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Ocean Shippers May “Pay Up” for Secure Capacity Despite Weak Market

Home News Ocean Shippers May “Pay Up” for Secure Capacity Despite Weak Market

Ocean Shippers May “Pay Up” for Secure Capacity Despite Weak Market

It is common knowledge that trans-Pacific container spot rates have come plummeting down to earth and are now back in familiar, pre-pandemic territory. Old timers are experiencing déjà vu as carriers resort to bygone tactics such as pricing for market share, imposing general rate increases, and expounding on their own cost increases to push rates to higher levels.

But not all is the same as 2023 begins. Many believe volumes will be weak in the first half due to recession fears, inflation, satiated consumers rebalancing their spending, and a longer-than-normal Chinese New Year owing to manufacturing interruptions resulting from Beijing’s rethinking of its zero-COVID policy.

Even as those conditions prevail during the traditional contract negotiating cycle, weighing down contract rates, it does not automatically mean shippers will be driving the hardest possible bargains with newly vulnerable carriers, even those shippers bristling after difficult experiences with carriers during the pandemic.

That’s because shippers can see the risks inherent in hammering a dwindling number of major carriers that could then withhold capacity if the market tightens again, as some believe it will in the second half of the year.

Such a scenario would be the result of carriers flexing capacity through their alliances and a potentially mild first-half recession. That would then phase into a restocking surge as retailers finally see an opening to align inventory to real-time consumer preferences and demand levels after three years of gaping inventory mismatch.

“Because there is so much uncertainty as to how carriers will manage softer cargo demand by curtailing their network capacity, I believe the larger retailers are willing to pay up to get secured predictable allocations,” said Kurt McElroy, executive vice president at Apex Maritime.

“Paying up” would be part of a deeper mutual understanding regarding capacity allocations, addressing one of shippers’ biggest grievances during the pandemic, when in many cases space commitments by carriers proved illusory amid extreme capacity shortages.

“If the markets take off again this year, for whatever reasons, the same situation with supply-demand could play out again as it did last year,” McElroy said. “That is all the more reason that BCOs [beneficial cargo owners] and their selected carriers and non-vessel-operating common carriers [NVOs] need to have a meaningful contracting relationship that is based on solid principles and mutually beneficial fundamentals.”

Risk avoidance as COVID legacy 

Paying for that assurance would be a possibly unprecedented twist in an otherwise weak market in which spot rates collapsed despite aggressive carrier intervention, suggesting that a mindset of risk avoidance in supply chains is an actual — as opposed to theoretical — legacy of the pandemic.

“It is clear there is too much capacity in the market at the moment, but demand will pick up,” said Dominique von Orelli, global head of ocean freight for DHL Global Forwarding. “We are convinced that the second half will see an increase in the demand and different consumer behavior, but the first half will be rather slow.”

Source: Journal of Commerce (JOC) 

View Farrow’s Global Consulting Page. 

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