Recent GRI success hastens signing of 2023-24 trans-Pac service contracts
The success of trans-Pacific carriers in pushing spot rates higher with their April 15 general rate increase (GRI) is motivating retailers and other importers to sign service contracts for the coming year, although at levels that are significantly lower than a year ago.
Sources said there has been a noticeable increase in contract signings this week as most existing deals are set to expire April 30. “The signing has definitely picked up,” a carrier executive told the Journal of Commerce on Tuesday. “It’s not a stampede, but an orderly increase.”
The Journal of Commerce spoke to six shipping lines, six forwarders, four importers, and two consultants for this story.
Sources say the floor for 2023-24 service contracts was reached at about $1,200 per FEU to the West Coast and $2,200/FEU to the East Coast, although those levels apply only to major customers — the so-called big-box retailers that commit to shipping more than 100,000 TEU a year.
For mid-size retailers that commit to shipping at least 10,000 TEU annually, rates are mostly in the range of $1,350 to $1,500/FEU to the West Coast, with East Coast prices about $1,000 higher.
The rates being locked in are a huge drop from the 2022-23 service contracts signed one year ago amid pandemic-driven supply chain disruption and port congestion, most of which had West Coast rates of $6,000 to $8,000/FEU and East Coast rates at $8,000 to $10,000/FEU.
Most, although not all, contracts for the 2023-24 service year begin May 1.
‘Longest’ contract negotiations
Unlike the past two years when customers were anxious to sign their service contracts because ships were full and spot rates kept increasing as the contract deadline approached, many shippers this spring were in no such rush as they waited to see if spot rates would continue sinking.
“These service contract negotiations are the longest they have ever been,” a second carrier executive said.
However, when it was apparent that the carriers’ April 15 GRI had succeeded in bumping up spot rates by several hundred dollars, customers began to sign their contracts out of concern that the rates would only go higher the longer they waited. “The GRI gave everybody a sense of urgency,” said another carrier executive.
Carriers have announced a second GRI that would take effect May 1, but they may not succeed in implementing it because demand in the eastbound Pacific is not surging and shipments are generally not being rolled at Asian load ports, according to non-vessel-operating common carriers (NVOs). And spot rates began to edge lower this week, according to indices. Longer term, retailers are projecting year-over-year declines in imports at least through August, which would indicate the peak shipping season could be soft this summer and fall.
According to the Drewry World Container Index, the April 27 Shanghai-Los Angeles spot rate was $1,820 per FEU, down 2 percent from the previous week and almost 80 percent lower year over year.
“The May 1 GRI is not going through,” Rachel Shames, vice president of pricing and procurement at the forwarder CV International, told the Journal of Commerce Wednesday. “Almost all carriers have extended their spot rates through May 14.”
Space commitments a concern
Now that the floor for service contract rates has been set, some NVOs are advising their clients to wrap up their negotiations soon or they may not be able to secure the vessel space commitments they need during the summer/fall peak shipping season.
“You better sign if you want to guarantee space at what is a good rate,” said Kurt McElroy, executive vice president of the NVO Apex Maritime Co. Importers learned a hard lesson over the past two years, McElroy said — if their contract rates are lower than the prevailing rates during the peak season, their containers may be bumped from vessels in favor of higher-paying freight.
With spot rates likely to remain fluid through the rest of the year, some NVOs are finding that their clients want contracts with a mix of fixed and floating rates so they can ship under the more favorable rate at the time. However, carriers are likely to use canceled (blank sailings) to manage capacity as volumes rise and fall throughout the year, said Kevin Krause, director, international product, at RIM Logistics.
“Carriers are smart as how to navigate these waters,” he said.
Importers are also being advised that unless they are large, core customers for the carriers they book with, they should expect to pay peak season surcharges (PSSs) when holiday merchandise begins to move this summer. “For the most part, that’s traditional,” a third carrier executive said.
Carriers will waive the PSSs for larger customers who consistently meet their minimum quantity commitments (MQCs), which gives carriers predictability and allows them to generate the year-round base cargo that helps to fill their ships.
“That base is valuable right through the peak season. There is absolute value to that,” the carrier executive said.
Strength of peak season an open question
Each spring, carriers plan their vessel deployments for the peak season. This year will be more difficult than most because carriers in the second half of the year are scheduled to take possession of a large number of new vessels from global shipyards and do not want to increase capacity on certain trade lanes simply because they have to deploy the ships somewhere.
Also, while the strength of this year’s holiday shopping season is a big unknown for many retailers, importers are being cautious as to their MQCs.
“It appears that some market recovery is happening now, but I don’t think we’re going to see anything ridiculous this peak season,” said David Bennett, chief commercial officer at the forwarder Farrow.
Inventory overhang from the past year or two is also complicating the decision as to how much new product importers are ordering for this peak season, Bennett said. It is an uneven picture, with warehouse space in some regions opening up but inventory overhangs persisting elsewhere. Also, some products are moving out of warehouses faster than other merchandise, he said.
Scott Weiss, vice president of technical sales at the drayage, warehouse and distribution provider Performance Team, which has facilities across the country, said warehouses in some regions, such as Southern California, continue to deal with bloated inventories. And some products are not turning over as quickly as they did in the past. “And it’s not just apparel,” Weiss said.
Some warehouses still have inventories from peak season 2022 — and even peak season 2021, he said. On the other hand, there are suppliers whose projections were “spot on,” so their warehouses are not overstocked, Weiss said.
The US retail sales-to-inventory ratio for February — the latest data available — was 1.23, unchanged from January, according to the US Census Bureau. Retailers generally consider an acceptable ratio to be about two to one, which ensures enough inventory to meet demand, but not so much that merchandise sits idle in the warehouses for months on end.
Source: Journal of Commerce
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