Contract negotiations in the transpacific trade have started between container lines and their customers, but the difference this year is that both parties are coming at each other from mutually exclusive positions.
Shippers want space guarantees and better service this time around, while the carriers want better freight rates.
The problem is that container lines are trying to maintain a balance between supply of capacity and market demand. It is a delicate and dangerous business that makes it impossible for carriers to guarantee space to any but their largest customers, because even the smallest spike in demand will use up all available space.
It is a particular serious problem this year. There is a concern that the surge in business in the first quarter is merely restocking by US retailers and will slow down once depleted inventory is replaced. With US consumer spending still in the doldrums, the second half of the year could easily be a dismal one.
As OOCL chief financial officer Ken Cambie gravely told reporters while announcing his group’s US$401 million loss last week: “The degree of uncertainty for the second half we don’t think should be underestimated.”
With such an uncertain outlook for the year, no carrier is going to bring back idle capacity, no matter how big the demand spike gets.
So forget space guarantees – carriers will not be able to put that on the table.
What about better service? Also not going to happen in current market conditions.
Having your booked cargo rolled because the ship is full is not in the good service column, and neither is adding 10 days to your transit time because the carrier is slow steaming its way across the Pacific.
So shippers can take a hike, but what about the carriers? Will they get what they want?
What the carriers really, really want are freight rate increases. Forget slow steaming, cutting overheads, slashing lifting and voyage costs or taking Haagen Dazs off the crew menu. The only thing that will get carriers back into the black are better freight rates.
The Transpacific Stabilisation Agreement estimates that the lines need to add US$800 per FEU to the West Coast and US$1,000 per FEU to the East Coast to make the services work.
We don’t believe those increases have a hope of being achieved. Instead, the carriers will arrive at the now standard mutually unacceptable compromise in which the shippers pay a bit more and the lines lose a bit less.
Call it a Mexican standoff with transpacific characteristics.