2018 – So far, two distinct markets for shippers

Gary Ferrulli, chief executive officer, Global Logistics & Transport Consulting | Jun 02, 2018 12:48PM EDT

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There have been stark contrasts this year in actions taken by transportation providers and the impacts on ocean carriers, truckers, and shippers.

Ocean carriers either totally misjudged the impact of rising fuel costs, or chose to ignore it, plowing ahead with their strategy of filling ships and chasing market share. Although not all carriers have reported their first-quarter results, those that have provide a view of the full year ahead: It’s not going to be a banner financial year for them. They’ve signed long-term contracts with little opportunity to recover fuel costs that have soared 30 percent this year and 70 percent over the past 16 months.

Contrast that with the US trucking industry. When fuel prices spiked, trucking companies almost immediately raised their fuel surcharges. The supply-demand issue is one element, because finding enough truck capacity is a real struggle, giving cargo interests virtually no leverage to mitigate a rising surcharge. Evidence suggests, however, that cargo interests are accepting the situation.

As for shippers, it’s a mixed bag. They are paying considerably higher costs for trucking services, while essentially paying what they have been for their international containerized ocean transport. As trucking volumes far exceed the international containerized moves, shippers will pay more to move their total freight in 2018.

The ocean carriers again are absorbing what should be a shipper’s cost. They have done this with several cost factors, including terminal charges and equipment repositioning in the US. A recent report from shipping analyst Alphaliner notes the ocean carriers continue to chase market share at the expense of their bottom line, by not managing capacity. So, they find ways to impact themselves negatively.

The likely 2018 scenarios

I’ve discussed this situation with clients, service providers, and industry colleagues, and there are some interesting scenarios that could occur with varying implications for shippers and ocean carriers. I’ll only discuss the most likely here because of space constraints.

The likely scenario is that ocean carriers will continue their largesse and absorb a vast majority of the fuel cost increases, until it reaches such a pain point that they’re forced to act. I’m thinking it could take several months, and then the actions will vary, but ocean carriers likely will ask shippers for a surcharge, regardless of contracts.

If shippers agree to pay, they move on. If they don’t, watch for a strict interpretation of the contracts, especially on capacity and volume commitments. For a shipper who has signed up for 5,000 TEU — roughly 100 TEU a week — don’t expect to be able to book beyond that number during the summer-fall peak season. And when space gets tight, shippers will see their shipments increasingly rolled to later sailings.

The alternative is that the carriers swallow hard and watch as their bottom lines come in considerably lower than anticipated and budgeted. And we aren’t talking a few million dollars — hundreds of millions, even billions, are at stake industrywide. Can they start another six-year industry losing streak as they did between 2011 and 2016?

All the while there is a clamoring for improved services — from transit times, ports, and points served, to new technology. Certainly, most carriers are pursuing technology upgrades. Faster transit times are getting some play, and one wonders how long it will last if fuel prices continue to rise. The situation is the same with ports and points served, which are greatly impacted by fuel-associated costs, including the inland and repositioning costs.

These issues weave their way into a situation in which ocean carriers, knowingly or unknowingly, push more cargo to third parties. Although the ocean carriers essentially signed many contracts with no provisions to recoup significant cost increases, my contacts in the third-party world took a different approach. Asked to provide the same terms as the carriers, the replies were generally “no.”

Non-vessel-operating common carriers and forwarders know that when the peak season comes, and they are paying spot market rates with a fuel charge, they will get space and be able to provide that to shippers who need it — and at their normal margins.

How much of this have carriers thought about? The first-quarter results reflect decisions made in the first four months of 2017. But the service contracts implemented on May 1, 2018, reflect well-known cost factors to the decision makers, which by all indications are going to produce some disappointing results to the carriers and their investors. It all sounds eerily familiar, like 2011 through 2016, just after a good year in 2010.

History is repeating itself again.