As ocean carriers around the world introduce interim levies to profit from the just-back-on-track container freight volumes, they set off the issue of the unilateral manner of fixing tariffs and the much larger need of a level-playing field for both themselves and shippers.
by Radhika Rani G.
- CMA CGM raises freight rates for all types of US export cargoes to Asia by US$ 150 per 20-foot container and by US$ 200 per 40-foot equivalent unit from March 15.
- Mediterranean Shipping Co hikes rates at US$ 300 per 20-foot equivalent unit and bunker charges on freight at US$ 510 per TEU from Asia to Europe, effective April 1.
- OOCL announces price hike as trading conditions in Asia-US route are “subject to unacceptable rate levels and the situation is unsustainable in the longer term.”
The list is long and goes on. These levies, the respective shipping lines assert, are an interim measure to achieve rate restoration and maintain their current levels of service. Almost inevitably, the cost is passed down the supply chain until it hits the consumers in the form of higher prices for goods and services. So, in the prevailing scenario, carriers across the world are bracing up for business and big bucks.
But shippers, at least the smaller and younger ones, seem to have been taken to task as they are just not prepared for the big change, so soon. At least not until maritime trade limps back to its past momentum and monetary cushion. However, shipping lines are optimistic about hey days ahead – the optimistic ones look within this fiscal – and hope to implement dues till new deals are struck.
While the trend of generate rate increase (GRI) proposed by shipping lines is quite normal around this time of the year, especially as an effort to enhance the basic ocean freight, the spate of surcharges could be a fact that many shipping lines are bleeding due to shrinkage of volume, recent downtrend, excessive capacity and under-utilisation of vessel capabilities.
According to the Asian Shippers Council, nearly 25 surcharges such as GRI, bunker adjustment factor and currency adjustment factor have been imposed during the economic downturn. The emergency revenue charge (ERC) is the latest in the string. This pushes the rate of a 40-foot container plying between Singapore and the US from US$ 1,500 in early 2009 to US$ 2,500 in 2010 prior to ERC. With ERC of US$ 400, the rate shoots up to US$ 2,900.
The difficult part of such increases, say shippers and forwarders, is that regular or large ones among them may get away with the hike due to their negotiating power – derived by the volume – but it would be the small timers who could be hit by the increases. A stark truth indeed! Because a small and medium-sized shipper obviously finds survival in the present crunch a costly proposition. And the industry is not out of the woods yet, despite the rate increases.
Tryst with TSA
To go into the details, the Transpacific Stabilization Agreement, a research and discussion group of major container shipping lines, has announced an ERC for the first half of 2010, in an effort to obtain critically needed revenue prior to the usual service contracting season that begins for most carriers and their customers in May 2010.
TSA declares that its members will engage with customers in various ways depending on how their contracts are structured, applying the ERC where contract terms allow, and seeking to negotiate reopening of contracts that do not provide for interim adjustments. The guideline also recommends that early bids or new contracts with early start dates prior to May 1 be quoted with the full, previously announced GRI.
Following the announcement, three members of the TSA in India – APL, Hanjin and CMA CGM have announced uniform rate of ERC. But some shippers feel such an even quantum tantamounts to ‘cartelisation’.
“There is a lot of talk these days mostly by shippers and forwarders about ‘cartelistic’ behaviour. However, no one was complaining last year when rates tumbled in what was the worst rate war in container shipping history,” points out John Doble, vice president, sales and marketing at LAC Shipping. “Where was the cartel in 2009?” he asks.
Despite modest improvements in cargo demand and rates in recent months, carriers continue to lose money in both directions between the US and Asia, contends Westbound Transpacific Stabilization Agreement, a voluntary discussion and research forum of 10 major ocean and intermodal container shipping lines. “Every single global carrier lost money last year. The industry as a group lost close to US$ 20 billion, with Maersk at US$ 1.8 billion,” Doble reminds.
Interestingly, some shipping lines have survived with government handouts while others are still fighting to restructure debt. “If carriers like Hapag Lloyd and CMA CGM have secured stimulus packages from their respective governments on the plea of heavy operating losses, what about the huge surplus accumulated out of the profits prior to 2008,” counter shippers. “Though it is the prerogative of the carriers on how they will play in the market, making good their losses through surcharges is an ‘ulterior’ motive,” they add.
But TSA clarifies on the key issue. “India is not part of the scope of authority of either Transpacific Stabilization Agreement or Westbound Transpacific Stabilization Agreement, so any action taken by container lines who happen to be TSA or WTSA members with respect to the Indian market is being taken by each line individually, without consultation through the agreements,” Niels Erich, spokesperson for both TSA and WTSA, tells Maritime Gateway.
Budding box business
It may be noted that China’s exports grew 17.7 per cent in December 2009 and 21 per cent in January 2010 creating a scarcity of containers and rapid rate increases in the spot markets. The shortage in space and an eventual hike in prices is attributed to about 10 per cent of the world’s container vessels biding time at riverine estuaries awaiting a comeback call with demand rebound.
With container volumes going up through Shanghai, Shenzhen and Hong Kong after months of decline, spot rates have increased tremendously on the Asia-Pacific and Asia-Europe routes. For instance, a TEU from China to Europe that cost US$ 300 in February 2009 has shot up more than six times to US$ 1,400 this year, plus bunker adjustment surcharge of US$ 510. As a result, the China Containerised Freight Index, which collates data from leading shipping lines trading with China, shot up to 1,200 points in February this year, almost reaching its all-time high of 1,255 in October 2004.
India’s national carrier the Shipping Corporation of India too has hiked freight rates by 30-40 per cent in the India-Europe-US sector charging between US$ 250-300 for a TEU and US$ 300-600 for an FEU. The move, it says, is to meet the burgeoning operating costs and make the service viable in the wake of a pick-up in exports and demand for container trade.
Also, as the import cargo volume in container ports in the United States is likely to touch a double-digit increase this month, 13 per cent to be precise, when compared to the same time last year, the shipping community is upbeat about growing box orders. The US ports handled 1.08 million TEU in January 2010, up 2 per cent from the same month last year. These figures, according to industry observers, speak of anticipation among retailers – a trend contrary to cancellation of imports by merchants in the last two years to manage inventory.
However, the spot rate hikes are not applicable to about 75 per cent of container freight rates in the transpacific routes that are under contracts till May this year. “The increase,” says Orient Overseas Container Line (OOCL), “is an interim charge and set to expire upon contract renewal.” But anyone on contract due for renewal could better budget for higher rates and those who think the recent spike is an interim phenomenon, could budget for rates well above 2009 averages, analysts advise. With premiums flowing their way, carriers are in no hurry to rush capacity back and would like to make hay while the sun shines!
Duel for a deal
As both shippers and lines are keen to protect their own turf, there could be no meeting point or a common platform where both could exchange views. This forms the crux of the issue.
Amid tough business environment, it is natural for anyone incurring extra costs to pass them down to their customers, but at the core of the complaints by shippers is the unilateral, ad-hoc manner in which levies are imposed on them.
Shippers, while readily acknowledging that shipping lines need to make money, argue that they themselves are equally affected by the recession. However, they still need to ship goods and use shipping services. Shippers would therefore prefer shipping lines treat them as business partners rather than mere customers to profit from, by way of consulting them on levies imposed, say analysts.
Veteran shippers recall that periodical discussions between shipowners and users were a practice in the good old days. But with trade dynamics shifting globally, prior consultations between the two are passé in the present order. “We are not being taken into confidence. And so, our lobby is not strong. The government gave a lot of backing earlier but not so now,” they rue.
John Davids, advisor to the Southern India Chamber of Commerce & Industry, is vehement in his appeal for a common ground for both. To come to a fair agreement beneficial for both, he says the networking has to improve within the shipping fraternity. “Things can only improve when both shippers and carriers can come onto a common stand and resolve the mutual issues.” But is that only wishful thinking? At least for the moment, he admits.
As rate hikes take on a universal trend, what are the charges being leveled across the globe? Carlos Urriola-Tam, president of Caribbean Shipowners Association is matter-of-fact over CSA’s decision to implement GRI over the coming months. “We have not heard about them [the charges] in the Caribbean region,” he tells Maritime Gateway.
There is, no doubt, sustained pressure on the westbound backhaul segment of the market to make its full contribution to roundtrip costs, particularly given cargo imbalance, equipment repositioning and other constraints unique to the trade, admits WTSA. Nevertheless, an anti-trust behavior cannot overrule healthy container shipping industry, shipping lines aver.
Also, there is no denying the necessity, or even inevitability, of shipping lines imposing certain surcharges, but they can be introduced in a way that takes into account the needs and concerns of the users to create a win-win situation for all concerned.
Article published in Maritime Gateway, March 2010.
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