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  April 24th, 2017 | Written by

Consider These Factors When Negotiating This Year’s Ocean Contracts

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  • Avoiding one carrier in today’s environment of mega alliances is not the answer.
  • The lesson of the Hanjin bankruptcy is that companies should look beyond low prices.
  • The Japanese carriers will consolidate at some point next year.

The 2017-18 ocean shipping contract season is underway. As you evaluate your budget and ponder the best way to approach negotiations, you will want to keep costs down, consider options, and mitigate risks. But this year, there are four other key points you will want to keep in mind as you talk to ocean service providers.

The Hanjin impact. The Hanjin bankruptcy, one of the largest container shipping bankruptcies in history, has thrown ports and retailers around the world into a state of chaos and uncertainty. Large ocean vessels were stranded around the globe, and shippers worried about whether or not the merchandise would reach their shelves. After the South Korean carrier filed for bankruptcy protection and its assets were frozen, ships from China to the United States were refused permission to offload or take aboard containers because there were no guarantees that the operators would be paid.

After this experience, some companies feel they need to consider their carriers’ financials and do all they can to avoid putting their cargo on carriers that they perceive to be at risk. While companies are understandably concerned, avoiding one carrier in today’s environment of mega alliances may not be the answer—the fact remains that the cargo will continue to move with the carrier under a different bill of lading.

As I see it, the real lesson of the Hanjin bankruptcy is that companies should look beyond low price as the be-all and end-all of negotiations. Price is just one component of the decision-making process—not the only factor to consider.

Alliance reshuffle and independents. April 2017 marks the formation of new alliances. If you vaguely remember similar changes happening not long ago, you’re right. The three major alliances this year are 2M+Hyundai, THE Alliance, and Ocean Alliance, and as of April 2017, they are setting sails with new teams. The 2M Alliance now includes Maersk, MSC, and Hyundai (as a slot partner); THE Alliance includes NYK, MOL, K Line, Yang Ming, and Hapag-Lloyd; and the Ocean Alliance includes CMA CGM + APL, Evergreen, OOCL, and COSCO Shipping.

Although these three alliances control more than 90 percent of the transpacific trade and 96 percent of Asia-Europe trade, it is important for companies to look beyond each alliance to discover how they can better diversify their options.

Within THE Alliance, we know that the Japanese carriers will consolidate at some point next year. How can customers navigate with each carrier, knowing that their alliances will eventually change? There is no easy answer. What you can do is ask whether it makes sense to work across all three Japanese carriers today. Beyond that, we also know that Hyundai is not officially in the 2M alliance, and its agreement with 2M is only for three years. What will happen after that is still a very gray area.

In addition, there are a handful of carriers that are independent, including SM Lines, a “new” Korean liner in the transpacific market. Scale and alliances are critical in this industry, so watching for the long term strategy of these independent carriers is also vital.

There is another factor that must also be considered. U.S. legislators are so concerned about the limited antitrust immunity the ocean carriers enjoy today that they recently issued subpoenas to a few ocean carriers. Which begs the question, are the days of the alliances and conferences numbered? Only time will tell.

Carrier profitability. Bunker prices—by far, the largest operational parameter for ocean carriers—are slowly creeping back up. This is in part a result of OPEC and non-OPEC members deciding collectively to curb production of oil. As bunker costs increase, so does the pressure on rates. Overall, prices have increased compared to May of 2016. And while the amounts vary, the trend upwards is undeniable. While carriers argue these increases are not enough to push them into profitability, some increase is far better than none.

There continues to be a supply and demand imbalance. We saw this last year after rates took a spike, post-Hanjin’s demise, due to the simple fact that supply decreased while demand increased overnight. This continued imbalance will further add pressure on rates.

Some have speculated that with the new alliances, carriers will have better deployment strategies. We will have to wait and see. What happens with rates on May 1, 2017, will be an indicator to watch. If rates are too high, the market could crash, causing near-instant chaos. If rates start too low, supply and demand may cause spikes in the industry. A modest increase, such as the one we’re seeing today, might be the silver lining that this industry needs.

Many companies wonder if another ocean carrier will go out of business due to their financials. While we do not have a crystal ball, there are good reasons to think that we will not see any of the carriers within the three alliances going out of business this year.

US infrastructure. Many shippers focus their negotiation strategies on rates, space, and equipment at origin—all very important factors. But in today’s environment, people should also zero in on what happens after the vessel gets to its port.

Why is this important? As carrier alliances change, so do their terminal interests and subsequently, the rail interests for inland cargo. Unless both are seamlessly and efficiently managed, there can be monumental delays. Year over year, we have seen increasing issues and inefficiencies at the port with incremental volume increases or small volatility. A select few ocean carriers want to capitalize on market inconsistencies by charging demurrage above and beyond what the rail lines charge across the US interior.

Practices like these are not widespread, but the behavior is troubling. As you negotiate with carriers, be prepared to ask what they are doing to work toward a collective solution and improve efficiency.

Keep these four factors top of mind as you develop an overall strategy for negotiating with ocean shipping providers this year. Your budget will thank you for it.

Sri Laxmana is director of ocean services at C.H. Robinson.