Rate increases seem like fuzzy math
Here's a simple question with a not-so-simple answer: how exactly do carriers arrive at their rate increases?
The last two months have seen a veritable cavalcade of general rate increases on virtually every trade and involving most major container lines.
Only the most hardened shipper or forwarder would begrudge carriers their chance to increase rates right now, but what must be vexing shippers is the seeming randomness of the increases.
Five carriers operating in the same trade may levy different increases between the same origins and destinations. As an example, between August and September, CMA CGM began charging an extra $240 per TEU from the United States to Northern Europe, while Hanjin charged $150, Evergreen $200, Hyundai and Maersk Line $400, and NYK Line $250.
Confusion is also added by the fact that a carrier may levy an across-the-board hike for shipments from a huge geographical area ' case in point is a charge Mediterranean Shipping Co. announced Aug. 27 for U.S. and Mexican exports headed to Mediterranean ports.
The carrier said the increase is $100 per TEU and $200 per FEU, effective Oct. 1, regardless of U.S. or Mexican point of origin. But doesn't it seem preposterous that a $100 increase would be as appropriate for a shipment from New York as it would for a shipment from an inland origin like Kansas City? Or better yet, from a more inaccessible inland point in Mexico?
Evergreen did much the same, with its $200-per-TEU increase applying to all shipments to Europe leaving U.S. West or East Coast ports. Yet for U.S. exports to Asia, the carrier charged different rates for intermodal shipments than it did for shipments from Los Angeles or Oakland ($80 per TEU versus $40 per TEU for metal scrap, as an example).
Another perplexing feature of these increases is the manner in which they're being applied depending on the size of the container. Some carriers are merely doubling TEU increases to arrive at their FEU increases (like the MSC example above). Others are charging a fraction higher than the TEU increase (like Hanjin, which is levying a $150 per TEU and $225 per FEU increase from the United States to Northern Europe).
Still more confusion comes from the fact that some carriers delineate between commodities for their rate increases while others apply one rate to all cargo.
The sheer number of individual hikes in recent weeks is staggering.
As of Aug. 20, maritime consultant Dynamar compiled a list of 100 rate increases (or peak season surcharges masquerading as rate increases) across all the major global trades. All were due to go into effect from early August to Oct. 1. In the week that followed the report, five announcements by four carriers detailed rate increases or peak season surcharges on 21 sub-trades.
I suppose the first notion is to pin the raft of increases on the breakup of carrier conferences in the past year. Those conferences, for better or worse, provided clear direction on rates and surcharges. Now that lines trading in and out of Europe (as well as India and, nominally, China) aren't allowed to cooperate on rate-setting, it's every carrier for itself.
That leads to differences in rates and differences in methodology.
Look more closely at the U.S.-to-northern Europe increases. Hyundai and Maersk have charged the largest increases, and that's not all too surprising given the way those two lines (though vastly different in size and makeup) have responded to the U.S. export and intermodal markets.
Maersk famously pulled out of a host of inland points in the middle of 2007, citing the escalating cost of inland transportation. U.S. railroads have been holding firm on intermodal rates while ocean freight rates have nosedived in the past year, so the inland component of total shipping costs has only been magnified.
As for Hyundai, Senior Vice President Brian Black told American Shipper in June that the carrier was going to focus on 'prudent decisions on pricing power,' and that 'we weren't going to engage in port pairs that didn't make sense for us.' He did say that provided some opportunities in the U.S. intermodal market left behind by other carriers, but he emphasized Hyundai's priority was on finding viable streams of business.
In other words, Maersk and Hyundai have decided that shipping from the United States to Europe involves a certain cost and, publicly at least, they aren't willing to go under that cost to secure volume.
This is not to imply that Hanjin, for example, is providing lower quality service or is searching for market share with lower rate hikes. Nor is it to suggest Hanjin has found the magic bullet in transatlantic service that allows it to provide container transportation at $250 less per TEU than its compatriot carrier.
There are so many functions that go into total rates that it's virtually impossible to pinpoint where all these carriers are coming from in arriving at their figures.
What is certain is that it makes things complex for shippers, particularly those that use multiple carriers. Rate and surcharge increases are a normal function of the shipper-carrier relationship, but so many have come so fast that it could make it difficult for shippers to accurately determine which carriers are right for them on each of their specific lanes.
With bunker costs and the relevant surcharges now on the rise, don't look for the confusion to end anytime soon.
The Westbound Canada Stabilization Agreement, which represents 10 lines moving containers from Asia to Canada, said in late August its bunker surcharge for October will rise more than 60 percent. It will be interesting to see whether, as bunker surcharges rise, lines will be able to keep recouping these rate increases.
A.P. Moller – Maersk Chief Executive Officer Nils Andersen said in August that the current rate increases weren't nearly enough to be considered sustainable, and that more increases are needed. Lines welcome the revenue that bunker surcharges bring, but it won't address the issue of low rates not covering all their other costs.
But during a conference call with analysts as Maersk announced its first half results, Andersen also said something quite interesting about the structure of rates. His remarks were in response to a question about whether bunker surcharges would rise in the second half if oil prices rose as expected.
'We were quite successful in 2008 in introducing (bunker surcharges), but when the crisis hit it became a blurred picture,' he said. 'It's more reliable to include the total rate, including (bunker surcharge), but it reflects the reality of the market.'
In other words, by rates or surcharges, expect to pay more the rest of 2009.