Predictably, the art of reading crystal balls has disappeared, and with this complete lack of future visibility, maybe it is time annual contract negotations went the same way.
The word, “unsustainable”, was heard a lot last year, usually muttered by container shipping line execs every time someone mentioned freight rates.
This was of course on the transpacific trade that is governed by shipper contracts negotiated annually. In the blind pursuit of market share back in the dark days of 2008/09, container lines allowed customers to lock in contracts at freight rates that bounced off the sea bed.
Times were pretty tough, but at least the carriers could take comfort in the knowledge that the only thing that could send them careering into a fight for their survival was if some sort of global financial crisis hit the world and trade ground to a halt, and what were the chances of that ever happening.
So anyway, as some sort of global financial crisis hit the world and trade ground to a halt, the chronically low rates quickly began exsanguinating carriers’ balance sheets. Executives were soon trying to cancel contracts, laying up ships and rolling cargo in a desperate attempt to get rates up to more profitable levels.
It was an ugly period and generated immense ill feeling between shipping lines and their customers, who let’s face it were never the best of mates to begin with.
That ill feeling this week spilled over into a court case, but surprisingly it is a shipper on the Asia-Europe trade – not really governed by annual service contracts – that is bringing the legal challenge.
UK High Street chain Argos is suing AP Moller-Maersk for US$13 million for reneging on a two-year contract to ship goods from Asia.
Argos had somehow managed to secure from Maersk a two-year contract for 2010 and 2011 to ship 5,000 FEUs a year from Asia to the UK. Incredibly, the UK shipper had secured the space protection at a rate of US$930 per 40ft container. Either Argos negotiators are brutish football hooligans that hold families hostage at contract time or the Maersk counterparts were a little depressed by the trade downturn.
According to The Independent, legal documents submitted to the high court said: "On 15 January 2010, [Maersk said it] would no longer provide any space protection for [Argos] at the agreed rate [$930 per container] and was instead unilaterally imposing an increased rate of $2,730 per container."
Argos documents to the court claim that Maersk "wrongfully repudiated and/or renounced the contract. [Argos] had to find another shipping line in order to ship containers from the Far East to the UK. [Argos] duly obtained alternative space protection for a period of two years from Kuehne & Nagel. Accordingly, aggregate losses are $13,877,660."
It is hard to see how Maersk can win this one, but it reinforces a widely held view that annual rate contracts should be scrapped. Who in their right mind would be prepared to take a chance on the level of rates a year from now? Maybe the Maersk guy who negotiated the Argos contract, but then he has probably moved on by now.