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Transpacific contract negotiations going down to the wire

Many US importers holding out for lower annual rates

The upside scenario for shipping lines — Houthi-inflated spot rates spur big gains in annual transpacific rates — is not happening, says Flexport. Carriers are seeking relatively small year-on-year increases

ANNUAL contracts for transpacific container shipping typically begin May 1, leaving just a few more weeks to finalise 2024 deals. Negotiations are running late.

“Nearly everyone has usually signed by the beginning of April. That isn’t happening this year,” said Flexport global head of ocean procurement Nerijus Poskus, in an interview with Lloyd’s List on Thursday.

“May 1 is right around the corner — and you need to book your May sailings in the middle of April.”

Prevailing spot rates typically anchor contract rate decisions, but today’s market dynamic is far from typical. This year’s transpacific contract negotiations coincide with high spot rates inflated by Red Sea diversions.

Shipping lines admit Red Sea-driven upside is temporary, meaning spot rates will be lower during the back end of May 1-April 30 contract period. Consequently, current spot rates are less relevant than usual.

Spot rates are already retreating. The Drewry World Container Index (WCI) assessed Shanghai-Los Angeles spot rates at $3,825 per feu for the week ending Thursday, down 20% from early February.

The ongoing slide in spot rates is delaying contract agreements. According to Poskus, many US importers, particularly smaller importers, “are dragging their feet and not signing early because they believe contract rates may end up being lower if they wait longer”.

On a positive note, he added, “Some of the big guys have already signed, based on my market intel, and that sets a baseline allowing other people to start thinking about locking in rates.”

Flexport has yet to finalise its own transpacific contracts but will do so shortly. “We have contracts ready, more or less, with quite a few shipping lines, and will finalise them as soon as a critical mass of importers is ready to sign,” said Poskus. “We’ll make the decision in the next seven to 14 days.”

Flexport: Carriers not seeking big increases

Poskus believes carriers have now pared their annual contract offers to reasonable levels and importers who wait too long risk getting stuck in the spot market, which is much higher priced in the near term.

“It doesn’t matter that spot rates are coming down, they’re still significantly more expensive than fixed rates.” The WCI Shanghai-Los Angeles index is still up 94% from late November, prior to Red Sea upside, and up 115% year on year.

What carriers want for their transpacific contract rates in 2024 “is not as high as what people may think carriers want,” he maintained.

Last year, carriers sought to sign annual contracts that would not lock in losses. They accepted transpacific rates that were just above breakeven.

“This year, carriers are essentially asking for an increase of a couple hundred dollars [per feu] over last year’s transpacific rates,” said Poskus, who asserted that current annual contract offers are much lower than earlier market chatter of a $400- to $600-per-feu increase versus 2023, and slightly below rates on offer a few weeks ago.

“Even at $100 to $200 more, that will barely cover inflation for carriers, so it’s almost the same as last year. Having healthy carriers is not a bad thing, and if you’re paying them a nearly breakeven rate and you’re able to lock that in for a year, it’s a pretty good deal.

“If you really think that it’s going to be a bloodbath and carriers are going to fight for market share, then you should consider going into the spot market.

“But that’s a big bet,” he warned. Spot rates could surprise to the upside due to new supply chain disruptions or other reasons. “That bet could go either way.”

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