Negotiations between importers and ocean carriers on next year’s shipping contracts kicked off in March, with carriers looking to significantly increase freight rates. While the contracts aren’t due to be finalized until May 1, debate over whether the proposed increases were appropriate or even reasonable is building.
As before, the members of the Transpacific Stabilization Agreement, a conglomerate of 11 major shipping lines that negotiates rates from Asian ports, laid out the proposed increases they would seek in the negotiations several months ahead of time. In a statement on Sept. 22, the TSA recommended a $300 increase on each standard 40-foot container, known as an FEU, shipped from Asia to the West Coast.
For goods moving beyond West Coast ports to inland destinations via rail or truck, carriers are seeking an increase of $650 per FEU. For Asian shipments utilizing the Panama or Suez Canals to reach the East Coast, carriers are recommending an increase of $500 per FEU. A peak season surcharge of $400 per FEU was also recommended for June 15 through Oct. 15.
The TSA, whose members include American President Lines, Evergreen Marine and Hanjin Shipping, argue that the increases are necessary given rising import volumes, higher costs associated with fuel and improving terminal operations and security. Goods destined for inland ports in particular became more costly, with the TSA suggesting an increase that was nearly double what it asked for last year. Railroads raised their intermodal freight rates by as much as 30 percent in 2006, according to TSA.
“We’ve been struggling with the higher cost of fuel, so it’s not feasible to absorb steep increases in retail transportation as well,” said Jack Yen, president of Evergreen Marine, in a statement released in January.
Hubert Wiesenmaier, executive director of the American Import Shippers’ Association, said last week that Maersk’s decision to cancel its services to many interior locations served by West Coast ports over the past year forced other ocean carriers to reexamine their own operations.
“They weren’t getting adequate returns,” said Wiesenmaier of Maersk’s decision. “That was sort of a wake-up call for a lot of other carriers to look at these rates. So, inland rates will be under close review.”
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Even rising steel costs, said the TSA, had resulted in higher prices for new containers.
Suggestion of an overcapacity in the container shipping industry, however, is proving a bigger threat to ocean carriers. According to a review and forecast of the container market for 2006 and 2007 conducted by Drewry Shipping Consultants, supply is outpacing demand.
“The cellular containership fleet increased by 15.4 percent in the 12 months to mid-2006, while total effective fleet capacity was up by an estimated 13.3 percent,” said the report.
As a result, Drewry expected the average freight rate to fall by 6.3 percent by the end of 2006.
“Despite the continuation of positive trends such as strong Chinese economic growth and a lack of port congestion in 2006, negative factors including the delivery of new tonnage will mean a continuing market downturn,” said the report. “Ocean carriers will need to rein in their costs to fully survive the down cycle. Creative strategies such as slowing down ships to save on bunker costs may become more prominent.”
The TSA contends that the gap between capacity and trade levels are more balanced.
“New, larger ships are a fact of life, but they replace ships that are redeployed to other trades,” Albert Pierce, TSA’s executive director, said in a statement prior to resigning his position in November. “Most U.S. ports can’t handle them fully loaded due to channel draft, terminal or rail constraints…We don’t see a capacity gap of more than 2 to 3 percent, and we view that as healthy.”
Paul Bingham, an economist with data analysis firm Global Insight, which produces the National Retail Federation’s monthly Port Tracker report, said there is no question that the amount of capacity being added is outstripping the growth in global trade.
“It’s a classic cycle in the steamship business,” said Bingham. “When they have tight capacity the steamships get happy and all order new ships…they add a lot of capacity and that plays out over several years. If you have even just a slowing of growth then you get into periods of overcapacity.”
Bingham acknowledged that a capacity glut predicted by some last year has not materialized. Even so, he believes steamship lines will continue to face some level of overcapacity in the next several years as the new ships they had contracted shipyards to build several years ago continue to hit the waters.
Ocean carriers have spent the last year finding ways to mitigate the impact of the overcapacity. Slowing ships down not only cuts down on fuel costs but allows additional ships to be added to a route. Carriers that chartered vessels from other companies have pressured the owners for better rates and are not renewing some agreements when leases are up. Other ships are being taken out of rotation for maintenance and cleaning.
Bingham’s sense is that importers are in a strong position heading into this year’s negotiations. One importer not involved in the apparel industry told Bingham he expected to wait for the best deal from a carrier.
“His perception was that this year was going to be one of the years that he could hold out a little longer,” said Bingham. “He wasn’t expecting to pay near the increases that were announced.”
In November, the TSA announced a change in its management structure. The group is now led by an executive committee represented by the chief executives of four carriers. The committee, chaired by APL ceo Ron Widdows, has shown early signs that it is interested in establishing a clearer and more consistent dialogue with importers. On March 7, the TSA hosted 27 of its customers for a three-hour meeting to discuss current issues and the outlook for the next several years. The meeting was the first group meeting between TSA and its customers.
Sara Mayes, president of the Fashion Accessories Shippers Association, which represents about 250 companies in a range of industries, was one of those present at the meeting.
“It was a first and I think it was a very good step and very positive,” said Mayes.
Even so, the relationship between carriers and importers remains adversarial. Mayes said carriers failed to get what they asked for last year and importers made it clear at the meeting that they weren’t likely to do so this year. She characterized this year’s proposed increases as “totally unreasonable.”
“I think we were all pretty much saying you can’t give us these numbers in the fall and expect us to present them to senior management, especially when year after year these numbers are thrown out and are unrealistic,” said Mayes. “I think there will be more of these meetings in the future and hope there will be.”
Wiesenmaier also said the meeting was a good first step and, provided the meetings continue, should help the two sides better understand each other.
“It will do much to establish a mutual understanding of what TSA is doing and how they come up with the formulas,” he said.
Still, Mayes believes the onus is on carriers to cut costs and learning how to manage their businesses better. One area she said carriers and importers agreed on was the rising costs of implementing security initiatives. Environmental issues also promise to be a topic of discussion going forward.
“Environmental issues will not be finding their way into negotiations right now, but there will be potential environmental costs,” said Wiesenmaier.
Bingham pointed out that ocean carriers are undoubtedly facing rising costs on a number of fronts. Fuel is more expensive, ships cost more today than they did five years ago and the Panama Canal has proposed substantial toll increases to help fund expansion efforts.
“Importers are in the strong position this year,” said Bingham. “Maybe they’re not even happy about it because maybe they’re not making as many sales as they’d like.”