TSA lines facing 'perfect storm' as they launch rate hike

9/27/2012

Transpacific Stabilisation Agreement (TSA) members are aiming to boost the baseline for freight rates as they head into a new round of 2013-14 contract negotiations with customers.

It suggested that carriers face a “perfect storm” next year on the back of a capacity shortage, weak balance sheets and tight credit.

The TSA lines have adopted a set of guideline rate and ancillary charge adjustments that they intend to apply to all new and renewed service contracts, from all Asian origins, to become effective with those contracts, from mid-October going forward. This includes “early bid” contracts concluded in late 2012 and early 2013, as well as standard contracts which, typically, take effect on 1 May 2013.

TSA said that it was recommending rate increases of US$800 per feu to the US west coast, $1,000 per feu via all-water to the US east and Gulf coasts and $1,200 per feu for intermodal shipments via all coasts.

TSA executive administrator Brian Conrad said container lines had faced a “steep uphill climb” throughout 2012 to reverse “dramatic” revenue losses as “steeply discounted” rates in key lane segments crept into 12-month contracts. 

“The eastbound transpacific is a dynamic, highly competitive market,” Conrad explained. “Rates negotiated for one route or commodity too easily go viral, spreading to all routes and commodities. That may often be the nature of markets, but it does not necessarily mean those rates are anywhere near economically sustainable for lines carrying the cargo.”

Conrad stressed that the proposed rate increases were badly needed because overall rate levels had fallen so far earlier in the year. He added that interim general rate increases had only been partially applied as individual contract terms or negotiations with customers allowed. As a result, the cumulative revenue effect, while helpful, was less than it appeared.

“TSA lines are mindful, going forward, of the need to avoid the rate erosion that typically occurs during the winter season, as contracts expire or open for renegotiation as their service commitments are met,” added Conrad. “It is critical that, between individual lines-announced September rate initiatives and the TSA guideline adjustments, there will be a reasonably compensatory baseline in place for the coming contract year.”

The TSA said that average freight rates, according to TSA’s revenue index, remained at levels seen in early 2011 despite subsequent increases.

TSA members estimate that most new capacity deployed in the transpacific trade during 2012-13 will be absorbed by a combination of steadily rising demand, slow-steaming and other factors.

It added that costs including aggregate inland transport, equipment repositioning and cargo costs among others were expected to rise by 8% over 2012-13.

The TSA said that average carrier operating margins had been negative since the beginning of 2011, bottoming at -12% in Q1 2012.

“Carriers are potentially facing a kind of perfect storm next year, and heading into 2014,” Conrad explained. 

“Just as global markets see greater certainty and trade growth accelerates in a meaningful way, carriers will be facing capacity shortages, weak balance sheets and tight credit. It looks increasingly likely that reinvestment will turn on a sustainable rate structure.” 

The TSA member lines are: APL, China Shipping, CMA CGM, Cosco, Evergreen, Hanjin, Hapag-LLoyd, HMM, K Line, Maewrsk Line, NYK, MSC, OOCL, Yang Ming and Zim.