Spring contract season may solidify container carriers’ newfound pricing power

Container box shippers and forwarders could be in for historically high rates and contentious contract negotiations with carriers upon first quarter 2021 contract renewals and a shift from term to spot volumes, following changing market norms brought on by the coronavirus pandemic.

With the majority of annual term contracts set to be negotiated in early 2021, many market players believe that high rates on many trade lanes and consumer demand seen throughout this year’s elongated peak season will push into 2021, causing contracted freight pricing to start at record levels.

A tumultuous year in global freight markets has seen container carriers commanding rates to record highs throughout the coronavirus pandemic by balancing capacity and voiding a record number of voyages to prevent rates from eroding downwards. As a result, a strengthening of carrier pricing power may be a long-term consequence of shifting market fundamentals felt in 2020.

“Do not go into contract negotiations with your provider with any sense that this will be a normal year,” said David Bennett, president of America’s at Globe Express Services, during a December freight outlook presentation.

Contract Negotiations

The majority of annual box rate contracts on major routes are negotiated in March and April. Some sources had expressed earlier in the year that discussions may begin sooner should the spot market return to normalcy.

However, as rates have maintained high levels through Q4 2020, this no longer appears an attractive option to shippers and forwarders, who hope instead to wait until rates trend downward.

“I don’t think any shipper in their right mind would like to start these conversations this side of the Chinese New Year,” SeaIntelligence CEO Lars Jenson told S&P Global Platts. “Negotiations will be pushed back a little at least on the trans-Pacific.”

This is because the starting point for freight contract discussions is historically dictated by the current spot rate, with actual contract rates usually settled at some discount to the going spot rate when the dust settles. And with current spot rates touching record highs, few shippers are eager to begin negotiations now.

Market watchers expect carriers to begin negotiations by asking higher prices for contracted freight on major trade lanes, as a result of soaring import costs seen throughout the second half of 2020, compounded by continued strengthening of carrier alliances and discipline in avoiding excess capacity.

“Like a rising tide, all of the rates on major trades are going up this year,” said one North American co-loader. “If I had to throw a dart, the days of $1,500/FEU to West Coast North America are gone for good, carriers will be looking to drive rates up, probably starting around $2,500/FEU for trans-Pac.”

Annual contracts could be replaced with three-month to six-month rolling contracts, mostly to protect the supply side of the market, allowing carriers to revise contract terms if rates are supported or trending upward.

“I believe we will see various contract cycles with shorter term agreements versus longer term agreements” Bennett said, commenting on the various agendas that market players bring to the table during contract negotiations.

But some shippers may push for longer-term, multiyear contracts, in order to hedge against further rate surges, capacity shortages, blanked sailings, and booking issues that have plagued the market in 2020.

In Q3 and Q4 of 2020, a flurry of spot market activity caused some significant customer dissatisfaction, as some shippers saw their contracted cargoes rolled and left on the quayside in North Asian ports in favor of newer booked spot cargoes.

“Buffer your transportation budgets to account for the extended volatility we expect to see in 2021,” Bennett said.

Spot market growth

The spot market currently accounts for less than half of freight moved on major routes, but 2021 could see a rebalancing of cargo from term agreements towards spot purchases, as shippers hesitant to sign contracts look to take advantage of a possible market downtrend after the Lunar New Year. The result would be medium- to long-term growth in the size of the spot market relative to contracted freight.

“If carriers are making better money on fixed contracts, the spot market doesn’t have to be so fiery,” said a co-loader. “They won’t jack up the spot market if contract levels are high.”

Shippers and forwarders may profit when contracted rates are low, but a cargo owner paying the lowest rate in the market to move their goods will be the first to have cargo left behind at port. So, some shippers, likely those who ship a smaller number of TEUs, may opt to operate on a spot basis, in order to both guarantee space amid carrier-imposed capacity shortages and to take advantage of a possible dent in rate levels.
Source: Platts