Ocean carriers hold all the cards in contract talks with shippers
February 25, 2021
(American Shipper) It’s annual-contract negotiation season for U.S. importers — and the hand they’ve been dealt couldn’t be worse. The deck is heavily stacked in ocean carriers’ favor.
Incredibly, Asia-West Coast spot rates are now nearing a base rate of $5,000 per forty-foot equivalent unit (FEU), not including a few thousand dollars of extra charges slapped on top. There’s talk that spot rates could stay strong until Q4, if not 2022.
Now is the time U.S. shippers negotiate annual contracts, which are usually finalized by May. The risk to shippers: If they don’t agree to much higher long-term rates than they’re used to, they could be even more exposed to spot rates, which would cost them even more.
The market “is beyond good for shipping lines and equally so on the other side, painful for shippers,” said Patrik Berglund, CEO of Xeneta, during a presentation on Tuesday. Xeneta collects data from forwarders and shippers on short- and long-term ocean contract rates.
“The carriers are seeing a substantial uptick in their long-term contract [rates] as we speak,” reported Berglund. “This has led to a situation where even a lot of big-volume players [on the shipper side] have seen increased spend. Some of them have not been able to conclude their RFQs [request for quotations] and have pushed them back because the spend increase they’ve seen has been too significant.”
What’s particularly unusual is that rate increases are not just high for average long-term rates. They’re also high at the bottom end of the range — i.e., rates paid by the largest shippers.
“Everybody is facing a significant cost increase,” Berglund said. “That’s different than anything I’ve seen in my 15 years in the industry.”
Conundrum for import managers
“The problem is that you have procurement and logistics people responsible for these contracts internally who are facing 40%-70% cost increases,” Berglund continued. “They have a huge conundrum in justifying that. Because the traditional challenge to a logistics department is a 5% reduction year-over-year.
“We’re at such a high historical level that it’s the worst possible time to go to market [negotiate a contract]. There is such a seller’s market that the carriers can basically do as they please.”
He advised shippers to “position themselves so they can go back and renegotiate later in the year. Make sure you’ve negotiated a validity period that allows you to go back and drive some of those costs down to a bit more normalized level.”
He also pointed out that carriers “are trying to drive volumes over to the short-term markets because of the profits there and the yields that are so attractive.”
“There is now a massive delta between your contracted rates and your transportation budget,” explained Berglund. “Because in order to get stuff moved, you can end up being pushed into the short-term market.” Furthermore, “there’s an additional $1,500-$2,500 [per FEU] surcharge in many cases in order to get things moved.”
To continue reading this article: https://www.freightwaves.com/news/ocean-carriers-hold-all-the-cards-in-contract-talks-with-shippers
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