Rate volatility puts carriers' BCO business at risk

This article by Peter Tirschwell originally published on JOC.com.

Despite the goal of newly consolidated carriers to reassert themselves to create value in the supply chain, rate volatility and how that alienates key customers and further strengthens non-vessel-operating common carriers (NVOCCs) may permanently limit carriers' role to provide wholesale capacity. In other words, some are suggesting that carriers are digging themselves into a hole they may never be able to climb out of.

The vicious circle, in evidence in the eastbound trans-Pacific for traditionally a direct customer or beneficial cargo owner (BCO), plays out something like this: carriers withdraw from customer service and relationship building with BCOs, fraying direct customer ties. As the peak season ends, rates late in the year get driven down to levels well below those contained in annual contracts signed in the spring.

Asia-to-US East Coast market rates, according to the Shanghai Freight Containerized Index, are currently about $1,800 per FEU compared with rates north of $2,000 negotiated in annual contracts. Logistics directors are forced to defend their contract rates versus the lower spot rates, undermining their credibility within their organizations and sometimes placing their jobs in jeopardy.

In response, some give up on contracting directly with carriers, placing some or all of their cargo with NVOCCs at generally higher rates, but with superior customer service, more value-added options, and fewer issues around rate volatility. As NVOCCs play a greater role in the market, even more pressure comes down on rates because of the NVOCCs seeking the lowest rates. The end-result is that despite tight capacity, such as exists currently in the trans-Pacific with continuing reports of cargo rollings, rates are continuing to fall, carrier profitability erodes, and with it their ability to invest in improving service.

"Supply chain managers have to be able to defend decisions to make long-term commitments to carriers in contracts when at certain points in the year NVOCCs and carriers collectively drive spot rates to levels well below their contracted rates," said Ken O'Brien, chief operating officer of Gemini Shippers Group. "To successfully do this, carriers have to honor the commitments made in service contracts and show a clear differentiation between transactional spot market shipments and service-oriented contractual shipments.

"Carriers have to be willing to concede that there is interplay between the long-term contract, and spot rate customers, and that rate actions taken in the spot market can negatively impact contract shippers," he said.

Some believe that in this respect carriers are failing the test, and in doing so, only further opening the door for NVOCCs to dominate the eastbound trans-Pacific. The share of NVOCCs in this market has been steadily growing; from less than a 30 percent share in 2006, it reached more than 42 percent last year, according to PIERS, a sister product of JOC.

APL received nearly 44 percent of its cargo from NVOCCs in 2016, up from 10.5 percent in 2006. 'K' Line's NVOCC cargo grew from 21 percent to 54 percent, and OOCL's reliance on NVOCCs doubled to 36 percent. As one BCO wrote on LinkedIn recently, "I really think in five to 10 years all but the largest of the BCOs will be dealing with NVOCCs." Such numbers are explained by carriers' allowing extreme rate volatility to play out in the market.

"The volatility in the liner shipping business has caused people in my position to lose their jobs, and driven [others] to deal with NVOCCs. The outcome of this in my view has been extreme volatility in the North American market, and I think that is something this industry is going to have to face, which the liner industry has created," Alan McTaggart, group logistics director for Techtronic Industries, said at the recent TPM Asia Conference. Techtronic ships more than 65,000 TEU of power tools and other products annually on the trans-Pacific.

"People talk about it being a commodity business. Sure, these big ships are commodities. They're all the same, apart from the color, the boxes are commodities, etc. But I am not a commodity. If you treat me like a commodity, I will treat you similarly back. People are looking for personal relationships with the shipping lines," he said.

"It is still a highly competitive industry; you can see that in the freight rates," Jeremy Nixon, the CEO of Ocean Network Express or ONE, told TPM Asia. "The volatility, particularly on the trans-Pacific, it's not good for the industry, it's not good for customers who are trying to fix their rates. We need to find some better stability, but at the same time it's a highly competitive market."

Nixon said ONE, a new company created from the merger of Japanese carriers NYK, MOL, and 'K' Line, will have a clear customer focus. "We want to be big enough to survive, but still small enough to care," he told TPM Asia. "We want to be very customer centric, with very close relationships with the customers. We do acknowledge those concerns and frustrations in the industry today, that it has become a very transactional relationship and a very distant relationship, and we do very much want to learn from the [third-party logistics] sector."