France’s CMA CGM, the world’s third-largest ocean carrier, will cease all increases in spot rates worldwide through Feb. 1, effectively immediately.
At first blush, the decision sounds like a game changer. But even if other carriers make similar announcements, how much of this is genuine mercy toward customers that will have bottom-line effects related to spot capacity that is still actually available — and how much is public relations?
“Since the beginning of 2021, container shipping spot freight rates have continued to rise due to port congestion and the major imbalance between demand and maritime container transport effective capacity,” said CMA CGM.
“Although these market-driven rate increases are expected to continue in the coming months, the Group has decided to put any further increases in spot freight rates on hold for all services operated under its brands (CMA CGM, CNC, Containerships, Mercosul, ANL, APL).”
CMA CGM said that it is “prioritizing its long-term relationship with customers in the face of an unprecedented situation in the shipping industry.”
Higher rates, higher government scrutiny
The carrier’s announcement comes at a time when freight rates continue to increase and when regulatory attention toward container lines continues to escalate.
Drewry’s World Container Index weekly assessment reached yet another all-time high on Thursday, at $10,834 per forty-foot equivalent unit. Drewry’s Shanghai-Los Angeles assessment rose to $11,569 per FEU and its Shanghai-New York assessment to $15,124 per FEU.
The Freightos Baltic Daily Index — which includes premium surcharges in its U.S. trade assessments — put Asia-West Coast at $20,586 per day and Asia-East Coast at $22,173 per day.
On the regulatory front, the U.S., Europe and China held a virtual summit Tuesday to discuss supply chain bottlenecks and oversight of the container industry. Last month, the Ocean Shipping Reform Act was introduced in the House of Representatives, targeting carrier practices. In July, the Federal Maritime Commission signed a first-ever cooperative agreement with the Justice Department’s anticompetition division.
‘This chaos must soon end’
Asked by American Shipper for his reaction to the CMA CGM decision, consultant Jon Monroe replied, “Are the carriers finally realizing that this chaos must soon end? Will other carriers follow suit?”
Capping rates at record-high levels is better for cargo shippers than not capping rates, but even so, shipping costs will remain at unprecedented highs and all-in costs don’t just include the base rate that is being capped. They also include, to an unprecedented degree, additional premium fees and other charges. Furthermore, the bigger challenge for many U.S. importers of high-margin goods is getting their volumes moved in an acceptable timeframe, even more so than price.
Jefferies analyst Randy Giveans told American Shipper, “This [spot price limit] is only from September to February and I would assume that CMA CGM capacity is already almost full from September to February. They don’t say how much capacity this applies to or how impactful this will be. It could be like a gas station after Hurricane Ida telling people it’s not going to increase gas prices when it only has 8 gallons left in its tank.”
Fearnleys Securities made the same point, questioning “how much volumes this will impact, with some liners at their Q2 2021 call noting they had good visibility for the balance of the year, suggesting much of their capacity for Q4 2021 has already been sold out.”
Balancing shareholders and customers
Whether other carriers follow CMA CGM’s lead and cap spot rates raises another question: Don’t carriers have a responsibility to their shareholders to maximize returns?
“There is always a balance for all companies between customers and shareholders,” said Giveans. “You don’t want to gouge your best customers to the detriment of future volumes. It’s not about making as much money as you can right now no matter what — that’s shortsighted. There’s a balance between squeezing out every penny you can and sustaining relationships with your best customers.
“We may see other announcements from other lines and this will provide some goodwill with customers and with governments. So, in 2023, carriers can say: ‘Hey Walmart, Target, Amazon: Remember back in Q4 2021 when we didn’t charge you that extra $2,000 [per FEU]?’
“But if they’re saying they’re not going to increase rates, how much have they already increased rates? And how much [spot] capacity do they even have left to sell?
“I don’t think this means carriers are not going to do better in Q4 than Q3. That’s not the takeaway here,” said Giveans. “Let’s be real: They’re going to have a blowout Q4 no matter what.”
Contract versus spot customers
To the extent there is unsold capacity in Q4, the better long-term strategy for carriers — and their shareholders — would be to reserve that capacity for contract customers. And the less available for spot customers, the lower the practical consequences of a spot-rate cap.
Lars Jensen, CEO of consultancy Vespucci Maritime, explained in an online post, “The market is still in a situation where there is a lack of capacity. When there is insufficient capacity, you need to prioritize who gets space and who does not get space. Until now the prioritization, especially of the last marginal slots on a vessel, has been done on the basis of price. Pay a sufficiently high premium and you might get space.
“The development indicated by CMA CGM would appear to lead in a direction where the prioritization will lean more towards contractual customers and customers with stronger pre-existing relationships. This will consequently be an advantage for customers with such relationships and a disadvantage for typically smaller customers who might have a preference for shopping around in the market to find the best transportation deals for each individual shipment.”
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