Doubling rates in new contracts
Container lines have secured Transpacific service contract rates with midsize shippers at approximately double the rates from last year’s agreements:
2020-21 service contracts (expiring at the end of this month)
Midsize shippers agreed to rates of (approximately):
$1,300 to $1,400 per FEU to the West Coast and
$2,300 to $2,400 per FEU for all-water shipments to the East Coast.
Running from from May 1 through Apr. 30, 2022
Mid-size shippers have agreed to pay (approximately):
$2,850 to $3,200 per FEU to the West Coast,
$3,800 to $4,200 per FEU to the East Coast, and
over $5,000 per FEU for inland point intermodal shipments to interior hubs
As of April 21,2021, the average Transpacific rates in contracts of more than 88 days, signed in the last three months, were 76 percent higher than what they were at the same time last year.
Free Storage Allowance reduction will run up Demurrage Fees
Mid size shippers can also expect cost increases from an additional source. Carriers have tightened commercial terms, most notably, free-time allotment.
Depending on the circumstances, free storage time could sometimes extend as long as 30 days. Negotiations started with carriers indicating they would allow no more free time than the five days generally stipulated in contracts. But carriers ended up agreeing to allow 7-14 days of free-time allotment.
In addition, other typically lenient situations are tightening up. For example, in the case that the container terminals don’t have space available to accept empties, carriers often grant retailers an extra grace period if their truckers are temporarily denied the ability to return empty boxes to the ports and pick up import loads. Some carriers are no longer granting this extra grace period.
Capacity is the biggest problem
Along the Transpacfic trade routes, midsize shippers are in the most precarious predicament at the moment. Their core carriers do not have enough capacity to handle growing import forecasts and they can't manage to get new contracts with carriers they have not previously or regularly used.
Trans-Pacific carriers are left with trying to find a balance between accommodating exponentially increasing customer requests, while making sure they don’t book more cargo than they can actually handle. In order meet demands and to lower rates, shippers are requesting to increase their minimum quantity commitments by up to 40 percent over the MQCs in 2020-21 service contracts.
Shippers unable to secure the capacity they need directly from their core carriers should approach forwarders and NVOs with the understanding of such capacity restraints and be prepared to pay whatever it takes to secure capacity. Shippers in need of an expert agent can find one on the 7ConNetwork Agent Finder.
The causality of the Transpacific squeeze
US imports from Asia have been at record highs for nine consecutive months and show no signs of tapering off.
Price is much less relevant in this year’s contract discussions.
Some cargo owners learned that lesson the hard way, in their first round of negotiations. Many placed focus on securing favorable rates and therefore waited too long between rounds of their negotiations to realize that their focus should have been directed at securing capacity. Unfortunately, those who waited, to no avail, for spot rates to decline are now unable to secure enough space at contract rates to fulfill their requirements.
Idle equipment at the root of the damage
With equipment idle for such a long period, we’re faced with not only port congestion but also chassis and equipment shortages throughout the global supply chain. Hence, free-time reductions could end up costing carriers potentially millions of dollars more than they budgeted for in prior years.
All sizes of cargo owners scramble to lower their contract rates
The idea is that they can lower contract rates by committing as much volume as possible with their core carriers. However, these volumes have gotten too high. So high even, to the point where their core carriers can’t satisfy all the requirements of all of their regular customers. This is nothing but bad news for the cargo owners approaching carriers they had not shipped with regularly in the past. Reports indicate that these cargo owners are getting "rejected outright” by carriers.
Thus it has become extraordinarily difficult for midsize shippers to secure the capacity they need this year. All forecasts point to ever increasing transpacific imports this year, but midsize shippers will struggle to grow their business even with their core carriers unless they use forwarders within a forwarder network where they can achieve strategic procurement benefits.