Contract negotiations signal carrier intent

Taking advantage of current market dynamics shipping lines are trying to move the biggest shippers – retailers and manufacturers – onto two-year terms for 2022, with some container carriers trying to negotiate even longer periods, of three or even four years.

Contract rate spreads from base ports in China and other parts of Asia are in the top two quartiles of the highest spot rate levels (which is extremely high for BCO’s) with rates for 20’ containers being quoted at much higher than 50% of the 40’ price, placing a penalty on the smaller containers.

While some carriers have walked away from their contracts, pushing importers to costly spot (FAK)  and premium rates, others are looking to shift some BCO customers and logistics providers onto long term contracts, but there are questions about what dynamics the lines are looking at. Because, even with rates at all-time highs, ships full and capacity reduced by congestion and a lack of equipment, the market’s peak may have been reached. 

Rates on a few trans-Pacific trades did soften as a result of China’s Golden Week holiday, but the market has picked up again very rapidly, because backlogs continue and demand for space is still strong as consumers continue to consume and low inventory levels need replenishment.

If the power-cut enforced closures of factories in parts of China continue, it may well allow Asian, US and European ports to catch up with the processing of containers through their terminals, which will assist with the mitigation of congestion and allow shipping schedule reliability to improve. However it may just suppress demand temporarily, if manufacturers’ backlog of orders simply pile up.

It is clear that the carriers expect continued pressure on lead times and costs through to the end of next year. At a time they are making record profits, they have also been ordering new vessels (equivalent to 5m teu of new capacity) with the first deliveries coming in 2023. And with 2023 not too far away, carriers may find themselves with more capacity than demand once again.

It may be that some lines, particularly those with long-term exposures to very high charter rates, have been looking to lock-in contracts at long-term rates that will allow them to meet those obligations.

The current logjams and challenges within global supply chains will be worked through as demand settles to more realistic levels and with an order-book that now stands at around 20% of the fleet, it is very likely that some sort of discounting may begin in the market, before those vessels are delivered.

It should be noted that the majority of this new capacity will be provided by ships carrying more than 20,000 TEU and this could simply reignite much of the current global port disruption, because many ports do not have the infrastructure with cranes, equipment or capability to handle Ultra Large Container Ships (ULCS), which can be 61 metres wide, 400 metres in length and require 17 metres depth clearance.

Carriers that have secured capacity at very high rates with long contracts beyond the 2023 period, when much of the order book will be delivered, may be desperate for market share, but with the three alliances functioning so well, don’t expect it to be any of the big lines.

The leading shipping lines got through the tricky second and third quarters of 2020 much better than they had expected through cutting capacity, so even though their share prices fell the lines were in good shape financially.

Carriers have been forced to become very effective at managing their capacity and they will evolve into the post-pandemic era in a much stronger position, so while some may falter, the majority – certainly the larger lines – will maintain healthy returns.

Global supply chains are likely to be under intense and sustained pressure for some time yet, and we will continue to share with you the most important developments so that you are informed and prepared to make critical decisions ahead of potential issues. 

We negotiate rate and volume agreements with carriers across all three alliances, which means we have the freedom to react to market conditions and changes. 

Please contact Elliot Carlile or Grant Liddell to discuss your supply chain expectations and deadlines to ensure your business is ‘future proofed’ for the rest of 2021 and 2022.