What is effect of port congestion on contract pricing?
Covid-19 has upended nearly every industry and international shipping is not immune. Congestion at US seaports resulting from demand exceeding the supply of port services is complicating the traditional contract signing season. Some shippers are opting to negotiate earlier than usual, some as early as January and February. The effect on contract pricing is the adding of upwards pressure.
The relationship between carriers and shippers has been strained tremendously, and in some cases has deteriorated broadly due the impact of Covid-19. Shippers have cancelled orders or simply did not show up to retrieve their goods, thereby leaving ocean carriers burdened with overcrowded storage facilities. Carriers then have had to mitigate their losses by further reducing capacity at US ports. When shippers started coming back a few months after the pandemic’s outbreak, pre-Covid-19 capacity levels were no longer available, which created a seller’s market due to the revitalized demand exceeding the current lower levels of supply. As such, pricing pressures were immense in Q3 and Q4 2020, and continue to escalate upwards in 2021 as the congestion at American seaports shows no signs of abating.
Shipping Spot Rates
As ocean freight container shipping costs continue to rise, carriers and shippers are trying to find a middle ground, and to repair their strained relationship. Shipping rates have more than doubled since the beginning of 2020 and continue to increase in 2021. Shippers are concerned about the rising rates while the freight carriers are seeking assurances from shippers on the volume of TEUs (twenty-foot equivalent units) they are willing to commit to. For example, spot rates for Asia–West Coast US have increased to more than $3,900 per TEU and are expected to still rise further. Normally these rates hover around $1,500 per TEU.
As a result, the trend is now towards tiered pricing along with two-way commitments being agreed to as part of new contract negotiations. Shippers are exhibiting more willingness to pay higher rates for the assurance of guaranteed space in the carrier’s scheduled containers. They know that failure to achieve a negotiated agreement will result in paying prevailing higher spot rates, which continue to escalate. So, the impulse to negotiate and secure a firm cost per TEU is beneficial to both shippers and freight carriers, even though for shippers it means agreeing to a cost that is two to three times higher now than it was prior to the Covid-19 pandemic.
Carriers Standing Firm on Fees and Penalties
Fees, penalties, and surcharges that were often not enforced in the past are now being pursued by carriers as binding and regularly enforced. Demurrage and detention charges are now escalating as a result of the congestion in US ports, and shippers are being charged storage fees too. These charges are adding more strain to the already tense relationship between carriers and shippers.
Covid-19 is spurring shippers to turn to NVOCC (Non-Vessel-Operating Common Carrier) providers, who perform all services of an ocean carrier except operating the actual vessels. An NVOCC issues its own bill of lading with the same data fields found on the ocean carrier’s bill of lading. The ocean carrier thus has a direct relationship with the NVOCC, not the shipper. NVOCCs buy services from ocean carriers and resell these services to their clients at a marked-up freight cost. For the carrier this eliminates much of the headaches of dealing with the variability of shippers’ situations, and for shippers this helps assure access to a guaranteed spot on a freight vessel sailing.
Government Monitoring of Shipping Costs
Both American and Chinese governmental agencies are monitoring the skyrocketing ocean freight rates because of the impact it has on their mutual trade and commerce. The US’s Federal Maritime Commission is looking into ways to help reduce rates and China’s Ministry of Transportation and Communication has held special meetings with carriers regarding the soaring rates situation. The European Shippers Council is keeping several European Union Commissions engaged regarding the higher rates and the impacts they are experiencing.
Given this congestion period in ocean transportation and resulting soaring freight rates, there is a lot of pressure on shippers to commit to volumes and pricing regarding their shipping needs for the coming year(s). During normal times and especially now during these unique capacity constrained times, CPC Consultants guides our shipping clients through all challenging scenarios and finds the optimal balance of service and cost to navigate through these uncharted times. Call now for a free assessment and discover what CPC Consultants can do for you.