Now might not be the best time to sign long-term contracts on the Asia-Europe trade with prices at high levels. Photo credit: Shutterstock.com.
With Asia–Europe ocean contract rates beginning to rise to meet the elevated spot market, some shippers are pushing back — either delaying signing annual contracts or negotiating lower rates — after carriers failed to uphold capacity commitments during a tumultuous 2020.
Rates on long-term contracts from Asia to Europe this week are up 43 percent year over year, according to rate benchmarking platform Xeneta, which means some shippers are prioritizing volume commitments regardless of the rate.
“Minimum quantity commitments [MQCs] are a vital component in this year’s contract play — where any deviations from the agreed volumes will be an expensive affair for the shippers,” a spokesperson for Xeneta told JOC.com.
Dominique von Orelli, executive vice president and global head of ocean freight at DHL Global Forwarding, said MQCs would be “extremely important” in any contract talks on the Asia-Europe trade this year.
“Shippers will need to improve their forecasting to work out their required volume, so that is one good thing to come out of this,” he told JOC.com Thursday.
Xeneta has previously warned that shippers choosing to not lock in capacity could be left out in the cold again, forced to pay higher spot market prices to move any cargo beyond negotiated MQC levels. But in some cases, MQCs were either insufficient or not honored during the second half of last year, which has some shippers waiting out the spot market to see what happens.
The supply chain manager for one South Europe-based shipper told JOC.com that its carrier partners simply did not keep to its previously agreed weekly volume during the peak season.
“We had enough MQCs for our volume, but these were not fulfilled by the carriers that cut all MQCs and only focused on the short-term rates to make huge amounts of money,” he said. “With the sudden cut by the carriers, we had to purchase more space, or create new contracts that were far higher, just to evacuate our cargo from Asia. Of course, if we did not have MQCs at all, we would probably have had to stop importing.”
Asia-Europe shippers have reported being offered spot market rates as high as $16,000 per FEU, which the South Europe supply chain manager labeled as “piracy.” “The carriers would tell us, ‘Sorry, there is no space for your box, but if you pay $1,000 more, we can work something out.’ That is unacceptable.”
The logistics director for a Germany-based importer said he was receiving space, but it was under the average 52-week commitment he — and his carriers — had agreed to back in November.
“For everything on top, we face issues and have difficulties getting it away,” he said. “On some of the routes out of Asia it is even worse, with almost no equipment and ridiculous prices.”
The ‘all-is-up-for-negotiation market’
Peter Sand, chief shipping analyst at BIMCO, said in the current container shipping environment, the contract market is “all over the place,” with many shippers refusing to sign one-year contracts at the higher prices being asked for by the carriers.
“We know of contracts done with flexibility, where 2020 volumes are kept intact, but with another price for boxes on top,” he told JOC.com. “In the ‘all-is-up-for-negotiation market,’ there is common ground both parties can live with, which is higher rates for a short period, but not as high as the spot market.”
Alan Murphy, CEO of Sea-Intelligence Maritime Analysis, wrote in the firm’s latest Sunday Spotlight newsletter that contract rates on Asia-Europe are tightly correlated with short-term rates, but with a three-week lag.
“This means that if a shipper believes spot rates are going to retract from the current elevated levels, now might not be the best time, from a pricing perspective, to sign longer-term contracts,” Murphy noted.
Xeneta data shows spot pricing from China to North Europe this week is up 285 percent year over year at $4,432 per TEU, more than four times the rate recorded on Aug. 30.
The Shanghai Containerized Freight Index (SCFI) offers a similar picture, with the average China-North Europe spot rate up 341 percent year over year at $4,276 per TEU, also more than four times the late August rate.
Carriers say the supply chain disruption that pushed spot rates to record highs in 2020 was largely out of their hands, pointing to the unexpectedly strong recovery in demand after initial COVID-19 lockdowns in Europe were lifted that has driven volumes beyond the available capacity and created a global container shortage.
The high demand is also causing port congestion in the UK and at some European ports. Asia-Europe shippers are also feeling the knock-on effects from chronic US West Coast port congestion that is delaying the turnaround of containers, with rolled cargo at transshipment hubs further adding to box unavailability.
Hapag-Lloyd CEO Rolf Habben Jansen said in a letter to customers this week that the carrier’s fleet was “stretched beyond capacity” and the ability to address congestion by deploying recovery sweeper vessels was only possible to a limited extent. He added that the charter market was also sold out, and that these factors made it difficult to maintain weekly service offerings.
Murphy believes that over the coming three weeks, contract rates should flatten for cargo headed to the Mediterranean, and decline slightly on Asia-North Europe, an outlook that the Europe-based supply chain manager agreed with.
“After Chinese New Year in mid-February we expect the rates to drop slightly, but the real drop will happen from March through May when the big volume shippers will be importing less,” the supply chain manager said. “But we do not see any return to the pre-pandemic rate levels.”
Contact Greg Knowler at [email protected] and follow him on Twitter: @greg_knowler.
