The period from March through May 1st is usually the time when contracts are being reviewed and renewed depending on market expectations and economic indicators for that year.
By mid-March of 2017, most large Beneficial Cargo Owner (BCO) contracts including long-term rates were finalized. Large BCO contracts are the benchmark for smaller to mid-size BCOs and eventually all NVOCCs. Carriers moved to NVOCC contracts, which were also concluded by the end of March/early April 2017.
This has not been the trend in 2018. So far, it has been very challenging for all parties involved in negotiations for several reasons. Most carriers waited for each other to observe and feel market expectations. So far in 2018, rate negotiation and setting for the year has been a challenge for carriers. Large BCOs have been pushing for lower rates, while carriers have been trying to keep rates higher. While lower rate levels are not favored by steamship lines, most carriers have seen losses for many years, and seek higher rates. Efforts to push rates higher have not been accepted by BCOs. Regardless of market realities, low rates over the long-term will not benefit either party, including BCOs who will suffer as they will face service disruptions and many other issues. We have discussed this in past articles.
There are several reasons why this year’s contract negotiations took longer, making arranging shipments in April and May a challenge.
The following are the reasons that contract rates have become harder to manage and estimate.
- Market realities: Plagued by overcapacity, supply and demand balance still plays the most key role. BCOs are aware that another year is expected with excess capacity. There is around 24% more East Coast capacity for the first 9 weeks of this year compared in 2017, according to sea intel maritime analysis. Therefore, BCOs are trying to negotiate lower rates for both East Coast and RIPI moves. Excess capacity is also expected for Pacific Northwest trade this year, as many additional services are entering the market.
- Mergers and acquisitions: The shipping industry is going through a large period of mergers and acquisitions. To reach economies of scale, carriers are forming alliances or merging with other carriers. The largest and most recent development is the new carrier ONE, which was formed after merger of three Japanese carriers (Kline, MOL, and NYK.) This means delays, due to new organizational requirements and policy changes within the newly-formed companies.
- U.S. trucking shortage: Carriers are charging premiums for shipments that they handle door deliveries themselves. Most carriers try to reduce their involvement on value-added services. Maersk’s latest decision to become an end-to-end logistics provider is an exception. The move is seen as an extra cost for them. Most carriers stopped providing chassis already and suspended their door delivery services during the worst trucking shortage period over the past few months. This has affected contract negotiations for NVOCCs and BCOs that require door delivery services. There is a capacity shortage. However, so far, it is hard to measure its direct dollar impact on prices.
- Additional requests from BCOs: In addition to lower base rates, BCOs are trying to maximize the free time they are getting in their contracts, as a result of the recent trucking shortage. Extra free time requests for per diem, detention, and chassis negotiations contributed to delays during contract renewals.
- Unknown political environment: Uncertain political developments, including recent ones between the U.S. and China have affected negotiations, due to market uncertainty. Some certain cargo groups are directly affected by the trade war rumors or tariff retaliations between two countries. Although personally I believe full range trade war will not happen, some BCOs have preferred to wait and see how it will play out
Collectively, all of the above reasons, and more, have affected contract negotiations in 2018.
Another challenging year, between May 2018 and 2019, lies ahead with too many unknown factors.
At this point, it is certainly a big mistake for BCOs to look at low rates as the only differentiating point. Most BCOs do not, but some, especially lower-value cargo importers, depend on lower rates as rates are generally one of their biggest costs. There is a learning curve. Sooner or later, regardless of the commodity type, service, dependability, reliability, technological advancement, and discrepancy will prevail compared to just a race to the lowest rates.