Why Rates Will Remain High for Quite Some Time... But Should They?

Last Wednesday marked a rare milestone. Three at least partially successful GRIs (General Rate Increases) implemented by the carriers in a month. This latest increase being applied on top of an already ten year record high spot rate to the West Coast and an almost equally high rate to the East.  For many, this is a shock and for many, this seems insane given the global pandemic and the weakening and closing of the world’s economies. There are some strong reasons why the carriers are effectively implementing these increases. But there are also some real issues that make these record rates harder to swallow.

As I have stated in articles in the past, carriers are showing a discipline both individually and in their alliances, I’ve rarely if ever seen in my industry lifetime. They are learning the value of capacity management as well as the real business of controlling their largest cost, the vessels that carry the cargo.

With so many fewer carriers, there are not as many “dominoes” that could possibly fall. In downturns of the past, it was a race to the bottom. Carriers fought each other for market share to fill those costly ships, but those days seem long past. With the large amount of capacity that was eliminated as the pandemic hit, the carriers are definitely in the driver’s seat and will likely remain. Although they have called for fewer blank sailings, capacity is still tight and as volumes increase with inventory replenishment stock, carriers do not feel confident this spike is long term. So the bottom line, folks, there is not enough room on the ships. And when the vessels are full, allocations are held tight, and rates…. Go up. This time by a lot.

The carriers are making hay while the sun shines. However, are the carriers being a tad greedy? Well let’s see. Here are a few things working in their favor to make them record profits; that make the level of the increases even more difficult to accept:

1.      Contract Rates were fair. Given the pandemic and the clear indication of the economic downturn, importers could have pushed for much larger decreases on the 2020-2021 fixed rate contracts. The common theme for this year’s negotiations seem to be “let’s all get along and make a fair deal.” So carriers didn’t exactly take it on the chin.

2.      Fuel is at an almost record low. BAF levels are way down. And since most BAF levels are either negotiated and published quarterly or for some contracts, annually, the levels that were initially agreed to were much more advantageous to the carriers. And remember IMO2020 (the new 2020 low sulfur fuel that carrier now have to use per a world-wide agreement) that was going to cost the industry upwards of $15-20 Billion? That fuel is down too. So while some carriers are still charging their own version of a new BAF for this new fuel, the impact to their bottom line is substantially less impactful.

3.      Charter rates have tumbled. Many of the vessels in rotation are actually owned by charter companies and their rate levels are down over 50%. In some cases, they are below breakeven. So again, carriers that are utilizing charter contracts, are putting major money into their wallets.

4.      Forecasting remains a mystery for many customers and allocations are being strictly adhered to. As long as carriers are not receiving strong and solid forecasts, they will keep capacity increases at bay. And with the limited capacity and a higher volume of bookings, they are strictly enforcing customer allocations. All BCO (Beneficial Cargo Owners) and NVO/forwarders have their annualized contracts divided by 52 weeks. This sum is then the number of TEUs (twenty foot equivalent units) that each customer is allowed per week at the lower, fixed rate level. Any additional need for space is charged at either the Spot rate level or with a sizable Peak Season surcharge. 

So rates will remain high for the foreseeable future. Will the carriers hold capacity? Yes. Will they more than likely attempt to push through even more rate increases in the next month? Oh yes. Will this article give you some thoughts, ideas, and items to talk with your carriers about? I hope so.