In the past, the annual choreographed contract negotiations between ocean carriers and shippers were a bit like a high school prom. You didn’t particularly care for your date, but you didn’t want to miss the dance.
That’s not the case anymore, according to Charles van der Steene, the head of sales in North America for A.P. Møller – Maersk, who says the world’s largest ocean carrier is more and more entering into long-term committed relationships with shippers.
“We’ve been very deliberate since Q3 last year when the surge of volume actually started to occur to focus literally all of our attention toward our longer-term contract partners,” van der Steene said. “So what you would have seen in the last nine months, on our vessels at least, is a shift that was quite dramatic between the share of short-term — what you would call spot — shippers on our vessels versus longer-term shippers on our vessels.
“There was quite a significant financial investment because we decided not to enjoy the short-term market rates but stick to our longer-term partners. It was also a true buildout of our long-term vision — no longer being a regular carrier but the long-term container logistics integrator that we want to be for our bigger partners,” he said.
No one is likely to feel sorry for Maersk for that undisclosed financial investment. The reputations of the big men on campus have been bruised as the ocean carriers have made money hand over fist while some customers struggled to get inventory to stay afloat during the COVID-19-caused U.S. import surge. Maersk’s fourth-quarter ocean division earnings nearly doubled year-over-year to $2.2 billion.
But Maersk could have made even more money, according to van der Steene, who said the company has changed its ways from the past, when it “would have tried to capitalize on the short-term market because the rates would of course go up.”
Maersk now takes its long-term contract relationships much more seriously, he said.
“We have, with quite a number of our customers, agreed to go beyond the regular 12-month cycle and could go up as high as three years or in some cases even evergreen contracts,” van der Steene said.
“The way these contracts work, you basically determine a rate level for the here and now but also agree to a mechanism how that rate would potentially adjust as time passes. So it’s really a statement of intent to work together to stay away from the usual carrier-versus-shipper dynamics where if the market goes up, the carrier would go and play the short-term market and if the market goes down, the shippers would go and play the different carriers.
“That’s not who we want to be anymore. We want to jointly think about your supply chain as an integrated one and we as Maersk are the integrator of container logistics. We will help you and together with us, we will make it work. It’s a statement of intent that we will lock in a rate for now and agree on a framework to be adjusted over time,” he said. “This is a seismic change to how we do business.”
He said that shift required “a large conceptual change in our organization to accept the fact that if the short-term [rates were very high], we would say, ‘We’re not going to go there, we’re going to stick to our long-term partners, we’re going to allow them to ship 200, 400 or 500 more containers this week as opposed to giving those 500 containers — or even all of our containers — to the short-term market and as a result make a fantastic result for the year.’
“That changed the conversation entirely — internally for us but also with our customers when we said, ‘Look, this is how we’d like to approach it. Let’s do this together,’” van der Steene said. “Forget about the whole ‘us versus them.’ … This is the only way to go.”
This change in the way business is conducted will take time to become the norm, but Maersk CEO Søren Skou has been quoted as saying he expects two-way committed contracts to make up nearly all of the Danish shipping giant’s business within five years. Hapag-Lloyd CEO Rolf Habben Jansen said last week that about 70% of the German ocean carrier’s “volumes are contracted, either mid or long term.”
During an appearance on FreightWaves Midday Market Update last week, Gordon Downes, CEO of NYSHEX, said, “This is about change management, getting both carriers and shippers comfortable with a new way of contracting, a new way of doing business, a new way of operating under the world of commitments and so forth.
“It’s a wonderful change. I think it’s going to be hugely beneficial to everyone involved, and I think that the role that Maersk and other carriers are playing in terms of driving this transformation is very constructive,” Downes said.
“It benefits both sides. So the shipper benefits by having a two-way committed contract because … they can be confident that the price that they agreed to is the price that they’ll pay, the service they agreed to is the service that they’ll get,” he said. “The carrier, for instance, can better anticipate what cargo’s going to show up for a given vessel. They can better manage the utilization of that vessel. They don’t have to do what they’ve done in the past, [when] they would overbook the vessel because they knew there would be downfalls. This allows them to be more precise in how they plan.”
NYSHEX provides a two-way enforceable contract solution for its customers and reminds them that “the key thing to know about contracting is it’s not about the price. In fact, if you just contract with only the price in mind, that’s actually more often than not going to come back and haunt you,” Downes said. “What we’ve seen in the past with the way the container shipping industry operates is that the contracts with the lowest price are the ones that have the lowest probability of getting on the ships because the carrier is of course prioritizing cargo that pays the most and therefore the lower contract prices get the lowest level on the priority list.
“So it’s always imperative to contract with price and service in mind, and if you don’t balance those two things correctly, you’re putting your entire supply chain at risk,” he said.
Full dance card
According to van der Steene, the COVID-19 pandemic not only has drawn attention to the need for change but accelerated it.
“We’re talking much less on a transactional basis, much less about the procurement side of things, but much more about the solution side of things, which is a pretty fundamental shift. The good news of course is it’s part of a shift that we would have hoped would happen. It’s very much linked to our longer-term vision as a company,” he said.
Van der Steene insisted he is having no problems lining up dates to talk about contracts. In fact, customers are calling him to sign early.
“One of the changes that we have seen is that we have opened up contract talks earlier. The other change was we’re talking about longer-term contracts,” he said. “What has become significantly different is we’re now talking about not so much should we set another contract for the next six months or 12 months. We’re talking about if we think about the overall demand differently, how can we as Maersk help you better serve the demands within a contracting framework?
“Some of our contract discussions with some of our longer-term key partners were already starting back in Q4, where based upon our joint crystal balls our assessment was: ‘Let’s try and be ahead of the game and look at the longer term and see how we can assure that we are ready for what’s going to come together,’” van der Steene said.
He said coming together also enables both sides to get off the “hamster wheel” of contract negotiations and come to agreement sooner.
“Why don’t we just sit down, accept the fact that it’s going to be a dynamic world and we are much better off jointly to focus all of our attention, all of our energy on managing within this dynamic world and avoid spending it on contract negotiations that probably don’t have a lot of value,” van der Steene said. As a result, “we would expect by the end of the month of March, the lion’s share of our contracting will have been completed, which is quite a significant difference from what we would have been accustomed to.”
No image problem
Very likely to make the yearbook pages are two recent high-profile cases of container losses. The Maersk Essen lost 750 containers in January en route from Xiamen, China, to the Port of Los Angeles. In February, the Maersk Eindhoven, also sailing for LA, lost 260 containers.
“The timing I would say has almost been irrelevant in the sense that it’s always a bad time for a safety issue to occur, and it hasn’t impacted any of our discussions from a contracting point of view,” van der Steene said. “The only thing that it has done is, of course, for us as an organization, is to further acknowledge that everything that we are doing, this is our highest priority in terms of health, safety and environment and is even further intensified on everyone’s agenda.
“It’s clear that with all the effort that we put into this, no one is shielded from these accidents to occur. We just need to make sure we keep our crew, our people as safe as possible and then the goods of our customers that we are allowed to ship as safe as possible. So that hasn’t really changed anything,” he said.
Van der Steene maintained that Maersk has been “extremely open and fast in our communication around the issues and … extremely proactive in trying to make sure that, OK, it has happened, how do we now make sure that we course correct for that cargo that we still have on our vessel and we need to get to the market in the safest way possible and the fastest way possible? And that’s exactly what we’ve done together with our customers.”
Also highly publicized has been port congestion, particularly in Southern California, a problem that van der Steene said is complex.
“I would not see it as an image problem” for Maersk or any other ocean carrier, he said. “There is an information challenge out there in terms of the people understanding what is actually happening today. Why are we where we are? Why do we see vessels on anchor in LA/Long Beach? Why do we see the same happening now on the East Coast?”
The port congestion cannot be blamed on one factor — or on ocean carriers, van der Steene pointed out.
“We speak of the perfect storm. There is to begin with an unprecedented surge in volumes. That’s component No. 1. At the start of this surge, there was a complete wrong positioning of equipment globally to be able to feed into the surge. That was a result of the massive drop in Q2 last year because of COVID, which led global trade to come to a standstill almost, which meant that the equipment that you needed to have in Asia when the surge started was not in Asia and we’re still reeling from today. They were just not in the right location.”
He said COVID-19 outbreaks at ports and chassis unavailability were other contributing factors.
“There is no one cause. There’s also no one fix,” van der Steene said. “What we have done at Maersk is a few things. We have infused a significant amount of new equipment into the supply chain to make sure that we are able to have equipment where we need it as much as we can. There’s a lot more equipment in our network now than we had nine months ago.
“Two, we have reviewed our physical network of ships around the world and redeployed that network where we felt the need was the most,” he continued. “On top of this we created additional gateways into North America to make sure as we redirected our network to also feed more capacity into the Pacific Northwest, to feed more capacity into the Gulf, to feed more capacity into the East Coast to make sure that we created a much wider ability to cope with the surge, not just on the port side or the ocean side but on the land side.”
Van der Steene said it’s too early to tell whether there will be a midsummer U.S. import lull before peak season begins.
“This is extremely dynamic. I think the entire industry, including ourselves and many shippers in the U.S., would have thought there would be somewhat of a lull after Chinese New Year, and the reality is no one saw that,” van der Steene said. “The real task on all of us is making sure the supply chain for customers is as agile as possible so if indeed there might not be any lull before the peak season we are able to keep things flowing.”
Van der Steene said the bottom line is he is communicating with Maersk’s customers far more often than during contract renewal season.
“We’re having discussions with our customers now that are so deeply strategic that we’re creating solutions together. Yes, they’re taking our calls, but more importantly, we speak to each other every week to make things work and make things better.”