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Feb.6, 2017

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10 THE JOURNAL OF COMMERCE FEBRUARY 6.2017 COVER STORY US SHIPPERS NEGOTIATING annual trans-Pacific service contracts face a potentially no-win scenario this year: Lock in capacity now at higher rates than just weeks ago, or hold off until the spring when alliances will clarify their networks and hope carriers' pric- ing discipline erodes. In current contract rate discussions, container lines are offering shippers rates that are $100 to $300 higher than at the beginning of the year. Carriers are emboldened by eastbound spot rates that are nearly triple what they were in June, high vessel utilization, and robust restocking ahead of the Chinese New Year shutdown of Asia factories in late January. Financial markets perceive a turn- ing of the tide, and in recent weeks have bid up prices of container lines' stocks; Hapag-Lloyd's stock is up 52 percent since Dec. 1, while Maersk Group is up 15 percent. "Looking to 2017, liners are now in a better position to negotiate higher contract rates for the year ahead, though we note that overall the ratio of spot cargo carried by liners has increased significantly in recent years," according to a Morgan Stanley research report issued Dec. 23. "We also note that if liners can maintain these gains beyond Chinese New Year (Jan. 28), they will be in a stronger position for the annual trans-Pacific contract discussions in the spring." Carriers are offering 2017 to 2018 contract rates of roughly $1,600 to $1,800 per 40-foot-equivalent unit to the West Coast and about $2,450 per FEU to the East Coast, according to interviews with analysts, carrier executives, and importers. Container lines are still stinging from the prior contracting season when contracts for the largest retailers fell below $750 per FEU in some cases. In early January, ocean carriers were targeting contract rate levels of $1,500 per FEU to the West Coast and $2,800 to the East Coast for beneficial cargo owners looking to sign early. West Coast contract rates of about $1,600 per FEU for the larg- est importers look achievable, said Ed Zaninelli, a consultant and former Orient Overseas Container Line executive, "due to the way things are working, and the spot market right now." However, with carriers likely to increase vessel sizes to the East Coast since the Panama Canal was enlarged last June, there will be more competi- tion among carriers for market share on all-water services to the East Coast. Zaninelli said $2,450 is a realistic contract rate on East Coast services. When final numbers are tallied, the container shipping industry Some trans-Pacific BCOs are betting that carriers' current discipline on pricing will erode by spring. Will the strategy backfire? SHIPPERS' RATE GAMBLE By Bill Mongelluzzo and Mark Szakonyi

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