products relies little on the ocean rate makers like Sony or Samsung can secure at a given time.
So if carriers can’t compel customers to ship more with lower rates, why are they so quick to lower base rates to levels they admit are unsustainable?
The answer may lie in the total revenue picture. And it has a lot to do with load factors — in other words, how full ships are running. Carriers on the major east/west trades had grand plans to roll out peak season surcharges starting from June. On the eastbound transpacific, the suggested peak season surcharge was announced by the Transpacific Stabilization Agreement many months ago, while from Asia to Europe, the planned fees were more ad hoc.
As we moved through months of decent but unspectacular demand growth in the first half, those peak season surcharges seemed more and more unrealistic. As rates on the two trades fell (dramatically in the Asia/Europe trade), they looked downright silly. Then transpacific demand actually fell in June, with the bellwether ports of Los Angeles and Long Beach recording their first volume drops in more than a year and a half. And so lines, one by one, postponed introducing peak season surcharges.
But the key point to consider here is the surcharges have not been delayed or shelved due to low rates, but due to low load factors. It’s a subtle, but crucial difference.
Contract and market rates have declined as carriers have been forced to retreat to rates agreed earlier this year on the spot market. Carriers granted those spot market rates in an attempt to bolster load factors, so carriers could assess peak season surcharges on the basis that their ships were full.
It was a gamble that didn’t pay off. Instead of running brimming full ships, which would allow them to assess peak season charges when demand invariably rises in the second half, carriers have been running services with decent load factors, but with much of the cargo riding on rates that are too low. Now the spot market rates are being used as benchmarks and the peak season surcharges haven’t stuck.
Transpacific lines said they were going to try to assess a peak season surcharge from mid-August, with TSA Executive Administrator Brian Conrad citing “robust forward-bookings and other favorable market signals” as justification for the surcharge. Will they stick? It depends on load factors, which remained unremarkable as of mid-August.
How do we know that load factors aren’t anywhere near the point where carriers could make those peak season fees stick? There hasn’t been one report of rolled cargo in Asia. American Shipper research affiliate ComPair Data has yet to come across an instance of a major east/west “peak loader” service, where lines run an extra vessel from time to time to clear a backlog. There’s ample capacity to cover the solid but far-from-explosive growth.
And it appears the gap is widening. Maritime consultant Alphaliner estimated in early August that 10 percent capacity had been added to global services (including 12 percent on Asia/Europe) in the last 12 months, without an equivalent amount of demand to fill that capacity.
“The main trade lanes’ modest second quarter capacity utilization levels of below 90 percent are expected to rise only moderately in August — despite the recent capacity withdrawals undertaken by some carriers,” Alphaliner said.
TSA’s optimism with regard to utilization has to be tempered by these capacity growth projections. There are hordes of big ships due to be delivered from the second half of this year through 2013 and beyond, with all being employed thus far on the Far East/Europe trade. Mid-sized and post-Panamax ships are already arriving in secondary trades.
With Europe’s economy in tatters, it’s only a matter of time before these larger super-post-Panamax vessels are pressed into service on the transpacific, provided there’s requisite demand and port infrastructure for them. Otherwise, the only option for carriers may be to idle vessels — even brand new, $100 million ones.
Utilization levels, at compensatory rate levels, are key.
So as we progress through the heart of peak season, shippers really shouldn’t be expected to face peak season surcharges unless carriers are truly able to get load factors high enough to convince shippers that there’s a premium on space — even if the rates for most of the cargo are far from premium.
More than a rate
The ocean freight forwarder market is facing an uncertain time with respect to margins, simply because rate information that used to be such a strategic advantage for them is coming more into the public domain.
“We believe it is getting more difficult for forwarders to increase yields enough to offset declining growth rates in air freight and ocean freight, as shippers are starting to get better access to real-time freight rates, which should continue to challenge (earnings per share) growth over the next couple of years,” analyst Stifel Nicolaus Transportation & Logistics Research Group wrote the day Expeditors International released its second quarter financials.
The note didn’t say as much about Expeditors, which Stifel Nicolaus dubbed a “historical high flyer,” as it did about the nature of the forwarding industry in the current age of lightning fast information. Where once ocean forwarders could craft an entire business model on knowing rates its customers didn’t, that won’t work anymore.
“If your value proposition hinges on the idea that your information is more relevant, I would suggest you need to find a better value proposition,” Matthew Harding, principal of Chainalytics, told American Shipper.
Access to rates is becoming easier by the day. Now, it may be hard for a small shipper to get a rate direct from carriers or large non-vessel-operating common carriers, as the maritime consultant SeaIntel found in June (“Small shippers need not apply,” at www.AmericanShipper.com), but there are now a plethora of rate indexes that give pretty good parameters for rates on most trades.
And the much-derided ocean freight derivatives market is gradually developing — the maturity of that market will give shippers even greater acuity into rates. Which means ocean forwarders will need to focus much more on services and relationships to grow their business, rather than relying on taking a bit more margin on the rates they provide.
The savvy ones are already doing that, investing in systems and people, in essence, providing more than just a rate.