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August 6 2018

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62 The Journal of Commerce | August 6 2018 www.joc.com Trading Places Peter Tirschwell US IMPORTERS ARE facing a perilous peak season in the trans-Pacific this year, with many likely to be forced to pay significantly higher rates to get goods onto ships that in many cases are nearly sold out. Carriers in certain cases are holding the line on weekly mini- mum quantity commitments (MQC) as they have done in prior periods of tight capacity, meaning that any given shipper will be allocated only one week's worth of capacity out of their total annual MQC. As an exam- ple, with a total annual commitment of 1,000 TEU, just 20 FEU or 1/50th would be allowed. Any volumes over that, some carriers are saying, will need to be moved at current spot rates that today are about 50 percent higher than the roughly $1,000- to 1,200- per-FEU rates from China to the West Coast that many eastbound contracts settled for in the contract year beginning on May 1. Since hit- ting a 2018 low of $945 to the West Coast, spot rates tracked by the SCFI index were $1,616 on July 20.. "We're counseling our customers to prepare for a tight space situation from mid-July through September," Simon Munn, vice president of full container load product and capac- ity management at DHL Global Forwarding, told my colleague Bill Mongelluzzo in July. What are the implications of this? There are several. It's a reminder that conditions change quickly in transportation markets, and such changes aren't easily foreseen. An annual contract with a carrier is no guarantee of capacity when you need it, espe- cially when conditions tighten. Carriers are much maligned for their chronic inability to make a decent return and for allowing others such as forwarders to profit by using their ships. That said, carri- ers hold all-important cards as the ultimate providers of capacity, and they flex their muscles occasion- ally. They are all too easily written o¡ due to the commoditization of the carrier business and the prog- ress forwarders are making in technology. Carriers might struggle to main- tain a general rate increase (GRI), their sometimes clumsy e¡ort to drive up prices laughed o¡ by the market. They can withdraw capacity, however, and that will have a mater- ial impact on the market. You can see it happening in the trans-Pacific with the recent announcements of the 2M Alliance suspending a weekly service e¡ec- tive July 4 and the THE Alliance's cancellation of a service in August. The capacity reductions amount to nearly 7 percent without consid- ering the Zim/2M rationalization of Asia-US East Coast service that by itself will result in a 5.2 percent reduction in total capacity in that trade, according to industry analyst Alphaliner. Any lack of pricing discipline becomes immaterial when there is simply no space to be had. That's why e¡ectively managing carrier relationships, more of an art than a science, is incumbent upon anyone — forwarder or BCO — that is on the buy side of ocean con- tainer space. Building credibility with carriers may be a laborious, drawn-out process, but, strategically, it should be ingrained in the think- ing of anyone on the buy side. Little things such as consistently providing accurate forecasts up to eight weeks out, tendering actual container loads against confirmed bookings, living up to MQCs, and building long-term personal rela- tionships with key people at select carriers can make a di¡erence when space tightens. Educating internal stakeholders and senior manage- ment as to the rationale for proac- tive carrier engagement can ensure the needed support. And that typically happens as a result of carriers' acting in self-pres- ervation. Until such day as this business fundamentally changes, carriers will struggle to maintain pricing discipline when even a whi¡ of overcapacity exists, but when they start losing money or believe they are under threat. President Trump's threatened tari¡s are one such risk. They would hit all China-to-US trade if fully implemented, and would force carriers to take matters into their own hands. Few around in 2010 will forget when carriers, reeling from multibillion-dollar losses in 2009, laid up record capacity and were unable to handle an unanticipated surge in trade. It's noteworthy that the topic of technology, which can dominate discussion in this market, is largely a non-factor when confronted with the need to manage the impact of blunt-force actions such as capacity withdrawal and the resulting mar- ket impact. But there are opportunities for carriers to think and act di¡erently. The New York Shipping Exchange model of di¡erentiated pricing allows carriers to price dynamically like airlines do based on price levels the market will support at any given moment, versus the bull-in-a-china- shop approach of the tradewide GRI. The latter is rarely successful except when coupled with underlying capacity tightness, a circumstance that occurs all too infrequently. JOC email: peter.tirschwell@ihsmarkit.com twitter: @petertirschwell Red sky at morning Conditions change quickly in transportation markets, and such changes are not easily foreseen.

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