Container pricing today is more likely to be based on a carrier’s cost of providing the service and the value of a customer’s business, rather than what on what is in the box.
Has container shipping become a commodity where all containers are priced similarly? It’s a question that can spark spirited debate among different players in the industry.
The simple answer is no, but pricing today is more likely to be based on a carrier’s cost of providing the service and the value of a customer’s business than on what is in the container, but even those differences have been lessened in recent years as shipping lines chase cargo at a time when the industry is awash in excess capacity.
Brian Conrad, executive administrator of the Transpacific Stabilization Agreement, which includes 14 of the largest container liner companies, said with current overcapacity, “rates seem to be driven right now by supply-demand factors and market share and load-factor concerns.”
He said it is very difficult for carriers to differentiate pricing based on what is in a container, “unless you have a commodity that really requires very special handling or is very time sensitive. In that case, you might be able to get a little bit more of a premium.
“But the days… of footwear getting a different rate vis-à-vis toys, getting a different rate vis-à-vis computers,” has largely disappeared in the past three or four years, whereas it was quite common a decade ago, he said. “The market does seem to be moving more toward a commoditized rate practice right now.”
In the short term, Conrad does not expect to see the carriers returning to the practice of pricing products very differently depending on what is in the container, but adds, “I wouldn’t say never, we just don’t know.”
“I think unfortunately it’s true. About the only distinctions that are made in today’s world is on your specialized commodities, hazardous, refrigerated and such. Then there’s some differentiation. But the old saying a box is a box is a box, that’s pretty much how things are with carriers,” said Gary Ferrulli, president of North America for Los Angeles-based Unicon Logistics.
“You can look at the transpacific eastbound and there’s going to be a little differential maybe for garments,” he said, where shippers may pay a $50 to $100 premium.
“And, of course, there will be differentials for the reefer and fireworks, but other than that when you look at the spot market rates you see it pretty much applies to the vast majority of the dry cargo that’s moving that’s not under service contracts,” he added.
Patrik Berglund, chief executive officer of the Oslo-based rate-tracking company Xeneta, thinks if the market improves carriers are “going to introduce everything they have in their arsenal.”
Juergen Pump, senior vice president of Hamburg Süd North America, noted that ocean shipping “is anything but a commodity business.”
“There certainly is an element of it as far as strictly the ocean transit is concerned but that’s really where it stops, because the big differentiator is really what happens on the shore side—whether it’s cargo delivery, whether it’s intermodal service, quality of the equipment. Documentation quality is a big driver in our industry, responsiveness to inquiries. It’s a long list,” he said.
Pump said with the rise of large vessel-sharing alliances, “it’s even more important to provide individual service. The ocean aspect of it is just one part of the equation. You can get the same transport from Shanghai to Long Beach, and that portion may be identical to five other carriers on the ship, but that’s really where it ends. Then it comes to: does the product get a proper arrival notice in a reasonable amount of time, is the bill of lading correctly rated, is the container without holds, how is the IT support, event tracing—there are significant differences between ocean carriers.”
He said differential pricing based on the content of a container depends on the trade lane.
“Let’s say you have a trade that is in trouble because of overcapacity, there’s certainly a tendency that the bandwidth between the highest and the lowest rate gets squeezed to sometimes less than $100 between waste paper and electronic components. If you have a trade where supply and demand is reasonably balanced then there are significant price differences.”
“I think that there are thousands of people in the industry, employees of ocean carriers and employees of the intermediaries, NVOCCs, who on a daily basis resist the commoditization of ocean freight,” said James Devine Jr., president of Distribution Publications Inc., a tariff publisher based in Oakland, Calif. “They’re all working very hard to differentiate their services from the competition and no, it’s not a commodity and they don’t want it to be because they believe that will be much less profitable.
“I’m seeing them every day, tariffs and service contracts and other related things, and yes, there’s a wide range of freight rates,” he said. “Commodity description definitely has something to do with it—high-value cargo, low-value cargo, hazardous cargo, cargo that needs special handling, cargo that doesn’t need special handling, cargo that moves on a seasonal basis, cargo that weighs more, weighs less, how it stows in the container. Those are all factors that impact the freight rates that are negotiated and ultimately paid.”
Devine said volumes and capacity between different port pairs have a major influence on rates.
“When you’re looking at Shanghai to Los Angeles and Long Beach where there’s so many vessels and so many services, yeah the number of slots available is going to impact the price there, and then when you look at smaller ports like Qingdao to Oakland or Qingdao to Portland, the smaller volume between those ports is definitely going to impact the price. And there isn’t a standard add on—‘oh we just add on $50 dollars to the Shanghai price for Qingdao,” or ‘we add $100 to the Los Angeles price for Oakland.’ Folks don’t want to do that. That reduces profitability,” he explained.
“I certainly think that the days of gold paid the highest and ping pong balls paid the lowest, that’s gone,” said Rich Roche, vice president of international transportation at Mohawk Global Logistics and a member of the Transportation Committee of the National Customs Brokers and Forwarders Association of America. “Certainly, you’re basically looking at the movement of the container itself regardless of what’s in it.
“Carriers today, it seems like they’re scrambling for market share. And when they’re doing that it’s a box that counts not a commodity description. I would say that we really have moved towards an FAK (freight-all-kind) GDSM (general department store merchandise)-type of market,” he added.
Jeff Bergmann, CEO of Worldwide Logistics, which manages the Toy Shippers Association, NCBFAA’s Shippers Association, and International Housewares Shippers Association, said “I’ve been doing this for 25 years and obviously when I first got into this it was very commodity specific.”
Today he said, “We will let the steamship lines know what the commodity is… but everything’s pretty much the same rate no matter what we’re seeing, what the commodity is, unless its hazardous or something along that line. That’s the direction we’ve seen it go.”
“We have contracts with 16 carriers. Only one charges different rates for garments versus everything else,” said Sara Mayes, chief executive and president of Gemini Shippers Group, another large shippers’ association. “We don’t expect rates to vary by commodity anymore.”
Robert Ambrite, a vice president at Hanjin Logistics, said when he began in the business in 1972, every line differentiated themselves with transit times, customer service, and even different containers. Conference carriers generally charged a premium of about 10 percent over non-conference carriers.
Philip Damas, director of Drewry Supply Chain Advisors, said when his firm runs tenders for annual or long-term contracts for beneficial cargo owners using Drewry’s e-Sourcing Ocean Freight Solution, “carriers quote one rate for several products, where the service requirements are the same, with the exception of refrigerated, hazardous and other special requirement products.”
He said that customers of Drewry’s rate benchmarking service are also happy to compare their freight rates against the rates of other beneficial cargo owners in completely different industries, provided the service requirements are the same. “But some products have lower service requirements than others and are priced lower, so it is not possible to generalize,” he said.
“For the spot market, there are obviously freight-all-kind and general department store merchandise freight rates, irrespective of products, and I believe that there are much fewer different product-specific tariffs than in the past, but there are still different spot freight rates for products such as agri-products, scrap metal, waste paper and recycled products,” Damas said. “So, it is not true to say that there is a single rate for all products either in the spot or in the contract markets.”
Ferrulli said geography, whether a carrier can obtain backhaul cargo or will have to incur major expense in repositioning containers, is a major driver of freight rates. For example, he estimated carriers have a surplus of about 16,000 empty containers a month out of the greater Dallas area that need to move back to Asia for reloading.
Peter Gruettner, president of Extra Logistics in Lakewood, Calif., said pricing is based more on the cost of moving a container between two points than what is in the container. He said this is similar to how air freight is priced—“a kilo of scrap plastic or a kilo of microchips, they look at it as a kilo is a kilo,” unless it is hazardous cargo.
Regular or high-volume shippers will generally get a better price, though he said non-vessel-operating common carriers, who are among the largest shippers, may pay more than very large beneficial cargo owners when moving freight-all-kind consolidated containers.
That’s because NVOs need a guarantee that their containers will not be bumped during periods of high demand, but also, Gruettner said, carriers “understand the math that at the end of the day a consolidator is building consolidation containers for a profit.”
Gordon Downes, CEO of the start-up New York Shipping Exchange and a former executive at Maersk and brewer SAB Miller, said “I don’t think we can say that container shipping is ‘commoditized.’ There are at least three meaningful ways that carriers can differentiate, namely transit time, reliability and service.
“The ways that carriers differentiate have evolved. Perhaps 10 years ago, a carrier could have charged a premium simply because they had a strong brand, or the shipper needed to move high-value cargo. Today, with the help of applications like Xeneta, shippers know what the market rate is, and they simply aren’t prepared to pay a premium just because they ship high-value cargo. These days, smart shippers care a lot more about the data, like their carrier’s actual average transit time, on time arrival ratio, and even the standard deviation. This can have a major impact on a shipper’s metrics, for instance inventory holding costs, working capital, on-shelf availability and even sales. As the industry evolves, carriers need to differentiate in ways that are measurable and meaningful for their shippers.”
The 16 carriers that are members of the four major east-west alliances today—the 2M, Ocean3, G6 and CKYHE—are reorganizing themselves.
Several carriers are merging—COSCO and China Shipping, and CMA CGM and APL—and it is possible that Hapag-Lloyd and UASC and even the two South Korean carriers, Hanjin and Hyundai Merchant Marine, could be combined. There is still a question about whether a couple of the carriers will be included, but it seems likely that all the carriers that had previously belonged to those four alliances will now just be members of three vessel-sharing partnerships—the 2M, OCEAN Alliance and THE Alliance.
“Obviously those carriers within alliances won’t be able to different their transit times. After all, they are loading on the same ships. Here, I think, reliability and service levels will become the key differentiators. For instance, an alliance member that offers a guaranteed allocation during peak will be able to charge a premium over another alliance member who might overbook their allocation and then risk rolling cargo. Likewise, an alliance member with well managed equipment flows could be more reliable than another alliance member who may run into equipment shortages from time to time,” Downes said.
Downes believes “it is very important for carriers to compete with differentiated products, and not just price, because that creates more product choice for shippers and more revenue opportunities for carriers.”
Don Pisano, president of American Coffee Corp. and chairman of the Ocean Transportation Committee of the National Industrial Transportation League, said he believes “carriers are in the process of commoditizing themselves. They appear to be on a quest for size to achieve the economies of scale while neglecting the basic elements for more organic growth, competing for business on the basis of rates, routes, and customer service. Between the recent mergers and acquisitions and the vessel-sharing agreements, it is getting more difficult for carriers to distinguish themselves, particularly on the east-west trade.
“Most small and medium-sized shippers like ourselves complain that customer service levels have fallen to new lows. The carriers’ sales reps are out hustling to gain additional business with little time to assist customers in their day-to-day needs. Yet, they have been getting little backup support from well trained and knowledgeable staff to service their existing accounts,” he said.
“It is taking longer to receive service contract proposals and amendments, resolve freight bill discrepancies, and it has become more difficult to deal with the occasional problem shipments and issues with their marine terminal operators. Most successful businesses are keenly interested in listening to customers, understanding their needs and doing their utmost to meet those demands. The carriers just don’t seem all that interested in what their customers have to say, or at least, it doesn’t appear to make it that far up the management chain to make any difference,” Pisano added.
Peter Friedmann, executive director of the Agriculture Transportation Coalition, also is concerned about the homogenization of container carrier services because of the alliances. AgTC feels it is important to recognize carriers who offer superior service and he notes the results of an ocean carrier performance survey of its members is highlighted every year at the group’s annual meeting.
Berglund, of Xeneta, a service that allows shippers to compare container freight prices, said for the past decade carriers have been “fighting this commodity stamp with everything they have basically. It’s the worst thing you can say to a carrier that they’re selling a commodity.”
But given the oversupply of tonnage and low freight rates, he thinks “the climate is spot on for them to stop fighting this. Because there is a difference between a commodity and cheap.
“Think about coffee beans, for instance. You pay for different various quality of coffee beans and coffee beans is a commodity. But you need to have transparency in both pricing and quality, which this industry has been lacking proper transparency for as long as I’ve been in the industry and before that we’re talking faxes and telexes,” Berglund said.
“I think there is definitely an opportunity to make substantial profits if everyone acknowledges it is a commodity. But then full visibility and transparency would be required on both price and quality, which is what we’re working on in achieving with Xeneta,” he said.
Carriers say they differentiate pricing on factors such as weight, volume, commodity, and contract length.
He said Xeneta has built up a database of 12 million contracted rates, between 160,000 port pairs, and that it shows there is no correlation between lower prices and shippers who move higher volumes of containers.
“I can show the case of a company with 4,000 TEUs that has a way more competitive, long-term contract than one with 80,000 TEUs,” Berglund said.
And he said the company has also seen carriers offering similar rates to shippers asking for short- and long-term contracts.
“I respect the carriers, they are really struggling. But we have seen some crazy rates,” he said.
Carriers are so desperate for cargo that Berglund has seen shippers offered rates of just $6 to move containers back from Europe to Asia, or even at no charge, if they will pay the terminal-handling charge in the origin port.
“That is better than nothing, to move an empty box back to Asia to fill it up,” he said.
Andrew Thomas, a professor of marketing and international business at the University of Akron, agreed that part of the reason that container shipping has become a commodity is because it has become so inexpensive.
Back in the 1990s, when Thomas was involved in a company that exported motorcycles from China to South America, he recalled paying $25,000 to $30,000 to move a single 40-foot container.
“The price went down exponentially, because the innovation, containerized shipping got cheapened,” he said. “As efficiencies entered in, there was competition—more people could do it better and inefficiencies got wrung out of the system. Now the system is so efficient that it’s hard to distinguish different companies within the business, and that’s why you’ve seen such consolidation in the industry. Because of those massive efficiencies, you can’t have so many smaller shipping companies as there were 20 or 30 years ago.”
In addition to the technical invention of containerization, Thomas noted a fundamental reason for world trade has grown so quickly and shipping has become so inexpensive is that the U.S. Navy has guaranteed freedom of navigation all over the world.
“Around the world, nations and companies have all built their business plans and I think their national security arrangements around the assumption that the Americans will continue to do this and pay for it,” he said. “That’s been a big breakthrough and that’s enabled this commoditization, I think, to take place. But at the same time, the question is, and I think our current election cycle kind of reveals this, is that some Americans are thinking maybe we shouldn’t have to be paying for all this for all time. I can tell you when you talk to people around the world, they get a little scared because this is something they don’t want to have to deal with.”
