Complexities in managing annual cargo rate negotiations have been exposed by the Covid-19 virus with shippers and forwarders struggling to understand what cargo commitments they can make, while the carriers’ demands must also be kept at a reasonable level.
That then begs the question what is reasonable? And to answer that question you will need to know when and how the Covid-19 crisis will end. That is why minimum quantity commitments (MQC) are front and centre of the contract negotiations between shippers, freight forwarders and the carriers operating on the Transpacific.
According to consultant Jon Monroe, the beneficial cargo owners (BCO) have all completed their contract negotiations, but the MQC requirements have remained a difficult discussion for all three representatives.
Not least the retailers who have had stores closed over the preceding four weeks and you are still uncertain when you will be able to reopen your shop and what kind of situation you will be faced with when you are finally free to open your business again.
“Imagine you are a fairly large retailer, but you have been closed for four weeks and uncertain when you will re-open, how would you determine your MQC?” asks Monroe.
Painting the picture of how negotiations were conducted, Monroe added, “Some apparently threw darts. Others estimated MQC based upon last year with a reduction for the number of months they expect to be closed. This, however, may be a rough guestimate.”
He also pointed out that the difficulty for BCO’s will be compounded if the lockdown is extended into the “Back to School season”.
With these complexities in mind some importers opted to extend existing contracts for 30 days. For the smaller shippers the difficulty is even more complex in that they will often sell to the larger retail outlets and they will not know when those larger partners will reopen their shops. However, even if they knew when retailers would be opening their doors, will the consumers be coming in?
That is a difficult question to answer as many have been furloughed and others are unemployed as a result of the virus. Consuming at the pre-viral levels seems an unlikely scenario.
Freight forwarder contract negotiations remain ongoing, carriers are, however, pushing to get contracts finalised and signed by the end of April, but the non-vessel operating common carrier (NVOCC) discussions have only just begun, according to Monroe.
It is the MQC element that is attracting the most attention with the NVOCC negotiations also.
Most NVOCC clients are small to medium sized importers some who often sell to the larger retailers and that introduces the similar uncertainty in both camps.
“This year will be a roller coaster ride. We expect once contracts are complete, the market may turn into a volatile spot market,” comments Monroe.
However, he also advises that “If your company is using an agent in China, pick one with a strong presence at each origin port. Many deals will most likely be done at the last minute at each origin port.”
Carriers, for their part, have sought to maintain freight levels and protect their cash flow using the alliance structure to manage capacity on the major trade lanes, including the Transpacific.
Vessel voyages have been pulled and ships rerouted in some cases in an attempt to limit capacity, bolster rates and cut costs.
Still, in some cases vessel utilisation has dropped below 90% and in a few cases, below 80%. Imagine what vessel utilisation would be without the blank sailings,” says Monroe.
Restrictions on seafreight capacity has lead to many shippers opting to use air cargo operators to move their cargo and that move has created further well-documented logjams, with airfreight waiting times now at up to 10 days and rates at US$16/kg, the highest they have ever been according to Freightos chief marketing officer, Eytan Buchman.
“Rates out of China are reaching record highs by some reports, with Freightos.com marketplace data indicating yet another 25 to 30% increase across lanes since last week, on the heels of a similar price increase the week before,” said Buchman.
Rates at sea remain steady, with most commentators putting that down to the successful capacity management programme put in place by the carriers.
The Freightos FBX index puts rates on the China-US West Coast trade at US$1,493/FEU (FBX01 Daily) down 7% since last week, but only 3% lower than this time last year.
China-US East Coast prices (FBX03 Daily) are down 2% from last week, reaching US$2641/FEU. This rate is the same as it was for this week last year.
However, the question is what will be the demand later in the year and what levels of capacity will be available to meet that demand, and at this moment how can ship operators and their customers estimate to an acceptable degree of accuracy what that demand will be.
To misquote one prominent American, we know what we don’t know, but what we need to know is what will the unknowns be?
Nick Savvides
Managing Editor
Current Contract Status of Key Carriers   Â
- COSCO/ZIM – still under BCO negotiation, only small part of BCO signed . NVO’s at initial offer stage.
- APL – NVO negotiation to complete end of April. CMA took over all APL lanes except Asia to N. America
- HPL – NVO negotiations to complete end of April
- ONE – ONE wants all NVOs to send the proposal of general fix NAC, MQC and ratio by 4/15. After 4/15, NVO still can change or add some of  fix NAC. The sign is ONE want to speed up the fixed contract negotiation and they may need more fixed biz from NVO.
- OOCL-Finished BCO. NVO now started negotiations. How many space/MQC budget left for NVO and rate levels.