April 1 Trans-Pacific GRI to Set Stage for Contract Rates
Shippers and carriers alike are paying close attention to the results of the general rate increase that liner companies are putting into effect today in the eastbound trans-Pacific trade.
The amount of the spot rate increase that carriers are able to nail down this week and keep over the next few weeks will play a role in the ongoing negotiations between U.S. shippers and their carriers on rates they agree to under the 2013-2014 annual contracts, which usually start on May 1. Spot rates play a role in determining contract rates in the trans-Pacific, but less of a role than in the Asia-Europe trade.
The annual contract rates will, in turn, play an important role in whether carriers can achieve profitability on the trans-Pacific this year.
Those contract negotiations are moving slowly, according to Jefferies shipping analyst Johnson Leung. "We think the eventual increase may be too small to help container liners to make money in the trans-Pacific this year, which may be complicated by sequestration," he said in Jefferies weekly research bulletin.
Today's GRI reflects the recommendations that the Transpacific Stabilization Agreement issued on Feb. 4 for increases of $400 per 40-foot container to the West Coast and $600 per FEU to all other destinations.
The TSA scheduled increases were to take effect when the trade is recovering from the Chinese New Year celebrations in Asia, during which many factories in China shut down for week. But demand has been slow to recover this year, with vessels on the eastbound trans-Pacific sailing at below 80 percent of capacity, according to Jefferies.
Leung said carriers are trying to achieve annual contract rate increases of $800 per 40-foot-equivalent unit to the U.S. West Coast, but said he had heard that the level under discussion in contract negotiations is already down to about $100 per FEU.
"We think the increase may turn out to be way below $100 per FEU by the time the contracts are actually signed at the end of April," he said.
Carriers need an increase of $200 to $300 per FEU to break even on the trade, "so $50 per FEU or no increase would be disappointing."
To make matters worse, Leung said trans-Pacific operating costs could increase this year just because of the budget sequestration in the U.S., which could extend the port stay of vessels and dwell time of shipments at ports because of fewer resources from government agencies.