12:59am 19th July 2021
Cargo owners warned they may need to renegotiate upwards any ‘too good to be true’ contract prices in the current inflated market if they want their cargo to move – unless they are one of the giants like Walmart
Shippers who are feeling pleased that they have negotiated excellent rates with ocean freight carriers should be wary in a market where carriers are increasingly prioritising high-paying cargo over contract rates with anyone other than their biggest customers, according to container shipping consultant Lars Jensen, CEO and founder of Vespucci Maritime.
“Sometimes it is a matter of being realistic. It could be a case that a shipper struck a fantastic deal four or five months ago with a carrier. But that rate is now $10,000 lower than the spot market,” he observed.
“Ask yourself, how likely is it that that cargo will be loaded? There is a very high risk that it will not be. Go back to the carrier if your deal is too good to be true. Unless you are one of the giants like Walmart, your cargo is not going to move. The carrier will give people paying $15,000 priority.”
Jensen was speaking in webinar last week entitled ‘Surviving Peak Freight: Challenges, Opportunities and Strategies’ organised by Zencargo, a ‘digital-first freight forwarder’.
He said that large cargo owners have materially better conditions than the smaller ones and some will be using this for strategic commercial advantage. The larger importers can absorb the costs. The smaller ones, who have no choice but to increase prices, will lose market share or be driven out.
“Shippers are not in the same boat on this,” highlighted Jensen.
He said it was incredibly important, especially for smaller shippers “to get a good handle on the fact that not all cargo is equal. They need to be flexible about the stuff that can wait”.
And they need to build in much larger buffers than usual. The earlier out they can commit to volumes for, say, the period October to January, the greater chance they will get it.
Another stress he identified is that of the logistics manager of an importing company who has to try and explain the situation when the senior management “is presented with a freight bill that is five times normal – and even after that, the freight does not move”.
In most years, freight is not a major issue for the senior managers – it should just work. But that is clearly no longer the case currently.
Enormous pressure on logistics managers
“So, there is enormous pressure on logistics managers – they need to present a clear and compelling case of the market situation to their commercial managers,” Jensen noted. “They are not poor at their job – it is just market conditions.”
Jensen said we have never had a situation where structurally there was insufficient capacity. “The norm for decades was that cargo might get pushed back for a week or two, but never anything like this. So, the world’s supply chains are not designed to cope with this situation.”
Rates are currently sky high, especially on the transpacific and Asia-Europe trade lanes, because there is too little capacity to meet current demand levels. But it is not that there are not enough vessels, but instead that congestion has effectively reduced that capacity. “Every conceivable vessel that can sail is sailing. The problem is delays,” Jensen noted.
Good news and bad news
He said there was good news and bad news. The bad news is that port congestion is not getting any better, so it won’t be solved anytime soon. The good news is that we don’t have to wait years for new ships to be built in order to increase capacity.
Jensen said there are some examples of forwarders chartering their own vessels or using trucks to move cargo between Asia and Europe – “but this is a tiny fraction and will not structurally solve anything”. Instead, the only thing that can provide a balance at the moment is lower demand – when shippers decide they can no longer afford to pay the rates, then demand drops.
Price rises cascade to secondary trades
He also has further bad news for shippers. “Anyone moving on secondary trades needs to brace themselves for a potential sharp increase in rates in the coming months. As vessels come off charter, they will be moved onto transpac and Asia-Europe, where owners can get five to six times normal charter rates. Smaller vessels will be pulled out of regular trades and, as you can’t conjure vessels out of thin air, rates will go up here as well.”
But he was willing to offer some hope by looking at the “absolute best-case scenario. If nothing unpredicted happens from now on, we would see a gradual resolution of the bottleneck problems.”
In terms of timing, he suggests comparing it with the labour dispute on US West Coast in 2015 “where we ended up with a massive queue of ships off the Californian coast. From the time the dispute was resolved until the resumption of normal trade took about six months.”
He concluded: “If we were really optimistic, it could be the second half of November or December, the world could look something like normal in operational terms – though not in relation to rates.”
As reported last week, Jensen also highlighted that a battle of “shippers vs shippers” for equipment and cargo slots was helping to drive up freight rates and being used strategically by some shippers to compete with their rivals.
“There are clearly cargo owners now, particularly bigger ones, that have materially better conditions than the smaller ones,” said Jensen. “I also have a strong sense that some of these larger cargo owners will be using this for strategic competitive advantage.”
Jensen said that those shippers with high volumes were more likely to have their volumes shipped and at better rates. This meant a large retailer fighting a small retailer in the same line of business could use a freight rate that is $5,000 lower than its competitor even if the larger one is still paying far above what it was paying last year.
The smaller competitor that cannot absorb the cost will either lose market share or be driven out of competition.
And rates would continue to keep rising as long as this competition occurred and capacity was insufficient for demand.
By Yvonne Mulder
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