Choppy Rate Negotiations: What to Expect for the Current Contract Season

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The end of April usually marks the end of contract negotiations for Transpacific Eastbound trade where both carriers and BCOs finalize the base freight rates which are good for one year.

Depending on the various contract types and negotiation tactics, some rates might be subject to peak season surcharges (PSS), General Rate Increases (GRI) and additional unknown items at the time of the contract signing, while some contracts might already include those.

Typical contracts also include a Minimum Quantity Commitment (MQC) from each of the parties where one party commits to the other that a certain MQC number written on the contract will be honored regardless of the market situation. Space allocation is broken down to the weekly number of containers and carriers are expected to honor that space. In return, BCOs are expected to fulfill those commitments or may face potential shortfall penalties.

Fixed rate negotiations used to give larger BCOs the upper hand, but things have changed.

Larger BCOs had the great convenience of knowing your cost until the end of next contract season compared to smaller BCOs where they may be exposed to wild fluctuations of the spot market. In return, it was a better deal for carriers, as they have a fixed volume commitment which gives them great control over scheduling and space allocation.

Just like everything else in shipping, things have changed on rate negotiations and this contract season has been shaping up to be an interesting one where BCOs are in no rush to make any commitment in the hopes of taking advantage of the current weak spot rate market to recoup the extremely high rates they paid during the Covid pandemic.

BCOs are in no rush to commit anything, since they paid the price of sky-high freight rates, got sloppy service offerings from carriers, and experienced all the other problems during the Covid pandemic. It was a big lesson as contracts simply didn’t mean much and the priority was to increase revenues by charging more and giving space to top bidders.

Relationships still matter, and as such, both parties are trying to manage this period delicately.

As a result of an influx of incoming new vessels which were ordered a few years ago and still weak demand where many importers are in wait-and-see mode, it will be weeks before many contracts are finalized.

The main reason for this one is the big unknown on the demand side: currently there are only estimates about the second half of the year and the general consensus is that it will be a stronger second half of 2023 compared to the first half of 2023. Soft retail sales and still higher inventory levels, especially for the larger retailers, are further complicating the current environment.

How these trends would affect the current state of the market is unknown.

Will we have a big jump on the numbers which may create space and equipment issues? There are certainly visible positive developments in the market compared to three months ago, but TEU figures are still down an average of around 30% year-over-year.

Another big unknown is how much carriers will be able to keep their current capacity control discipline? Carriers control the space in the means of blank sailings which have a cost, too. The market is also changing where we will have more individual players very soon and they will be making own decisions based on their own company goals.

Overall, broader economic indicators are also not helping with the current situation. Importers cannot plan ahead because it is still not clear how much longer we will be in the current high interest rate environment. It’s also unknown if there will be a recession or how big it will be. Will inflation be brought under control and will consumers will start spending on discretionary items? These are all big questions.

Every company is different and there is no one fit for all solution for rates.

However, my expectation remains the same for this contract season. Importers should take advantage of spot market rates. With the added capacity coming in, even if some of these are absorbed by new IMO regulations, it will still be a buyers market where weekly, regular volumes dictate rates. And, regardless of what tactics carriers may use, the market isn’t strong enough and the advantages that importers get from fixed rate deals will not be as attractive during this contract season.

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Serkan Kavas
Serkan Kavas was born and raised in Turkey. He graduated from Dokuz Eylul University with a Degree in Business Administration in 2001. He had an internship in Germany at a major industrial company after college. He worked at their family business in Turkey and managed their exports from Turkey to Europe. He moved to the U.S. to continue his education in New York and obtained his MBA degree with International Business concentration at New York Institute of Technology in 2005. After graduation he was recruited by MTS Logistics and he has been working at the company since 2005. Serkan worked his way up from the entry level to operations manager and to his current position as our VP of Imports at MTS Logistics. He wears different hats daily with different responsibilities. He has vast knowledge, experience, and understanding of all aspects of logistics, freight, and the supply chain. His focus now is to help develop our import department and help our company move forward.