Shippers have begun the annual ritual better known as contract negotiations. There is one major difference in this year’s negotiations compared to the last two years. Shippers head into the negotiations with the leverage.
The current Asia to U.S. market is weak. That point cannot be disputed. Spot rates have plummeted and plenty of space is available to shippers. Once the negotiation period is over, it is highly likely that shippers will have secured favorable contracts. At least that is the conventional wisdom shared by most industry experts.
Carriers charged $15,000 to move containers from China to the West Coast during the height of the space crisis. You can understand that some shippers intend to retaliate against the carriers by driving rates down to the lowest possible levels. This is a natural reaction considering how the 2021 and 2022 contract negotiations unfolded, which left many shippers scrambling to move their product. However, shippers should be leery about driving contract rates down to unprofitable rate levels.
The industry has witnessed what happens when rates remain at unprofitable levels. The end result usually does not bode well for shippers. Carriers are not going to sit idly by and move cargo at unprofitable levels for a prolonged period of time. Shippers should expect to see an abundance of cancelled sailings and removal of capacity. Those tactics may not be imminent, but the carriers will eventually flex their muscles.
Demand is projected to remain weak through the first half of the year. It is unclear whether demand will rebound in the second half of the year. There are plenty of analysts that believe demand will rebound in the third quarter as large retailers begin their restocking process. If this does happen, spot rates will spike upward and available space on ships will be at a premium again. Of course, this is all predicated on the assumption that the carriers flex their muscles leading up to the third quarter.
We have already acknowledged that shippers have the leverage moving into negotiations. Shippers should refrain from signing contracts containing unprofitable rate levels. Cargo moving under these contracts will face space constraints should the market rebound quicker than anticipated. A better course of action for shippers is to use their leverage to secure favorable contracts that are fair to both parties. Being fair should not be construed as leaving money on the table. A favorable contract can contain very competitive rates, terms and space protections during the life of the contract.
There are too many uncertainties to rely 100% on spot market rates and services this year. Rates are low now but that can change in an instant. Last year at this time spot rates were $15,000. It is highly unlikely rates will approach those levels in the foreseeable future or ever again. Nonetheless, carriers are more than capable of manipulating the market when their backs are against the wall. It feels like their breaking point is not too far off in the distance.
