Editorial: Low rates aren’t shippers’ problem

   There’s plenty of capacity to be had on board those new mega-containerships, and shippers and NVOs shouldn’t be compelled to pay more than what the market will bear. Simple supply-and-demand economics really.

   In late November, the Transpacific Stabilization Agreement, a group that represents 15 liner carriers that move nearly all the container cargo between the Far East and the United States, strongly recommended freight rate increases and 2016-17 service contract guidelines.

   The lines hope to restore the lowest current market rate levels to at least $950 per 40-foot container (FEU) to the U.S. West Coast; $1,700 per FEU to the U.S. East and Gulf coasts; and $2,950 per FEU for intermodal moves to key Chicago-area inland point destinations.

   The rate situation for these carriers “represents the first time that the trade has been under the physiological $1,000 mark since August 2009 having been in nearly constant freefall since the end of the port congestion debacle at the start of the year,” Richard Ward, a container derivatives broker at Freight Investor Services, correctly noted at the time of the TSA’s announcement. 

   For Jan. 1, TSA members are recommending large general rate increases—$1,200 per FEU to the West Coast and $1,600 per FEU to the East and Gulf coasts. That’s about a doubling of the spot rates. For all 2016-17 service contracts, TSA lines are recommending longer-term minimum rates of $1,700 per FEU to the West Coast and $2,900 per FEU to the East and Gulf coasts.

   The carriers are quick to blame the introduction of larger, yet more fuel-efficient ships and new alliance complexities, as well as the uncertain global economic climate, for their financial woes, which could be quite substantial for not only this year but for the next couple of years, if overseas consumer markets don’t gather a good head of steam.

   But who’s fault is it? The finger should be pointed squarely at the carriers themselves, who made the decision to build these gigantic ships in the face of a slow-to-cure global recession. Granted, cleaner emissions regulations and an internal operations drive to lower container-slot costs are pressuring carriers to build new ships with more fuel-efficient engines, but do shippers and ports require this ongoing race to introduce plus-18,000-TEU ship sizes in the main east-west trades? The carriers may benefit, but shippers and even the public via the ports are paying for a cascading inefficiency that results from scrambling to handle these mega-ships and their massive drop-offs of containers.

   So, when the container carriers cry “poor me” during this year’s service contract rate negotiations, shippers should ignore it and get the best rate possible to service their businesses. The carriers created their own mess—the proverbial race to the bottom—and will have to fix it themselves.

   One caveat: In 2009, the carriers had a financially disastrous year, but the following year rebounded with fantastic results. This was because early in 2010 the carriers radically reduced their capacity through vessel layups, service cancellations, an increased application of slow steaming and skipped sailings. There are indications that carriers are already moving in this direction to try and balance capacity with demand. A small increase in demand could result in rebounding rates and rolled cargoes as it did in 2010. Signing contracts early at lower rates was a good strategy in 2010 and might be again.

   So, when the container carriers cry “poor me” during this year’s service contract rate negotiations, shippers should ignore it and get the best rate possible to service their businesses. The carriers created their own mess—the proverbial race to the bottom—and will have to fix it themselves.

   One caveat: In 2009, the carriers had a financially disastrous year, but the following year rebounded with fantastic results. This was because early in 2010 the carriers radically reduced their capacity through vessel layups, service cancellations, an increased application of slow steaming and skipped sailings. There are indications that carriers are already moving in this direction to try and balance capacity with demand. A small increase in demand could result in rebounding rates and rolled cargoes as it did in 2010. Signing contracts early at lower rates was a good strategy in 2010 and might be again.