By Henry Byers – Director of Pricing and Partnerships at Steam Logistics
This year’s peak season in ocean shipping was one of the most challenging in recent history, testing the strength of supply chains around the world. This was especially true for the tradelane from Southeast Asia to the US, which is known widely as the transpacific eastbound (TPEB). This lane was plagued by a variety of challenges this year: blank sailings, volumes at an all-time high, trade disputes, tariffs, congestion, delays…the list goes on. So, the question now for most shippers (BCOs) and NVOCCs is how those issues will affect this tradelane for 2019 and beyond?
There are a few differing perspectives on how contract season (and ocean shipping overall) will materialize next year. Some experts expect that both consumer demand and the US Economic output will sustain a high level, and therefore will enable ocean carriers to charge higher rates than previous years. Others believe that the demand that was pushed forward from the January 1st trade deadline has resulted in a buildup of inventory here in the US, and therefore, will reduce demand substantially during Q1 of 2019 and the normal pre-Chinese New Year rush. This would prevent carriers from instituting any kind of rate increase for 2019.
In my opinion, the latter is the more likely of the two perspectives. Even though the tariff increases were postponed 90 days to March 1st, shippers have little choice but to assume that these increases will be imposed and that their “costs of goods sold” will rise considerably as a result. With this reality looming over US-based shippers, most have chosen to go ahead and move their shipments forward and build up inventory to circumvent these tariff increases for the short-term. This means that a large amount of volume that would have shipped in the next 90 days is already here in the US. So, for early 2019 and for what would have been a pre-Chinese New Year rush of ocean freight, the outlook for demand on the transpacific eastbound is grim from a carrier’s perspective. This decrease in demand will force rates to drop substantially leading up to contract season (with exception of the third week of December), and will ultimately set the stage for the BCOs/NVOCCs to the have the leverage in contract negotiations.
While both outlooks for 2019 can be debated, it seems that both sides of the negotiating table would agree that it is time for an overhaul on transpacific eastbound contract negotiations. If ocean carriers continue to accept rates as low they did for 2018, they will likely move further into the red, and some ocean carriers may even be forced into a Hanjin-like bankruptcy. Ocean carriers also face rising costs alongside the implementation of the 2020 Low Sulfur Fuel mandate by the International Maritime Organization, which is sure to have a substantial impact on the overall profitability of each ocean carrier.
On the other side of the table, costs are also rising for BCOs through tariff increases and greater shipping demands from their customers through e-commerce and on-demand delivery services. These pressures are cutting into their profitability, which may lead to them passing these additional costs on to their customers, undoubtedly affecting the demand for their products.
With external pressures mounting from what seems like all sides, this is sure to be a defining year for the TPEB. What happens in 2019 on this specific lane will play a significant role in the direction of ocean shipping in the future for both sides of the negotiating table.