The BOC Blast 265 – Trans-Pac Carriers Ready General Rate Increases on Spot Rate Run

Trans-Pac Carriers Ready General Rate Increases on Spot Rate Run

Bill Mongelluzzo, Senior Editor | Aug 31, 2018 6:39PM EDT excerpt:

Spot rates in the eastbound Pacific this week registered single-digit increases to the East and West Coast, marking a six-week upward run during the peak season and before carriers further flex their pricing power via general rate increases (GRIs).

There is a general acceptance among both direct importers and non-vessel operating common carriers (NVOs) that at least for the next few weeks, upward pressure on rates is likely to continue, said Michael Klage, solutions director at TOC Logistics. “The feeling is this isn’t going away, so we’ll have to deal with it,” Klage said Friday.

The spot rate from Shanghai to the East Coast this week increased 4.7 percent and the West Coast rate increased 8.1 percent to according to the JOC. While the week-over-week increases were single digit, year-over-year comparisons show just how strong the current rally in spot rates is. The East Coast rate is 52.9 percent higher and the West Coast rate is 53.7 percent higher than in Week 35 last year.

General Rate Increases

Ocean carriers 30 days ago pre-filed large general rate increases of as much as $1,000 per FEU to take effect Sept. 1.

The same forces that have been at work since July continue unabated, and in fact appear to be intensifying. A number of importers, fearing that their products would face tariffs in the trade war between the US and China, advanced as many orders as possible this peak season. At the same time, carriers, individually and as members of the vessel-sharing alliances, suspended three weekly services to the West Coast, reducing total capacity about 6 percent, and one service to the East Coast, reducing capacity less than 2 percent. Carriers entered the summer months believing there was excess capacity in the Pacific, but when importers began pushing shipments forward due to uncertainties over the tariffs, vessels soon became overbooked. Also, carriers raised their rates to recover some of the escalating prices of bunker fuel, which is up roughly 40 percent and has helped elevate spot rates. Those higher fuel prices, along with lower than expected rates due to global overcapacity, dented or even wiped away volume gains, as reported by a handful carriers in the second half.

Carriers are expected to maintain the elevated spot rates as long as volumes remain strong and capacity is tight.

However, six weeks of sustained spot rate increases could extend further based upon predictions of growing cargo volumes for at least the next month. Global Port Tracker, which is published monthly by the National Retail Federation and Hackett Associates, predicts that August will turn out to be a record month, with imports increasing 4.4 percent over August 2017. Global Port Tracker projects a 2.1 percent increase in September and 4.9 percent in October, year over year.

Capacity Has Fallen Below Demand

The net result of these developments is that capacity has fallen below demand, and ships leaving Asia have been booked at 110 percent of capacity or greater for the past month. Carriers have been “rolling” cargo, which means they have been holding back shipments for subsequent voyages unless importers agree to pay a premium rate. Beneficial cargo owners (BCOs) and NVOs who resist the rate hikes, which can be at the current spot rate or the spot rate plus a premium, are simply booking their shipments “subject to roll,” which in many cases becomes a self-fulfilling occurrence.

Klage said the experiences of NVOs and BCOs varies from carrier to carrier and trade lane to trade lane. West Coast vessels seem to be filling up faster than East Coast vessels, so spot rates are increasing at a faster rate to the West Coast, he said. Larry Burns, senior vice president of trade and sales at Hyundai Merchant Marine, confirmed that “to the West Coast, demand is still greater than supply.” The addition of two single-voyage “extra loader” vessels by Maersk Line in the eastbound Pacific did not significantly affect the supply-demand equation, he said.

The next few weeks will be marked by additional uncertainties. The GRIs are scheduled to take effect on Sept. 1, and the Sept. 6 deadline is approaching for the third round of Trump administration tariffs. Carriers and shippers are uncertain as  to when the fast-forwarding of shipments to get ahead of the tariffs will have depleted the bulk of the holiday season imports this year. Some are forecasting that the spike in imports in August will be followed by another surge around Oct. 1, when factories in Asia will close for the Golden Week celebrations. “There could be a double peak this year,” said Bruce Chilton, vice president of trade management at Ascent Global Logistics.

The trade also anticipates a shorter slack period this year between the end of the holiday shipments and the beginning of the pre-Chinese New Year spike. The factory closures for Chinese New Year in 2018 began on Feb. 16, but next year Chinese New Year will be on Feb. 5.