The 15 shipping lines that are members of the Transpacific Stabilization Agreement (TSA) have adopted guideline rate and ancillary charge adjustments that they intend to apply to all new and renewed service contracts for cargo moving from Asia to the United States.
The group, which includes some of the largest carriers in the world, is recommending rate increases of $800 per 40-foot container (FEU) to the U.S. West Coast, $1,000 per FEU via all-water to the U.S. East and Gulf Coasts, and $1,200 per FEU for intermodal shipments via all coasts.
The hefty size of the proposed increases can be gauged to some extent by looking at the Shanghai Container Freight Index, in which 30 panelists—15 from the ranks of carriers and 15 from the shipper and forwarding community—estimate spot rates from Shanghai to different regions of the world. Last Friday that estimate was $2,727 per FEU to the U.S. West Coast and $3,732 per FEU to the U.S. East Coast.
TSA said the recommended increases are for shipments from all Asian origins, to become effective with service contracts, from mid-October going forward. This includes “early bid” contracts concluded in late 2012 and early 2013, as well as standard contracts which typically take effect on May 1, 2013.
TSA said members also reiterated the need for full fuel cost recovery, including the bunker charge, the recently adopted low-sulfur component to address the higher cost of using cleaner-burning fuels within North America coastal zones, and a new, simplified intermodal fuel component – a single component for all inland destinations that will be incorporated into the bunker charge and will replace the current inland fuel surcharge, effective Jan. 1, 2013.
TSA Executive Administrator Brian M. Conrad said container lines have faced a steep uphill climb throughout 2012, to reverse dramatic revenue losses as steeply discounted rates in key lane segments crept into 12-month contracts.
He warned container shipping companies “are potentially facing a kind of perfect storm next year, and heading into 2014.
“Just as global markets see greater certainty and trade growth accelerates in a meaningful way carriers will be facing capacity shortages, weak balance sheets and tight credit. It looks increasingly likely that reinvestment will turn on a sustainable rate structure,” Conrad said.
“The eastbound transpacific is a dynamic, highly competitive market,” he added. “Rates negotiated for one route or commodity too easily go viral, spreading to all routes and commodities. That may often be the nature of markets, but it does not necessarily mean those rates are anywhere near economically sustainable for lines carrying the cargo.”
Conrad said the proposed rate increases are badly needed because overall rate levels fell so far earlier in the year. He added that interim general rate increases taken during 2012 were each only partially applied as individual contract terms or negotiations with customers allowed.
As a result the cumulative revenue effect, while helpful, was less than it appeared.
“TSA lines are mindful, going forward, of the need to avoid the rate erosion that typically occurs during the winter season, as contracts expire or open for renegotiation as their service commitments are met,” Conrad said. “It is critical that, between individual lines’ announced September rate initiatives and the TSA guideline adjustments, there will be a reasonably compensatory baseline in place for the coming contract year, beginning with early contracts coming up for renewal.” Average freight rates, according to TSA’s revenue index, remain at levels seen in early 2011 despite subsequent increases.
TSA members estimate most new vessel capacity deployed in the transpacific trade during 2012-13 will be absorbed by a combination of steadily rising demand, slow-steaming and other factors.
TSA said independent analysts, such as Alphaliner, expect a sharp falloff in new vessel orders after 2013, particularly as lenders and investors rethink long-term capital commitments in an industry generating weak returns.
TSA said “that potentially leaves vessel space and equipment in short supply beginning in 2014-15.”
At the same time, TSA said “aggregate inland transport, equipment repositioning, cargo handling, feeder ship and maintenance and repair costs will rise by 8 percent over 2012-13, putting further economic pressure on carriers. These costs are likely to rise with the signing of new labor agreements in coming months.
“Full recovery of fuel-related costs also remains a key issue for carriers, as bunker fuel prices remain near $700 per metric ton; as demand has spiked for low-sulfur fuel, which commercial ships are now required to burn within 200-mile North American coastal zones,” TSA said.
TSA said recent diversion of East and Gulf coast cargo due to concern about whether the International Longshoremen’s Association and employers would be able to reach agreement on a new contract by the end of this month also increased intermodal costs.
Last week the ILA and the U.S. Maritime Alliance, the group representing employers, agreed to extend their contract for 90 days, easing concerns that there might be a strike or lockout at the end of September if a contract was not reached.
TSA carriers are recommending that on Jan. 1 that fuel-related charges be consolidated under the bunker charge, for greater simplicity and improved collection. This will include conversion of the existing three-tier inland fuel surcharge into a single bunker component, also effective Jan. 1.
TSA said “the ongoing combination of increased operating costs and only slight improvement in revenue, has taken a significant toll on container shipping lines. Average carrier operating margins have been negative since the beginning of 2011, bottoming at minus 12 percent in first quarter 2012. Of the top 17 transpacific lines, 11 have debt-to-cash ratios exceeding 6-to-1, and six have ratios exceeding 8-to-1.”
TSA members include APL, China Shipping, Maersk Line, CMA-CGM, MSC, COSCO, "K" Line NYK, Evergreen, OOCL, Hanjin, Yang Ming, Hapag-Lloyd, Hyundai, and Zim. - Chris Dupin