Peak season of discontent

This isn’t working. Higher-than-usual fuel prices and tit-for-tat tariffs have exacerbated the chaos on the eastbound trans-Pacific this peak season, but the real blame falls at the feet of the container shipping industry.

Capacity is so scarce on the eastbound trans-Pacific that US importers from Asia, both large and small, have to pay in some cases $400 to $600 above already higher-than-usual rates to get space on ships. Thousands of containers are being rolled as ocean carriers prioritize higher-paying spot cargo — more than $2,000 per FEU to the US West Coast and $3,000 to the East Coast — in favor of lower-priced contracted cargo. And some shippers complain that their minimum quantity commitments, or MQCs, aren’t being honored.

Things aren’t much better on the landside. Trans-Pacific reliability is hitting as low as 35 percent and coupled with rail delays and chassis accessibility issues, it’s virtually impossible for beneficial cargo owners (BCOs) and trucking companies to plan their pickup and delivery schedules with any degree of accuracy.

This is the price the industry pays for its inability to reach a level of stability where container lines can make enough money from rates to cover their operating costs, much less turn a profit. In return, BCOs would theoretically receive the level of service they need to ensure their store shelves are stocked and manufacturing inputs delivered so they don’t have to carry unneeded inventory.

Peak-season woes were sown in the spring

The seeds of peak-season woes were sown in the spring when carriers entered the contracting season with hopes for meaningful price increases in annual service contracts. Instead, they left negotiating tables with contracts running from May 2018 through April 2019 generally in the range of $1,100 to $1,200 per FEU to the West Coast and $2,100 to $2,200 per FEU to the East Coast, a $100 decrease on both routes compared with how contracts ended the year prior.

Then bunker prices started to climb in April, with the August 2018 average price per metric ton of IFO 380 up 19 percent from April, 44 percent higher than in August 2017. The rise in fuel prices caught carriers unaware, with some working to recoup additional costs not captured through the bunker fuel adjustment via emergency fuel surcharges.

With their largest operating cost up even higher, a reluctance to pay even more to speed up ships, and concerns about a tariff impact, carriers reworked their trans-Pacific networks, resulting in a reduction of capacity to the West Coast by close to 7 percent and 1.6 percent to East Coast.

At the same time, US importers concerned about the next round of potential tariffs began rushing their peak-season shipments earlier only to meet the reality of having fewer slots available. Carriers’ sympathy of their plight goes so far. Carriers’ frustration with how contracting ended lingered, and they are still eating higher bunker fuel prices, which, coupled with lower-than-usual rates, pulled several carriers to a loss in the second quarter. Those losses sting even more after the container shipping industry was showing signs of a recovery, having made a profit ($7 billion) in 2017, for the first time in six years.

Carriers — now managing capacity ‘in a disruptive way’?

“Current capacity and demand are being manipulated by carriers to force price increases they were unable to get commercially,” said Mark Laufer, president and CEO of Laufer Group International. “Given the likely downturn in economic activity from [the fourth quarter] due to the negative effects of tariffs, it is hard to see how rates will be sustainable over the long run.”

Laufer added that amid the threat of an economic slowdown, the only option for carriers is to manage capacity “in a disruptive way to achieve any kind of compensatory rates,” and that holds particularly true as they face higher trucking and bunker fuel costs.

“Sometimes no space means no space,” said Allen Clifford, executive vice president of Mediterranean Shipping Co. Although some shipments are shut out of some voyages at Asian ports, this is not by intention. “We take no pleasure in turning away any client’s cargo. We are in the service business, and we are here to serve our partners,” Clifford said.

Amid these glaring signs of industry dysfunction, there is a creeping realization that shippers will have to pay more beyond just higher bunker adjustment factors. Encouragingly, there are real signs in the market of carriers delivering better service for higher prices and of shippers and carriers agreeing to enforceable contracts.

In the inaugural sailing of its expedited trans-Pacific service guaranteeing chassis availability, APL said 70 percent of the local cargo discharged at the Eagle Marine Service terminal in Los Angeles was available for pickup within four hours of unloading and the rest of the cargo was available by day end.

The chaos endured by US importers this peak season will also encourage more of them to check out the New York Shipping Exchange (NYSHEX) to guarantee that their cargo will ship for the sailing they booked — with the carrier facing a penalty if it fails to do so. Conversely, shippers face a fine if they fail to deliver the cargo they booked via the platform. To meet that demand, Maersk Line for the first time is offering slots on NYSHEX for eastbound trans-Pacific sailings. These are small but positive steps.

Contact Mark Szakonyi at mark.szakonyi@ihsmarkit.com and follow him on Twitter: @szakonyi_joc.

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