The rate debate has reached fever pitch and the attention of the White House as many speculate more of the same, with pricey ocean freight costs in a holding pattern at least in the near term.
“I think they’re going to stay, more or less, where they are today, which is relatively high,” Max Bernaldo, Geodis senior vice president of business development for freight forwarding, told Sourcing Journal last week from the floor of the annual TPM22 Conference in Long Beach, Calif.
Carriers, shippers and logistics companies come together at TPM to discuss the Trans-Pacific trade, with some also negotiating shorter-term contracts.
“The carriers have basically segmented the market, especially on the Trans-Pacific. You have a lot of people trying to sell long-term deals, up in three years just to maintain high revenue,” Bernaldo said. “Now, they’re selling one-year rates. This is where most of that is negotiated, here, and so that’s why TPM becomes such a big event typically. People are going to try to lock down rates for one year.”
IHS Markit vice president and head of commodity research for maritime and trade Rahul Kapoor also said at TPM the industry is not likely to see pre-pandemic rates for another two years.
This is the year of normalization, while spot rates, shorter-term deals that command higher pricing, peaked in 2021, Kapoor said.
The elevated pricing came up in President Biden’s State of the Union address when he called for a crackdown on carriers. Two subcommittees under the House Committee on Oversight and Reform have also initiated a probe into the largest carriers, last week requesting information on rate hikes from Maersk, Hapag-Lloyd and CMA CGM. Information on spot rates charged, communications with other carriers, and the process for setting rates is due back March 16.
Industry’s generally mixed on where it stands.
Shippers, of course, lament the high prices and some say carriers are taking advantage of the situation. Others see it differently.
“I actually think that it’s their time to make some money. There hasn’t been profitability in shipping for a long time,” said Patrik Berglund, cofounder and CEO of ocean and air analytics firm Xeneta.
Some, such as Berglund, say the record profits can now be reinvested into carriers’ businesses. Maersk is a good example, with its acquisitions in the logistics space.
Lawrence Burns, founder and president of Lawrence Burns Consulting, agreed saying if money was all carriers wanted, they could increase their container capacity to move more at the higher rates they’re charging.
“I don’t think that the carriers are actually overplaying their hand at all,” Burns said. “Yeah, the rates are going up, but I think if they really wanted to take advantage of this situation, they would take as much capacity as they can.”
Instead, Burns pointed out, carriers are cutting the number of trips in an effort to maintain greater scheduling consistency and reduce idle time for ships.
Lack of capacity is what’s causing the fragmentation in freight contracts to some extent. Companies can’t rely on a single contract to take care of all of their goods movement needs.
“I think nobody is getting full allocation, so if you need 100 containers a month, it’s difficult to get one carrier or two to take the whole thing,” Geodis’ Bernaldo said. “[Carriers] like to sell less [capacity] than what you need, so you can buy spot [rates], which is higher.”
And that’s where others in the industry argue the pricing is a byproduct of high demand.
That’s the word from Federal Maritime Commission chair Daniel Maffei, who made it clear last week at TPM the agency has yet to see evidence of anything on the rate side that’s actionable, even after increased reporting requirements.
“The vast increase in shipping rates are mostly due to the incredible demand for shipping services,” Maffei said.
There’s no one-size-fits-all solution for retailers, brands and other shippers. While some have found relief in negotiating long-term contracts, Jon Monroe of supply chain consultant Jon Monroe Consulting warned it’s a bit of gamble.
“[A] lot of people feel like 2020 was the peak [for rates] and if you take that as the peak and you look at multi-year contracts, then it’s like—I’m not good at darts and if I threw a dart against the dart board, I’d probably lose. But that’s what it’s like,” Monroe said. “I feel that as we get into 2023 and 2024, we have so much capacity coming into the trade. At the same time, we could be going into a recession and if that happens, then all of a sudden I don’t think those high rates are going to stick.”
The ballooning freight costs are what have pushed the supply chain to the forefront within many organizations and also at the mainstream consumer level.
“You’ve upped the scale quite a bit, upped the cost. And that’s why all of a sudden you’ve got companies where the CEOs are losing their jobs because… it used to be at the logistics level. Now, it’s at the C-suite level and it’s not easy,” Monroe said. “I mean, how do you budget for your year? How do you budget your cost for the products you’re bringing in if all of a sudden it continues to go up or you can’t get space or you have to pay a premium and that premium is five to 10 times your budget?”
While much of the media attention has put a spotlight on improvements needed at the ports, the past two years proved a turning point and realization that the supply chain—from middle mile and fulfillment centers all the way to consumers’ front porches—needs an overhaul, said John Porcari, port envoy to the White House Supply Chain Disruptions Task Force.
“It really is the first time that ports have had a seat at the table. I’ve always felt like in the transportation world, ports have been seated at the kiddie table for Thanksgiving dinner,” Porcari said, adding transportation should be an interdependent system.
While rates and inflation are debated, the discourse has forced a harder look at the supply chain from a macro perspective. The view, said Porcari, is that of an inadequate system.
Said Porcari: “We had a goods movement system that was creaking along.”