Major forwarder advises ocean shippers to postpone long-term contract tenders where possible

Date: Wednesday, April 14th, 2021
Source: Informa

Such guidance would appear to be at odds with that expressed by some other major forwarders who argue that the best policy is for shippers to forge ahead and ‘lock in’ rates at acceptable levels at the earliest opportunity, given the current market volatility and lack of visibility.

“We are advising our ‘long term’ customers to extend their (contractual) conditions whenever possible to benefit from a softening of the market maybe later in the year,” Anne-Sophie Fribourg, Bolloré Logistics’ director of strategic accounts and ocean freight development, told Lloyd’s Loading List in an interview. “But, of course, some customers cannot delay tenders because of rates expiration. Where this is the case – and rather than be exposed to the high spot prices currently – we would recommend that they do seek to reach agreements which lock in rates.

“However, now that carriers are attempting to apply Peak Season Surcharges (PSS) and other surcharges, even on long-term deals, finding something to lock in which is ‘sustainable’ is becoming increasingly difficult.”

She continued: “We’ve been advising our customers since Q4 (fourth quarter) 2020 to delay the launch of new tenders and many have done so until now. Today, we see in some of the tenders we are handling that the rates proposed by the shipping lines are high. And on top of applying PSS, they are also limiting the volumes.

“It is definitely not the best period to be negotiating tenders and most of those we put to shippers from carriers are for a start in July and which quote what can only be described as ‘elevated’ rates.”

Cooling rates later in the year

She added: “It’s our expectation that some of the heat is set to go out of both spot and contracted rates later in the year as demand becomes less strong than it is today, due to consumption shifting from goods to services as the COVID-19 vaccination roll-out gathers momentum.”

Turning to the Suez Canal blockage at the end of last month, Fribourg revealed that Bolloré had 12 containers on board the Ever Given when it got stuck on the sands and some 5,000 boxes on other vessels, which were queued as a consequence.

“It’s clear that this incident is adding to the disruption which has dogged the global ocean freight logistics for some time now – characterised by poor vessel schedule reliability, capacity issues, port congestion and acute equipment shortages of maritime containers. We certainly don’t see any improvement in terms of service levels before Q3 2021.”

Fribourg concluded: “The contingency plans we have drawn up in light of the Ever Given incident include proposing alternative solutions to our customers such as rail freight services between China and Germany and an air-sea offering via Dubai.”

Alternative perspectives

However, other freight forwarders have recently been urging ocean freight shippers to lock in rates at acceptable or sustainable levels, with the recent Suez blockage further reducing the likelihood that sea freight prices will return this year to anything like pre-Covid levels. Although shipping activity resumed in the Suez Canal last week after the Evergreen containership Ever Given was re-floated, forwarders have been bracing for further supply chain disruption in the aftermath of the week-long blockage that is likely to further sustain high freight prices.

Florence Gautrais, global ocean freight director at Geodis, told Lloyd’s Loading List this month that forwarders were expecting the incident to add to port congestion both in Asia in Europe and may lead to fresh shortages of equipment, “further impacting uplifts and departures to Europe and the US. In addition, the itineraries of delayed vessels might change or planned ports omitted for rescheduling purposes, creating artificial void sailings, with serious repercussions for available capacity,” she noted. “We are preparing ourselves for this situation and continue to explore solutions to the congestion already experienced.”

Gautrais said that taking into account the potential supply chain disruption from the Ever Given incident, it was unlikely that much of the heat would be going out of rates any time soon.

Ongoing strong demand

“With this new event (the Suez Canal blockage), we do not expect 2021 to show any sign of a major decrease in freight rate levels, as the ‘idle’ fleet is very low and this is further supported by the forecast of ongoing strong demand into the peak summer season and until the end of Q3.”

Turning to contract negotiations on ocean rates, given the volatility and lack of visibility in the market currently, Geodis – like some of its peers – is urging shippers to act swiftly and conclude deals that ‘lock in’ rates at sustainable levels.

“In such an environment, securing supply chain flows at acceptable prices, with dedicated, mutually-agreed allocations of capacity, as soon as possible, is the advice we encourage our customers to take on board,” Gautrais noted. “Waiting for a ‘back to normal’ situation or lower spot or mid-term opportunities to come in order to secure deals is a high-risk strategy.”

Difficult operating conditions continue

That is consistent with advice coming from DHL Global Forwarding (DGF)’s global head of ocean freight, Dominique von Orelli. In an interview last month even before the Suez blockage he told Lloyd’s Loading List there was still no sign of a significant improvement in the very difficult operating conditions that ocean freight forwarders and their customers had been experiencing since the final quarter of 2020. He highlighted that demand for ocean shipping remained extremely strong, equipment shortages were still there, and shipping schedule reliability was continuing to suffer as a result.

“I think this will be the case until at least the end of Q2 but am hopeful that we’ll start to see some relief early in the second half of the year,” he noted. “Having said that, I don’t expect schedule reliability to be at acceptable levels in 2021 as a whole and that the challenges we are facing at the moment will keep everybody – shippers, carriers and forwarders – busy the entire year.”

Various freight and logistics executives have said they expect the Suez blockage would only worsen those challenges.

Contractual changes

Turning to contract negotiations on rates between carriers and shippers in the current context, von Orelli said his message to customers for some time now has been “to lock in acceptable rates as soon as possible” – advice, he said, many of them are now heeding.

“We can sense more and more urgency on the part of customers to conclude long-term, multi-year deals on rates in return for commitments on capacity,” he told Lloyd’s Loading List just prior to the Suez blockage. “Customers are taking a proactive approach and asking: ‘What is the (contractual) model of the future? How do we construct a workable, predictable business model which balances long-term and short-term goals?’ What do we need to do? What commitments do we need to make in return for a reliable service?’

“This is the agenda on the negotiating table between shippers and carriers at the moment.”

Given the elevated ocean rates currently, he said there was a prospect of a little “softening” – and perhaps more markedly in the second half of the year – but not to the pre-pandemic levels of 2019.

Predictability trumps cost

“Clearly, some of the spot prices we’ve seen – US$10,000 or more per container in some cases – aren’t sustainable; but shippers who are waiting and banking on the rates to really come down risk having a problem finding capacity in a market which will continue to be supply-squeezed. Obviously, it will depend on the volume (of cargo) they ship and if you’re a small shipper, it’s maybe a different story.”

He concluded: “What customers need most is some kind of predictability on capacity. I think what the past year has taught us is that supply chain resilience will win out over the quest for lower operating costs. The market is so volatile at the moment with little or no visibility on what’s going to happen, and the best policy is to conclude deals on rates as soon as possible.”

Lines confirm continuing challenges

Rolf Habben Jansen, Chief Executive Officer of the world’s fifth largest container line Hapag-Lloyd, last week said substantial port congestion was likely to continue through the second quarter in both the US and Europe and predicted “significant” year-on-year rate increases for carriers as they negotiate long-term transpacific contracts with shippers in the coming weeks.

Endless perfect storm

With almost the entire global container shipping fleet already deployed, Habben Jansen said container shipping capacity was likely to be tight and services disrupted throughout the second quarter of 2021 as carriers attempted to realign services ahead of the third-quarter peak shipping season.

“We have port congestion in many ports, not only in the US but also in Europe and to some extent in Asia – we are simply losing a lot of time,” he said. “And that means shipping lines actually need at the moment significantly more ship capacity to transport the same number of boxes. We also see the total capacity is reduced because there are labour shortages in many places or restrictions, which are COVID related.

“Also, on the rail side and on the trucking side, and when we look at feeder vessels, we seem to see similar capacity shortages. Container usage time has gone up 20% which in reality that means you need about 20% more boxes to transport the same amount of goods. And also, when we look at voyage delays, those have tripled in the last 15 months.”

The Suez effect

On top of which, added Habben Jansen, the Suez Canal was still suffering “slightly longer waiting times than normal” even since the clearance of the channel following its blockage late last month, which has had major impacts on services to Europe, the US and to and from India.

According to Habben Jansen, this combination of factors is responsible for the current logjams and the “extraordinary peak” in spot rates which has occurred despite the supply-demand balance of container shipping capacity “looking fairly balanced”.

He reasoned: “That also implies that we will return to normalcy when this spike in demand normalises, and also when congestion eases.”

Q3 or Q4 ‘normalcy’?

Hapag Lloyd is currently dropping port calls to limit capacity losses and delays, and also speeding up and re-routing ships in a bid to get service schedules back on track. Habben Jansen said he was hopeful that service reliability would improve “in the course of Q3”.

He added: “Many of the services have rotations of 12 to 14 weeks and if you are out of schedule today, then in reality it will take you at least a cycle to get everything back into schedule.

“So, on some shorter services, it could be the beginning of Q3, but on the majority of the services, I think is going to be in the course of Q3.

“We just need to work ourselves out of these congestion related issues now. And hopefully we can do that over the upcoming couple of months.”

Asked if a third quarter return to “normalcy” was overly optimistic and if the market could remain “abnormal” into Q4, Habben Jansen replied: “One of the things we've learned over the last 12 months is that you should never say never. I personally don’t think so.”

Europe’s terminal bottlenecks

According to Habben Jansen, port congestion in Europe is currently “critical”, especially at some larger north Europe hubs, with lesser congestion also an issue at some Mediterranean ports. With large numbers of vessels due to arrive in northern Europe over the next week after delays due to the Suez Canal closure, he said carriers would reorganise sailing schedules to avoid an expected increase in congestion and delays.

“When we look at Europe, especially in North Europe, the congestion issues will be quite significant in the next four weeks,” he said. “When we look at cases like Rotterdam or the UK, we will be looking at alternatives to make sure we don’t lose any time.

“We do expect that most services will miss one or two sailings, which will impact the available capacity in Q2. And missed sailings means ships that arrive back in Asia too late. We do, however, also expect that this will return to a significantly more normal situation from the third quarter.”

US logjams

In the US meanwhile, port congestion is a problem at “multiple ports” due to low productivity and strong volumes, along with capacity constraints by road and rail. On top of 20 ships waiting outside LA/Long Beach, Habben Jansen said waiting times at the ports of Oakland, Vancouver, New York, and Savannah “are from multiple days to over a week”.

He said Hapag Lloyd was still expecting a “reasonably good” US peak season on the back of President Biden’s stimulus programmes. He also predicted that annual contract negotiations underway with US shippers would prove lucrative for carriers, with OEMs keen to secure guaranteed shipping capacity.

“We do expect significant increases,” he said. “The other thing we expect is that we will have more people that will want to sign up volumes for a full year, because that gives you much more certainty on what the rate is that you get, and probably also a better guarantee for space.”


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