Ocean rate outlook for 2014: Steadier, but still plenty of unknowns

Here's the biggest takeaway from a presentation by Transpacific Stabilization Agreement (TSA) head Brian Conrad at an industry conference last week: Although ocean carriers in the trans-Pacific trade are seeing some incremental volume growth and utilization rates, they continue to face uncertainties and challenges. For that reason, shippers should be prepared to respond to what Conrad called the "known unknowns"—situations that are bubbling under the surface but have the potential to become disruptive or costly.

TSA describes itself as "a research and discussion forum" that develops voluntary, nonbinding pricing and service guidelines for ocean carriers serving the U.S.-Asia trade. Conrad, TSA's executive administrator, spoke April 2 at the Coalition of New England Companies for Trade (CONECT) 18th Annual Northeast Trade and Transportation Conference, in Newport, R.I.

On the plus side, Conrad noted, there has been a "gradual upturn in volumes" and improved vessel utilization over the past year on both westbound and eastbound routes, and on services to and from the U.S. West and East coasts. TSA member carriers are projecting average vessel utilization in the mid- to high 90-percent range for East Coast lanes and in the "high 80s to low 90s" for the West Coast, he said. Rates for TSA members have been "pretty steady" over the last six months, and bunker prices have stabilized, although at a high price, he said. Conrad cautioned against reading too much into those statistics, given that average rates today are just 80 percent of those in June 2008, and in any case, the average masks the volatility of short-term rates. What's more, he added, "no carrier made money in the trans-Pacific in 2013."

WHAT TO WATCH FOR
The 2014 contract-negotiation season is now in full swing. Shippers reportedly are taking a tough stance on rates, and carriers are finding it difficult to bump up their compensation. Not surprisingly, Conrad focused on developments that could negatively affect carriers' cost picture and shippers' rates and service:

Labor disruptions. The International Longshore and Warehouse Union (ILWU) contract expires June 30. Nobody knows whether a new contract will be signed before that date, so both shippers and carriers need to plan for a possible strike or slowdown. Any resulting changes in plans, routing, and operations will increase costs, Conrad said.

Overlooked costs. Carriers will be looking to recover the cost of chassis fleets, credit terms, free time, and other under-the-radar items. "People forget that those things cost carriers money, and those costs must be fully recovered," Conrad said. Another budget buster: Carriers' costs will rise markedly in 2015 and 2016 due to the mandated use of more low-sulfur fuel, which costs an average $120 per metric ton more than conventional fuel.

Short-term vs. long-term rates. These are two very different markets—Conrad compared them to variable-rate and fixed-rate mortgages—and shippers should not try to use short-term rates to drive long-term rate negotiations, he said. Temporary rates won't cover carriers' long-term costs and could further destabilize pricing.

Larger carrier alliances. Some observers believe that the larger operating alliances being formed will lead to higher rates, but Conrad disputed that, saying that there is "plenty of rate volatility and competition on rates and service" in current alliances. A bigger concern for shippers, he suggested, was how the alliances, which are designed to manage costs and assets more efficiently, will affect service over time.

Supply and demand. There's no question that with larger container ships continuing to come online, supply will exceed demand at least into 2016, and probably longer, Conrad noted. Carriers are hoping to mitigate the supply-demand differential through operating alliances, reductions in the number of weekly services at certain times of the year, some scrapping of outdated ships, and redeployment of existing vessels. One interesting development is the deployment of larger ships serving the U.S. East and Gulf coasts from Asia to Suez Canal routes rather than the Panama Canal, he said. With the larger ships, carriers are able to achieve competitive transit times with lower slot costs, and Suez cargo has been growing "by leaps and bounds," although it's uncertain whether this is a temporary or a long-term phenomenon, Conrad said.