The current regime gives every indication that there will be an uptick in the contract rates for Trans-Pacific routes. To add to the intrigue is the widespread belief that the perks will also fall. This is a result of the fact that the container lines have a new self-belief that they can control spot rates and therefore feel that they can take much tougher positions than before without any real consequences. The information that is coming up is based on trends and also individual incidents that have had a momentous impact on the industry as a whole. In an industry where personal negotiations and relative power positions count for everything, this is a move that could potentially destabilize the market if not handled with tact and care. That is why many are currently reviewing their contractual terms and obligations for the 2016 and 2017 consignments.
What it means for the Industry Movers and Shakers
Gone are the days when offers and discounts were the order of the day. Instead, everyone can now expect hard bargaining and stringent tradeoffs that are based on the bottom line as well as the possibilities of securing a competitive advantage in the long run. The most likely affected industry will be that of containerized goods from the Asian sub-continent. Some of the old protocols that are bound to disappear include the offer of free chassis and detention. Brian Conrad of Transpacific Stabilization Agreement argued that the rate increments are necessary in order to provide some level of sustainability within the industry. He warns of significant increments in the contract rates in the region of at least $500 per unit.
A group discussion of industry insiders reveals another important dynamic: the players are desperate not to have another Hanjin crisis where a major actor in the industry goes down partly due to unsustainable offers to business partners. It remains to be seen whether the price increments will not put off potential entrants into the industry hence leading to overcapacity. That is why some shippers have decided to budget for minor rate increases but meanwhile doing a lot of background work for the express purpose of ensuring that they are not pushed out of the market in case the spot rates spike.
A Situational Analysis and Review
In order to understand what was happening before, it might be useful to consider the example of a 40-foot container that moves from the East to the West Coast. A booking for between May 1st, 2016 and April 30th, 2017 was anywhere between the $1800 and $2000 price range. However, there were instances in which some carriers and beneficial cargo owners were able to negotiate rates that are as low as $750 per FEU to the West Coast, going up to $1500 for the return journey.
For comparative purposes, we might consider the spot rate from Shanghai to the West Coast in the USA which saw weekly drops of up to 2.2% meaning that the journey could be booked for as low as $1990. The rate to the East coast experienced weekly falls of up to 1.5% which meant that it could cost about $2793 for a test case. The weekly decline in the past year was as high as 20% for trips to the West Coast and about 14.5% to the East Coast. This was in the wake of the resumption of the trans-Pacific normal trade patterns after a peak season.
Making Sense of the Figures and Patterns
Industry experts indicate that there is a high likelihood of the disappearance of giveaways altogether regardless of how they were individually configured. Carriers are going to make hard-nosed decisions about costs and benefits even with long term customers who are known for supporting the industry during times of stress. There might instances where old contracts are reviewed for best value. Many will be watching the South Korean courts keenly in order to see how the Hanjin case is resolved and if there are long-term implications for the industry which have not already been indicated in the short run. The carrier already filed for bankruptcy on the 31st of August. One of the good things to come out of the crisis is that the industry will be better prepared for a similar problem in the future.
Hanjin was not only a wakeup call for industry players but it also acted as a baptism of fire for those that had not yet really felt the squeeze in their operations. The case left more than half a million containers and 90 ships in limbo as they waited for money to pay for unloading costs. Greg Tuthill of CMA CGM Americas argues for a much more cautious approach to contracting. Specifically, the shippers should do a quality control and risk assessment for any ocean carrier that they intend to do business with. Such a process may be as detailed as putting together a contingency plan that considers all the possibilities. Where insurance is available, it might be advisable to take it up as an additional protective measure.
Industry-Wide Responses and Reconfigurations
The preferred choice was consolidation in order to create very large entities that were capable of withstanding the lean times. A case in point is the announced merger of NYK Line with MOL. Another less drastic measure is to engage in strategic security alliances which are based on rational choices and also the best practices within the industry. Added to this is the need to engage in due diligence as part of contract preparation. The good times of low rates and friendly discounts is unlikely to return in the short run. However, it is clear that the industry has enough resilience to overcome the current crises. There is unlikely to be a wholesale collapse of the industry and even Hanjin might be able to get another life after it has gone through the rigors of the court system. The problems have doused the industry with a touch of realism that is bound to be very useful in the long run.
