Trans-Pacific carriers take new approach to annual carrier contracts

Mark Szakonyi, Executive Editor, JOC.com | Apr 10, 2015 5:31PM

For the first time, the Transpacific Stabilization Agreement, a discussion group representing 15 of the largest carrier in the trans-Pacific trade lanes, is pushing for base levels during the current contracting season, a departure from its long-standing policy of issuing targets for rate increases.

But it remains to be seen whether carriers will gain traction from the effort, or whether shipper frustration with poor reliability that was exacerbated by West Coast congestion and their knowing all-in costs are less because of lower fuel prices will win out at the bargaining table. Transpacific eastbound trade in total is worth an estimated $11 to $13 billion in annual revenue for the carriers, so formulating a strategy for annual service contract negotiations is a critical annual exercise for the carriers.

The outcome of service contract negotiations in past years has been influenced by the direction of spot rates, with carriers in the past complaining that contract rates should not follow weakening spot rates in the early months of the year. Trans-Pacific spot rates this week rose from a 12-month low, rising 15.3 percent from last week to $1,889 per 40-foot equivalent, according to Drewry Maritime Research. Unlike the base rate minimums suggested by TSA,  the spot rates, which were up 2.9 percent from a year ago, include origin terminal handling charges, which can range between $150 to $300, depending on the Asian port. The surge in spot prices suggest that the TSA’s April 9 general rate increase got some traction, but past GRIs have shown little staying power.

The sought after rate floor for 40-foot equivalent units — $2,000 to the West Coast and $3,500 to the East Coast — gives carriers a “clearer benchmark of where they want the rates to go,” Brian Conrad, executive administrator of the TSA, told JOC.com. Unlike general rate increase announcements of prior years that can result in widely different rates from carriers depending on where prices began, the suggested contract base rates are aimed at bring 2015-2016 pricing “to a sustainable level without overreaching,” he said.

“We’ve heard it’s helped in contract negotiations, but it’s too early to say whether it’s been successful,” Conrad said. The TSA first disclosed its plan to set rate level floors last fall and is carrying that strategy into the current negotiations with large imports, which are in full swing and will be mostly resolved within the next four weeks.

Conrad estimated that less than 10 percent of carrier contracts have been finalized, and the majority will be completed by May 10, a typical time frame for finalizing eastbound trans-Pacific contracts. Before the contact base rate was announced on Oct. 1., the TSA had sought to create a pricing floor tool for short-term rates, or spot rates. The TSA, whose members are allowed under U.S. shipping law to discuss pricing with immunity from antitrust laws, also recommended a base rate for FEUs from Southeast Asia of $2,150 for shipments to the West Coast and $3,650 to the East Coast. Intermodal base rates will vary by destination, but as an example the TSA is proposing 2015 rates to Chicago-area ramps to be at least $3,900 from North Asia and $4,050 for Southeast Asia.

The announcement also included a revised bunker surcharge formula that the TSA said more accurately reflects current vessel size and fuel consumption, and the recovery of low sulfur costs triggered by tighter sulfur emissions standards for vessels operating in U.S. coastal waters that took effect in January.

Considering that the industry sees the GRI pushes as a “joke” because of their ineffectiveness, it makes sense that TSA “would try to draw a line in the sand” on the minimum needed for contract rates, said Chas Deller, who retired in September as head of global ocean freight procurement for UTi Worldwide and is now a partner in 10XOCEANSOLUTIONS Inc. which advises shippers in contract negotiations. Even so, he has doubts that most carriers will be able to secure contracts at or above the minimum levels suggested by the TSA.

“Why would customers pay more after the year we’ve seen?” Dellers said, adding that largely because of West Coast port congestion, shippers have experienced service even worse than in 2002, when a showdown between labor and employers led to a 10-day terminal lockout. The carriers can’t make any guarantees on what service will look like over the next year, either, because the alliance structures are still fluid, he said.

Shippers also know that carriers are spending less on fuel and carriers may end up shelling out even less in the future, depending on the market price for oil. A typical rate to move an FEU from the Asia to the East Coast was about $3,000 a year ago, with fuel accounting for about a third of the price. Now, bunker fuel  costs about $500, or half what it used, Deller said.

The suggested minimum levels don’t take into account the more favorable pricing larger shippers would expect in return for guaranteeing larger volume, he said. Ultimately, TSA should make the base minimum levels “sexier” by making them more accurately reflect of what shippers are willing to pay. For big shippers, the recommendation now of minimum contract levels of $1,800 per FEU to the West Coast and $3,100 to the East Coast would create “a significant turning point,” Deller said. TSA member should seek a base rate of $200 to $300 more for each for medium-sized shippers.

“If (carriers) get it wrong, there a billion dollar loss,” he said.

Contact Mark Szakonyi at [email protected] and follow him on Twitter: @szakonyi_joc.