Trans-Pacific peak-season uptrend continues, rolling varies
Bill Mongelluzzo, Senior Editor | Aug 24, 2018 2:43PM EDT
Excerpted from JOC.com
Spot rates in the eastbound Pacific edged up for the fifth consecutive week, and are up more than 50 percent since mid-June, but it is uncertain how long the overbooking of vessels leaving Asia will continue because the frenzy by importers to beat pending tariffs cannot continue indefinitely.
Trans-Pacific eastbound: steady climb since June 22
The East Coast rate has been on a rather steady incline since June 22 and is now 52.6 percent higher than it was in June. The West Coast rate is up 78 percent since June 22.
A good deal of uncertainty surrounding Trump administration tariffs is driving the frantic efforts by importers to get their holiday merchandise into the country before prices increase further. Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation, said Friday “there is no end in sight” to reaching a resolution on the tariffs and counter-tariffs by China.
That tariff uncertainty, combined with above-trend US import growth, created increased demand conditions — market conditions that, historically, typically lead to rising rates.
At the same time, individual container lines, stung by unexpected rises in bunker fuel costs and inland/logistics costs, saw a chance to at least stem the bleeding from their largely industry-wide disappointing results in the first half of 2018. (The industry also is coming off years of losses, with last year being the first in six that the industry earned a profit, $7 billion.)
Moreover, the strong increase in US imports cannot be underscored enough as a causal factor in the uptrend in rates. Imports in July increased 8.7 percent year over year, compared with a 6.1 percent increase in July 2017, according to PIERS, a JOC.com sister product.
Further, it’s also important to note that container lines are increasing rates with individual customers/shippers, as conditions require it, and/or are increasing rates as part of their obligations under alliance agreements.
On the other hand, retailers and other importers can only import so much merchandise leading up to the holidays, so eventually imports will slow down and space on vessels will begin to open up. Opinions differ somewhat on when the decline will begin. “We’re projecting it will be tight until Golden Week,” said Max Kantzer, CEO of Transmodal Corporation. Golden Week will begin on Oct. 1, which is China’s National Day, this year.
David Bennett, president of the Americas at Globe Express Services, said the trade environment in the eastbound Pacific will remain volatile and uncertain until at least mid-September. In the coming few weeks, however, he sees “no pullback” in orders by importers. Even the addition of “extra-loader” vessels by Maersk Line in August was not able to bring supply and demand into balance on the largest US trade lane.
Rolling occurrence varies by carrier, trade lane
Non-vessel operating common carriers (NVOCCs) and beneficial cargo owners (BCOs) noted that overbooked vessels, which lead to shipments being “rolled” to subsequent voyages leaving Asia, giving carriers leverage to increase their rates, is on a carrier-by-carrier and trade lane-by-trade lane basis. For example, space out of Southeast Asia right now is quite tight because carriers are reducing their allocations for vessels from those countries to free up space for the surging shipments leaving China, Kantzer said.
Also, the commonly held belief that the largest importers are immune to carrier surcharges is not the case during this year of uncertainty, said the logistics director for a national retailer. Carriers, across the board, are filling only those allocations that the large BCOs have made from week to week at their service contract rates. Most carriers will accept additional shipments, if the BCOs agree to pay at least the spot rate, and sometimes an additional charge on top of the spot rate, in order to book those containers on the requested voyage, he said. Most carriers say the low service contract rates and an unexpected surge in bunker fuel costs resulted in losses in the first half this year, so they are looking to spot rate hikes and peak-season surcharges to return to profitability.
The additional costs charged to BCOs who negotiated contract rates back in May can be quite high. This week’s spot rate to the West Coast is $1,000 higher than the service contract rate, and some carriers are asking for a surcharge of $400 or more on top of that spot rate.
This same development is cutting into the profits of NVOCCs as well. NVOCCs are usually able to secure a competitive rate from carriers for their study customers, known as “named accounts.” Those rates are lower than what NVOCCs quote to their infrequent customers, and the rates are known as freight all kinds (FAK). For example, an NVOCC that months ago negotiated a rate, but must pay (nearly double) this week before adding its margin, is in trouble. “This leads to very difficult conversations,” one NVOCC said. “We can’t operate at a loss,” he said.
Confluence of factors led to tight eastbound Pacific
Current conditions in the eastbound Pacific have developed from an unexpected confluence of events. Carriers earlier this year negotiated (certain) contract rates because initial projections were that the summer-autumn peak season would see modest growth of about 3 to 4 percent over last year. Carrier vessel-sharing alliances then suspended three weekly services to the West Coast, reducing total capacity by about 6 percent, and one to the East Coast, reducing capacity by about 1.3 percent with the anticipation of moderate increases in imports.
However, early shipping because of tariffs uncertainties, typhoons that threw vessels off schedule in Asia, congested load-center ports in Asia, and dismal overall on-time performance of carriers of 35 to 50 percent reduced effective capacity each week below demand. Individual container lines, as market conditions allowed, then leveraged the weekly rolling of shipments in Asia to increase their rates rapidly.
BCOs, NVOCCs, and carriers are already looking ahead to Chinese New Year in 2019, when factories will close for a week or longer for the celebrations, and they are projecting a short slack period in the late autumn. Then they expect imports will pick up strongly in December. Chinese New Year falls on Feb. 5, 2019, compared with Feb 16 this year. If carriers do not run extra-loader vessels for the pre-Chinese New Year rush, the fall in spot rates in late autumn could be temporary and another round of spot rate increases and surcharges are likely, shippers and carriers agree.