Ocean cargo carriers plan to restore rate “integrity”
February 09, 2012
As 2012-13 contract negotiations begin, container shipping lines in the transpacific are readying themselves for tougher bargaining.
Transpacific Stabilization Agreement (TSA) spokesmen said they face estimated 2011 losses in “the billions of dollars across their global networks, including the transpacific trade.”
David Jacoby, President of Boston Strategies International, told LM that vessel overcapacity was contributing the carrier’s weak earnings.
“Too many vessels have been on order, and the rates have softened as a consequence,” he said. “Carriers will have to reverse that trend in a variety of ways.”
TSA carriers are recommending a second, across-the-board guideline rate increase of $300 per 40-foot container (FEU), effective March 15, 2012, following on an initial increase successfully implemented on January 1. The March general rate increase (GRI) is intended to bring Asia-U.S. freight rates back up to near 2011 contract levels, establishing a baseline for upcoming contract negotiations. TSA cited recent investor filings and press reports affirming industry losses, and stress that a further increase is critical to carrier viability going forward.
The Agreement’s 2012-13 recommended guideline revenue program, to take effect no later than May 1, 2012 for all tariff items and service contracts, will raise rates by a minimum of an additional $500 per FEU for cargo to the U.S. West Coast, and a minimum of $700 per FEU for all other destinations. TSA lines also indicated that further additional revenue and cost recovery initiatives would be considered for later in the year, after a review of market conditions and outlook for the second half of 2012.
Lastly, carriers reaffirmed the need for 2012 service contracts to apply per formula rate increases for all equipment sizes, and to provide for collection of full, floating fuel surcharges and other applicable cost-based ancillary charges.
‘The erosion in transpacific rates during 2011 has been well-documented and dramatic,” said TSA executive administrator Brian M. Conrad. “If carriers adopt a marginal increase that only partially offsets huge losses as costs continue to rise, the result is another 18 months of losses. This year in particular, rate recovery must be meaningful in order to maintain service levels and, ultimately, carrier viability.”
Conrad cautioned customers not to assume winter season spot rates on isolated route segments should set contract pricing through mid-2013. “While there may be excess global capacity, infrastructure constraints continue to limit vessel size and utilization,” he said. On the cost side, he added, bunker fuel prices have exceeded $700 per metric ton since the beginning of the year, and West Coast prices in particular are approaching the record levels seen in mid-2008. In addition, improved employment, income, housing and consumer spending numbers suggest improved demand in the coming year.
“There has been a lot of uncertainty in the market and we should not assume the challenges are behind us,” Conrad added. “Still, indications look generally positive for a recovery in the trade, making it all the more important for shippers and carriers to coordinate their forecasting and plan for contingencies, and for carriers to adequately manage and recover their costs.”
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