Early indications from the annual contract negotiations being closed between beneficial cargo owners and carriers point to shippers paying up to three times as much as last year in principal trade lanes.
Unsurprisingly – given the levels of congestion in all major trade lanes – shippers are sucking up heavy rate increases across the board in a bid to secure leverage in the frenzied scramble for capacity.
Early data from rate benchmarking site Xeneta, has underlined the degree to which shippers are ready to lock-in some runaway rates achieved on the spot market in the last 12 months.
According to Xeneta’s MD Patrik Berglund average long-term contract rates between Asia and the US West Coast were around US$2,030/FEU, up 33% on last year’s figures according to data published by the Norwegian data specialist.
Average increases of 192% were being felt on long-term contracts between Asia and North Europe with rates reaching US$3,904/FEU. The average increase was 30% on the backhaul leg from Europe to Asia, according to Xeneta.
Shippers desperately seeking certainty in a market where average spot rates reached more than US$7,500/FEU from Asia to Europe, when including congestion surcharges, are preparing for logistics budgets to go through the roof in 2021.
Retailers such as Dollar Tree have already warned investors they expect to pay as much as US$80-US$100 million a year in extra logistics costs in 2021. These rates have so far been accommodated by retailers who have seen soaring demand and stronger pricing bolster profitability.
“Shippers for the time being have a simple, but unpleasant, choice;” says Lars Jensen CEO of Seaintelligence Consulting. “They can choose to sign contracts at rate levels much higher than what they have had thus far, but then have a high likelihood of getting space and equipment. Or they can choose to go for the spot market hoping rates will come down quickly – which is a strategy that may work if they are lucky, but may also be a strategy which leaves their cargo stranded with no means of getting moved.”
Shippers have been battered throughout much of 2020 and early 2021, after being caught off guard by runaway demand for goods fuelled by free-spending US consumers flushed with stimulus cheques and a series of supply-side shocks that have placed container lines in arguably the most powerful position ever in the build-up to annual contract negotiations.
Making the most of their advantage and the consolidation in the industry over the last decade, carriers have forced through increases across the board, including significant increases for their biggest customers who have typically commanded much lower rates at the lower end of the price spectrum.
“Not everyone is going to be spending US$7,500 to ship a box. We are talking about a spread of US$5,500 between the higher prices and the low prices,” said Berglund. “This is unprecedented. There are challenges to get enough volume moved at these high rates but even the market low is up 85% so some of the really big volume players are facing substantial budget increases,” said Berglund.
The industry has struggled to recover over the last 12 months with congestion and box shortages creating the worst reliability levels in the industry’s history at a time when it’s hitting customers for record freight rates. Reliability to the US west coast has fallen to a record low of 11% in the last three months.
A Freightos survey of shippers and third-party logistics companies involved in the ongoing negotiations indicated that many shippers were crossing their fingers for a softening in spot rates rather than locking themselves into long-term rates twice as high as last year.
“From what we’ve seen, as spot rates continue to stay extremely elevated – Asia-US West Coast rates are triple their level a year ago, and East Coast rates increased another 8% to US$6,248/FEU since the Suez incident – carriers are able to command contract rates well above last year’s levels,” said Freightos research lead, Judah Lavine.
“We found some are rushing to secure long-term contracts at higher rates in order to secure space and some form of stability, but we found that, compared to three years ago, BCOs are planning to rely much more on short-term tenders to avoid being locked into very high annual rates.
“They are more than doubling the share of volumes they sent using short-term contracts in 2018,” he said.
Shippers have been smarting at the deterioration in service levels in the last six months and paying more on long-term contracts is unlikely to fix that particular problem, said one shipper.
“One thing for sure: no carrier is guaranteeing reliability,” said a logistics executive of a major US food shipper that declined to be named. “For supply guarantees, there are several new models in the market but results are still being tested under actual circumstances,” she said.
“Carriers, to a larger degree, are pushing for contracts with high rates, in essence telling shippers that if they want to be sure to have space and equipment for their cargo, this is the way to get it,” said Larsen. “The Suez incident has served to simply emphasise what was already a concern amongst the shippers: Can you be sure there is vessel space and equipment when you need it? The short answer, for the coming period, is “no” – simply because of the bottlenecks we see in combination with the demand boom especially on the Transpacific.”
Freightos research suggests that shippers will rely more on 3PLs to tackle this issue. “Nearly half report plans to rely on some redundancy and contract with more carriers/3PLs than last year, as a strategy to have more options and better reliability when capacity is tight,” said Lavine.