Ocean shipping changes affect prices
By Sarah Stone -- Purchasing, 3/25/1999 2:00:00 AM
Starting May 1, 1999, ocean shipping will be altogether different from what it was before. Shippers and carriers are scrambling even before that date to realign themselves and to find new ways of maximizing profits, in the case of the carriers, or to lower costs, in the case of shippers.
For a long time, ocean shipping has been controlled by conferences of carriers, and government rules guaranteed that rate information was publicly available. As of May 1, though, that state of affairs will go the way of the dinosaur, when carriers and shippers will start making private agreements. Add to this the fact that shipping from and to Asia and Latin America has been greatly affected by economic instability in those areas, and the scene is set for some of the most volatile pricing in recent memory.
Three major shipping lanes, the Atlantic, the Pacific, and the South American, are most likely going to see major shifts up or down in pricing in the near future.
Atlantic rates continue to drop
For years the Trans-Atlantic Conference Agreement held the reins for virtually all Atlantic shipping and kept prices relatively stable. But with the beginning of the new era of private agreements between shippers and carriers, taca's role began to erode and then to be superseded by a new North Atlantic conference that is poised to focus its energies in a different way. Twenty carriers are in the process of forming the North Atlantic Agreement, which will concentrate on exchanging information. For example, it plans to help manage capacity by coordinating the exchange of slots.
With the end of public agreements comes the end of what amounted to a fixed-price or regulated market. So prices on the Atlantic lane have already begun to tumble as more ships jockey to carry less cargo, and as shippers are negotiating contracts privately in preparation for the newly deregulated market. Prices are down 15%-20% since last summer, and are most likely going to drop even more in this lane.
Some shippers have expressed concern that if the NAA does receive approval, it will do some of the same things the old Trans-Atlantic Agreement (taca's predecessor) was banned for doing, namely trying to control prices by artificially reducing capacity. But according to Christopher Rankin, the former head of P&O Nedlloyd who is currently shepherding the new conference through the regulatory process, new regulations on both sides of the Atlantic will prevent that from happening. Also, he says, carriers outside the agreement could simply pick up the slack (and the profits) if conference members decided to cut capacity or "rationalize."
Asia-to-U.S. rates stay high
While rates in the Atlantic lanes tumble, the picture for Asian trade is very different. After last fall's cargo crisis that was spurred by huge increases in exports from Asia and slow imports, carriers are planning even higher prices for cargo coming out of the major Asian ports, in order to take advantage of the situation while it lasts.
Last fall the Transpacific Stabilization Agreement announced it would be raising rates (by $900-$1,000 or more per 40-foot container, a substantial increase) for the May 1 season, and with an additional $300 surcharge for the peak June-November season. Part of the reason for the large rate hike is to make up for the scarcity of goods flowing the other way, from North America to Asia.
Ever since the economies of several eastern countries fell apart last year, Asian goods are cheap and American goods are expensive, relatively speaking. But many American shippers are still tied in, either contractually or by necessity, to materials and products from Japan, China, and Hong Kong, and have no choice but to pay the higher shipping costs, while American manufacturers are finding little market for their goods among those countries.
Some observers point out that these increases are really more of a market correction, since shipping rates in the preceding few years have been unnaturally low in the lane. And starting May 1, shippers will be able to band together to negotiate more favorable rates for themselves, enabling them to wield the same kind of clout that some of the huge importers have in the past.
Latin America most volatile
The most erratic shipping prices are those to and from South America, especially Brazil. As always, ocean shipping costs are intimately tied to the local economy, since cheap goods mean booming exports and a shortage of cargo space. Even before Brazil devalued the real recently, rates to Latin America were rock-bottom, but rates out were also low. Now the overcapacity to Brazil and other Latin countries is starting to drive carriers out of business: Di Gregorio Navegacao Ltd. has halted shipping and its containers were seized at four U.S. ports because of missed lease payments on the containers.
Several carriers, including Maersk, Sea-Land, csav, and P&O Nedlloyd, want to withdraw some 35,000 slots in order to adjust to plummeting volumes. Rates to eastern South American ports have dropped at least 30% in the last year to year and a half. Many carriers have been caught by surprise after having added capacity and after a number of global carriers entered the market, making it one of the most competitive from the carriers' point of view even before the Brazilian monetary crisis. And with deregulation about to enter the picture, shippers are able to bargain for the most favorable rates possible, which in the case of much of the Latin American lane means dirt-cheap.
Tumbling currencies usually mean cheap goods, so rates out of South America should climb. Carriers are desperate to make up some of the deficits they are seeing on the southbound route. However, many of the big South American exports to the U.S., such as steel, are already glutting the market and are readily available from Asia as well, so carriers can't get as high a price as they might hope.
With South American economies in flux, uncertainty over the effects of deregulation, and glutted world markets for some goods, shipping rates in the South American lanes are the most likely of all to continue being unstable over at least the next several months.
Shippers seek economies of scale
Most shippers see the coming deregulated ocean cargo market as unmitigated good. But a few clouds mar the sunny horizon, at least in the eyes of some observers. Besides the worry that the NAA will act like the old TAA, some are worried that smaller shippers won't be able to negotiate advantageous contracts like bigger customers and will end up bearing more than their fair share of shipping costs. One response is a huge upsurge of interest among shippers in forming associations whose amalgamated volumes will give members more clout at the negotiating table. Another is to make use of third-party logistics firms and consolidators, which will play much the same role on behalf of large numbers of shippers, not necessarily shippers of similar goods.
At press time, most rates, except on Asian exports, were low. Shippers for the most part are taking advantage of the situation while they can, and negotiating the most favorable contracts, since they have learned over the past year or two how variable the market can be. So long as the carriers stay in business, most shippers are happy with the current outlook and are getting the hang of rolling with the punches.
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