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Global Supply Chain News: Feeling Pricing Power, Container Carriers Likely Looking for Big Rate Increases in Looming Contract Negotiations

 

Soaring Spot Rates will Set the Table for Big Jumps in Contract Rates in coming Months

 

 

Sept. 30, 2020
SCDigest Editorial Staff

After many years being on the wrong side of the supply-demand balance, ocean container carriers are in the recently unusual position of feeling some pricing power.

Supply Chain Digest Says...

 

Unprecedented trans-Pacific spot freight rates signal that a transformation of the container shipping sector may be under way.

 

Drewry

 
 

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With initially big drops in container volumes after the start of the COVID pandemic, many predicted more tough times for the shipping industry, and initially it seemed those forecasts would be correct.

Only then it didn't turn out that way.

Carriers took lots of capacity out of the supply by idling some ships and blanking or cancelling many sailings. That tightened supply, and sent spot rates soaring. So instead of bleeding red ink in Q2, many carriers enjoyed strong profits in the quarter (see Maersk Leads Way at Ocean Carriers actually Making Money Despite Falling Demand).

Now, with the traditional contract negotiation period starting shortly in Europe and in early 2121 in the US, carriers expect to push shippers with "significant" hikes for long-term contracts, according to a report this week on the Loadstar.com web site.

That's in part because spot rates have recently been soaring.

Rates from Asia to the US West Coast are up big since May, and right now are an incredible 200% higher than a year ago, and some 70% higher from Asia to Europe year over year.

The Loadstar says actual payments to container carriers are even higher than that, with extra fees that some lines charge for premium services that include rapid ocean transport from the last load port in Asia, and expedited handling of containers at marine terminals in the ports of Los Angeles and Long Beach.

The maritime analysts at Drewry Shipping note that "Because spot rates tend to be indicators of contract rates, contract shippers and BCOs should start to budget for higher contract rates on most routes in 2021."

For Euro companies, that reality will be faced very soon. Traditionally, negotiations for the Asia to Europe lanes occur in October and November, with Asia to the US conducted February and March.


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Drewry adds that for US-based shippers and importers, rates could explode.

 

"With Asia to US west coast spot rates currently at $4,000, versus 2020 contract rates typically closer to $1,500, ocean carriers could set their 2021 contract rates at $2,000, $2,500 or even $3,000 per 40-foot [container] in their next tenders," said Drewry in a research note.

It added that "Unprecedented trans-Pacific spot freight rates signal that a transformation of the container shipping sector may be under way, and that shippers need to adapt. Ocean carriers seem to have come to realize the opportunity presented by the COVID-19 crisis, and that by managing capacity closely, they can manage prices with potency."

Any comments on th sudden pricing power from container lines? How big a jump do you expect for contract rates? Let us know your thoughts at the Feedback section below.

 

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