Upturned trans-Pacific market delaying service contract deals
Mid-sized US retailers, benefitting from the months-long plunge in spot rates that has still not hit bottom, are showing no hesitation flexing their new-found muscle during 2023-24 trans-Pacific service contract negotiations with carriers that have heated up in recent weeks, shippers and industry analysts say.
Those retailers are strongly resisting contract rates above $2,000 per FEU, and in many cases are pushing for levels significantly below that for West Coast delivery, sources told the Journal of Commerce. That’s far less than the $6,000 to $8,000 per FEU shippers were forced to sign for 2022-23 service contracts amid record high spot rates and demand a year ago.
Most contracts for 2023-24 take effect May 1.
In its most recent Global Freight Monitor, HSBC Global Research said the Shanghai Containerized Freight Index last week fell 2.6 percent week over week and is now just 18 percent above the pre-pandemic 2019 level.
“According to Shipping China, a local freight forwarder, the Asia-USWC contract rates are settling at $1,500-$1,600 per FEU, with two large shipping lines offering as low as $1,200-$1,300 per FEU,” HSBC said. “Contract rates on the Asia-USEC trade are settling at $2,500-$2,600 per FEU.”
However, some importers who were ready to finalize their negotiations have pulled back because spot rates in the eastbound trans-Pacific continue to the decline. A mid-size retailer said he was targeting a rate slightly higher than $1,600 per FEU to the West Coast, but indicated he’s in no rush to sign because he believes the market may sink further.
“I’m just going to slow down,” the source said. “Carriers are pleading with us to help them fill their ships.”
In its weekly update Tuesday, rate benchmarking platform Freightos said the Asia-US West Coast spot rate fell 3 percent from last week to $1,040 per FEU. That is 94 percent lower than the same time last year.
Kurt McElroy, executive vice president of APEX Maritime, said shippers are showing hesitance to lock in a contract rate when the market may not yet have reached bottom.
Logistics managers are thinking, “Sign a contract rate for $1,600 to $1,800 with spot rates below $1,100? No way! I’ll lose my job,” McElroy said.
“This year is going to be very different than the last two,” Brian Nemeth, chief growth and strategy officer at STG Logistics, said at the Journal of Commerce’s TPM23 conference in Long Beach. “With the demand dropping drastically [and] a bunch of ships coming online, the shippers are in a much better place going into this contract season and the carriers I think are going to struggle with maintaining price.”
Shippers warned not to get ‘too greedy’
Normally, the largest retailers set the market floor for service contract rates and sign agreements by early March, followed by mid-size importers inking their deals with somewhat higher rates. But large retailers this year are reportedly pushing hard to secure low rates, which is delaying their negotiations. So mid-size retailers are stepping up and beginning to sign contracts.
“Things are definitely different this year,” transportation consultant Lawrence Burns said. Burns said a few retailers in “the top 100, but not the top 50” have completed their contract negotiations to date.
Still, Burns cautioned that retailers shouldn’t press too hard for lower rates, as that strategy could prove to be a mistake later in the year if demand picks up. That’s because carriers could bump cargo to make room for higher-paying shipments. “Don’t get too greedy,” Burns said.
Indeed, David Bennett, chief commercial officer at the non-vessel-operating common carrier (NVO) Farrow, says retailers who last year paid contract rates above $6,000 per FEU should be able to afford $1,500 to $1,800 this year and still feel confident in pushing carriers for the commitment of space and consistency of service they desire.
Bennett said he expects that the market rate in the trans-Pacific should be set in the next couple of weeks. He advises importers to remain flexible for now, as there will still be plenty of time to negotiate a rate and service features before existing contracts expire on April 30.
“The market is looking for some form of stability,” he said.
NVOs will get more business
Because it is uncertain right now how long spot rates will remain depressed, importers are prepared to hedge their bets and ship a larger percentage of their freight with NVOs, both through “named account” contracts in which the NVO has locked in a rate at today’s favorable level, and “freight-all-kinds” contracts which reflect the spot rate in effect when the shipment is actually made later in the year.
A home furnishings importer said he plans this year to book 20 percent of his freight through contractual arrangements with NVOs, which would be his largest percentage ever. He is offering tenders to five carriers and two NVOs.
Apex Maritime’s McElroy said he expects shippers who last year booked directly with eight or nine carriers in order to cobble together enough capacity will reduce that this year to three or four core carriers and several NVOs. “If they did 20 percent with NVOs [last year], they may do 30 percent this year,” he said.
Source: Journal of Commerce
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