Ocean Container Rates Rebound as Carriers Close Ranks

Apr 25, 2012

Topic: Policy

Ocean containers rates — a rare source of margin relief last year in a supply chain beset by rising cotton, oil and labor costs — are heading back up. Outdoor industry companies would be wise to keep an eye on this as it could lead to higher wholesale and retail prices going into 2013.

Following a year of losses and consolidation, container lines serving the Asia-United States and Asia-Europe trade lanes are closing ranks on the base rates they charge to transport a 40-foot container (FEU) in their annual service contracts. Rates for 90 percent of the transpacific (Asia to the U.S. West Coast) container trade are set by annual service contracts that renew May 1 every year. The rates do not address fuel costs, which carriers recover through separate fuel charges that increased about 35 percent last year.

Shippers and freight forwarders use annual contracts to manage notoriously volatile container shipping costs. Contracts typically involve discounted rates in exchange for a volume commitment. Once these commitments are fulfilled — which usually occurs by the end of the calendar year — parties can renegotiate or simply walk away from the contract.

Open market rates declined steadily in 2011 as container trade between Asia and Europe dropped and new container ships came online. The British research firm Drewry estimates that container lines lost $6.5 billion in 2011 despite a 7.4 percent increase in the volume of shipments. However, Drewry reported earlier this month that spot rates had rebounded to break-even levels thanks to rate increases carriers were able to push through in mid-March.

It appears that the Transpacific Stabilization Agreement (TSA), which represents 15 carriers serving the Asia-U.S. trade lane, has largely succeeded in pushing through three rate increases since January, restoring rates to May 2011 levels. These include a $300 per FEU increase in mid-March and a $400 increase that kicked in April 15. TSA’s objective is to restore rates to where they were in May 2011 and lay the groundwork for increases of $500 to $700 per FEU in annual contracts that renew next month.

“Carriers operating in the Pacific are at a critical juncture,” TSA executive administrator Brian M. Conrad said. “As in 2009, we are back to a situation in which nearly all major carriers in the trade are moving cargo at a loss. For any carrier rate or cost recovery effort to be meaningful in 2012-13, it must reflect an actual increase from rates in effect at the beginning of the previous year, and it cannot extend promotional short-term rates in select trade segments to all commodities and all routes for 12 months.”

Thanks to a partial exemption from U.S. anti-trust laws, ocean carriers are allowed to discuss and recommend industry-wide capacity and rate issues, but must negotiate contracts individually with their customers. While these rates represent a small portion of a product’s landed cost, it appears they will become more of a headwind for vendors struggling to preserve margins this year.

At Oboz Footwear in Bozeman, MT, Josh Fairchild estimates recent increases in ocean container rates will shave 0.2 to 0.4 percent off his margins depending on the cost of the shoes.

“The bottom line is that absolutely these increases have a detrimental effect on our margins,” said Fairchilds, vice president of product for Oboz, which sources its footwear from China. “Since our pricing is set for 2012, there is no chance for us to pass any mid-season transportation cost increases on to retailers or consumers.”

While two to four margin points may not seem like a lot, vendors welcome any relief they can get in an era of steadily rising Asian labor rates, fuel surcharges, commodity prices and other costs.

“It comes right off our bottom line,” noted Bill Gamber, president and co-founder of Big Agnes, which receives as many as two containers from Asia a week during its peak shipping season.

Rising ocean container rates have forced Big Agnes to become a much savvier shipper in the last five years, particularly with items like sleeping bags, which are relatively more expensive to ship because of their bulk.

“We can’t go back and say we are going to levy a shipping surcharge the way the ocean container companies levy a fuel surcharge, because everybody is getting squeezed,” said Gamber. “So we’ve had to be a little bit sharper.”