By Eric Johnson
In late January, American Shipper
surveyed shippers on the transpacific eastbound trade and the results were, as expected, quite enlightening.
But perhaps the most intriguing number to emerge from the latest Transpacific Pulse survey was this: shippers who don’t lock in their rates on the trade for the year were five times more likely to have their cargo rolled in Asia than those that did.
For all the talk about shippers and carriers and truly becoming partners, here is tangible proof that deep, long-term agreements manifest themselves in better service. Only 12 percent of shippers whose rates were locked in on annual contracts had experienced rolls in recent weeks, compared to 60 percent of total respondents.
That gap most likely reflects the way third party logistics providers strategize on the eastbound transpacific relative to direct shippers. Only 2 percent of 3PLs surveyed said they had locked in their rates for the year, compared to nearly 30 percent of retailers.
That corroborates other American Shipper
research initiatives, which have shown that 3PLs are not proactive in locking in long-term rates with carriers.
“We found it interesting that 3PLs were least likely to lock in rates with the carriers,” said David Ross, director and transportation analyst with the investment firm Stifel Nicolaus. “We believe this either means 3PLs expect rates to fall this year or carriers expect rates to rise, or maybe both. Therefore, if rates fall, forwarders should be able to maximize their yields, whereas if rates rise, especially without a significant volume increase, forwarders should see 2012 margin pressure.
“Domestically, though, we’ve seen the transactional C.H. Robinson truck brokerage model — domestic forwarding, if you will — gravitate toward contractual rates with carriers and shippers over time. Today, that’s about half their business. But for the most part, we think it’s smart for the 3PLs to stay nimble, kind of like fuel hedging versus fuel surcharges. You can make more money with the former, but you can also lose much more money that way. For that reason, if we ever see forwarders locking in rates with the carriers, they are probably seeing something in the market with capacity that makes it a high percentage bet.”
Indeed, the bet that forwarders make is that their ability to spread risk (on both the carrier and shipper side) trumps whatever advantages may come from long-term contracts.
It is, of course, impossible to generalize across the 3PL/forwarder/non-vessel-operating common carrier (NVO) community. As Bob Connor, vice president of global transportation at Mallory Alexander, put it recently to American Shipper
, neutral NVOs have different strategies than integrated NVOs.
“The integrated NVO generally is working with its customers to try to develop a long-term relationship where ocean transportation is part of a broad transport solution,” he said. “The goal is to secure rates fixed for a longer period of time — minimally six months — and to provide the customer with multiple carrier options at a common price.”
But the most recent Transpacific Pulse revealed that most 3PLs and intermediaries are not doing this. In times of tightened capacity — such as when financially beleaguered carriers attempt to redress the supply-demand balance — repercussions will ensue.
Cargo rolls are one of those repercussions.
“The correlation between rolls and tight capacity makes sense but is interesting, because the rolls may actually imply overcapacity/lower demand levels in that the ships are waiting to fill up before moving,” Ross said. “The carriers are just limiting that capacity to make it seem tighter. This is the difference between what we call a fundamental (based on TEU capacity) overcapacity situation and an active capacity (based on TEU capacity chasing freight) situation.”
Whatever the cause of rolls, shippers should know that longer-term relationships, whether direct or through their intermediaries, lead to tangible, not just anecdotal service benefits. — Eric Johnson