According to Gordon Downes, the CEO of the online cargo booking site NYSHEX, “Things are getting nasty in container shipping,” as shippers and carriers clash in “misguided” attempts to shift the blame for the current state of the supply chain onto someone else.
[s2If is_user_logged_in()]Shippers are blaming the carriers for lacking loyalty, declining levels of service, incompetence and collusion, said Downes, while the lines are sticking to the line that they have a service contract and all they can offer is the minimum quantity commitment (MQC) divided by 52.
“Simply put – traditional service contracts are ambiguous and wide open to interpretation. However, if the contract terms clarified how much allocation the carrier would provide each week, and how much cargo the shipper would load each week (can be a range to accommodate a set amount of variability) – I assure you this would not be an issue,” claimed Downes.
According to Lars Jensen, CEO at Sea-Intelligence Consulting, the current problems in the supply chain are the result of the pandemic and are not the fault of any one member of the supply chain.
Jensen believes that all of the major players in the supply chain have behaved rationally and that changes in consumer demand were caused by the pandemic and could not have been foreseen by any one player in the supply chain.
“We have to make a clear distinction between a short-term bottleneck caused by the pandemic and the structural changes in the market,” Jensen told Container News, “It doesn’t matter what type of framework you have right now you would see problems, because they are caused by rapid changes in consumer behaviour,” he added.
First consumers, in the US and Europe mainly, stopped buying goods in the early part of the pandemic, with demand falling 20-30%, then demand increased from the end of May onwards.
By this time with demand declining vessel operators had already cut services, with vessels out of position. As a consequence it has taken around 14 weeks to develop a situation where the shortage of empties became apparent. And it could be solved by Chinese New Year if the empties are shipped back to Asia quickly, but if carriers must divert the boxes to pick up cargo it will take longer, said Jensen.
“No-one did anything wrong,” added Jensen it was rational for the lines to cut services in the face of a rapid decline in cargo demand.
However, Jensen goes further, claiming that a world where supply chains are stable has never existed they have always been in flux with rates fluctuating up to 100% year-on-year, schedule reliability swinging up to 25% within a year for the major trades and cancellations increasingly becoming the norm.
In a defence of the carriers, in what is becoming an increasingly passionate debate, Jensen, argues that while 2020 was a particularly volatile year the container shipping industry has never really been stable in reality with large fluctuations in demand and supply.
“People think they are living in extreme times, but they’re not remembering the past properly,” argued Jensen, “In any 52-week period it is fairly common to see a 50-100% swing in freight rates, and with a few festive events it’s normal to see extreme volume levels while, even though 2020 was a complete outlier, cancellations were increasing in the past.”
It was only when Jensen began looking at the statistics that he realised that the volatile state was not unusual, but that people want to get back to a world that is ‘normal’ which is “stable”, “but it’s not [stable] and it never was normal, markets are not stable,” said Jensen.
Last year was an unusual year concedes Jensen, “Over the last three decades we have not seen such volatility,” he said, and as long as the market remains relatively stable then contracts apply, but when the market hits a volatile patch then shippers may not deliver the MQC, or conversely if capacity is tight carriers may not be able to carry the agreed level of cargo.
There is no recourse in the courts for either the carriers or shippers who have seen contract agreements unmet, said Jensen.
James Hookham, of the Global Shippers Forum (GSF) agrees with Jensen, “There is a certain amount of give and take in any commercial arrangement,” he said. Moreover, Hookham agrees with Jensen that the latest round of contract negotiations will include far more detail where that will tie carriers to certain service levels, with penalties included if the carriers fail to meet the agreed service levels, or if shippers do not deliver the requisite number of containers.
Jensen, however, also believes that these negotiations will change the way carriers see their services. If penalties for a failure of service are introduced on the major east to west routes, these will be considered “backbone services”, and these services will not be able to have blanked sailings.
Secondary trades, however, will overlap with the backbone services and in periods of low demand these services will see the introduction of vessel cancellations, these secondary services will not be subject to penalties within the carrier contracts, but freight can be shifted to these services.
Hookham is also encouraging shippers, however, to question surcharges imposed by the carriers, “the scourge of every shipper’s budget, able to spoil a seemingly great base rate in just a few additional invoice lines.” He believes that 2021 could be the year that surcharges are finally laid to rest, and carriers begin to quote all-in prices.
Lastly, the GSF and many other shippers are keen to challenge the reasoning behind the Consortia Block Exemption Regulation (CBER), which is seen as giving the carriers, within their alliances, an unfair advantage to manipulate cargo capacity and thereby the rates.
Shippers believe that that the CBER has led to “Endemic structural problems” in the market, allowing the lines to “co-ordinate blank sailings, causing a fundamental dysfunction in the market.”
Shippers should allow themselves a moment in the contract negotiations to ask, “Show me how I benefit from your anti-trust immunity?”
Then Gordon Downes may see relations between the shippers and carriers get nastier still.[/s2If]
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Nick Savvides
Managing Editor
