The Transpacific Maritime Conference (TPM), sponsored by the Journal of Commerce, was held virtually last week for the first time since its inception over 20 years ago. Normally held in Long Beach, CA, within view of the port complex, the event normally attracts more than 2,500 people annually. It also ushers in the unofficial start of contract negotiations prior to the traditional May 1 start date. The conference serves as both a communication and networking forum for much of the maritime community, with only the face-to-face aspect missing in the virtual environment.
There was a lot to discuss this year, as we continue to recover from the massive disruptions that rocked the industry during the past 12 months, as brought on by COVID. We went from business as usual in the first quarter, to massive service cancellations in the second, followed by demand shock in the third, and ultimate deployment of all available vessels in the fourth quarter. We started 2021 with lingering shortages of containers made worse by the record number of containerships at anchor in Los Angeles and Long Beach harbors, which effectively extended port dwell times two weeks beyond normal.
During the demand period, ocean carriers raised rates to new heights and in some cases, tripled what they had agreed to the previous May. With record month over month demand continuing to flood cargo into the United States, there has been little pull back in rates so far, which signals carriers’ position of strength going into contract negotiations. At the same time, service levels have never been worse, recently falling to 13% reliability according to some studies. The high rates are likely to continue into the new contact period, as carriers work through their issues of too much cargo to move, on not enough ships—that are sitting at anchor too long—and without enough empty containers to handle the demand.
Changes in Contracting
There were some common themes repeated during TPM this year by the CEOs of the major carriers in attendance. The shift from a buyers’ market to sellers’ happened swiftly and decisively in proportion to the soaring demand. The impact will be felt with more than just rate hikes, however. Here are the other areas of contracting that may see some significant changes come May
- Destination Free Time will be reduced. Carriers are looking to get quicker turns on their equipment to get back to demand areas.
- GRIs and Peak Season Surcharge (PSS) will not be waived. Carriers are looking for pricing flexibility particularly in periods of higher demand.
- Capacity Management will continue. With less carriers in the mix today, it is easier for remaining few to quickly agree when to pull capacity out to sustain higher rates.
- Minimum Quantity Commitment scrutiny. Carriers will closely monitor and enforce MQCs directly proportionate to weekly allocation.
- Forecasting requirements. Carriers will be asking for rolling 6-week forecast updated every two weeks, to effectively manage allocation.
- 2-way penalty clauses. Carriers will give space and equipment guarantees or pay a penalty, in exchange for no-show penalties paid by clients.
- Premium Service Charges. Introduced by carriers last year in an effort to prioritize overbooked cargo, for those times when cargo positively must ship as booked.
There is no doubt these changes are not good news, particularly when service levels remain poor. Mohawk Global is going into our contract negotiations knowing that the carriers are in the position to command some or all of the changes, this year.
Where we can give some concessions, like free time for example, or front-loading PSS, we will do better on the overall rate. A deeper understanding of the changes this year, puts more importance on communicating with carriers to promote partnership and secure allocation, than it is to get the lowest rate in the marketplace.