Disclaimer: This is not a quantitative analysis, but rather an opinion piece reflecting the perceptions and opinions of Sea-Intelligence management team, as expressed by the author. These pieces will become a regular feature, alongside our other, highly data-intensive products and publications.

Author: Bjørn Vang Jensen

Years ago, while I was participating in a break-out panel at TPM in Long Beach, a very senior executive with a very large NVO, both of whom shall remain un-named, said, “as a shipper, 9 times out of 10 when you short this market, you win”.

“Shorting” something, a term normally used in the context of stock trading, essentially means that you are making a bet on something going down. But the word was used correctly in this context, even if it wasn’t related to equity trading. And the panel member was absolutely correct in his assessment as well.

As many shippers (BCOs and NVOs) have discovered lately, this is not one of those 9 times; it’s the 10^th.

There’s a rhythm to annual container contracting. The retailers open the ball, sign their contracts, and that then sets the benchmark for what comes next: The NVOs and the non-retail BCOs, who generally run their negotiations between January and April. They tend to end up with lower rates than the retailers, for a bunch of reasons.

Firstly, they are usually not in control of volumes at the level of the retailers. And make no mistake, there comes a point when volume is no longer your friend; when the scales tip to where you as a customer need the supplier more than they need you. This is not a good place to be for a buyer - of anything. Supply and demand, Economics 101.

Secondly, there still exists among very large shippers a mentality that denies the existence of this fact. That is to say, “we have immense volumes, and therefore we get to set the terms, and you can like it or lump it.” And carriers normally see it the same way, because this is the low-season, and they need “base cargo”.

Shippers who don’t swiftly change that mind-set are, in my opinion, in for an exceptionally rude awakening this year. Ask yourself why it is that you do what you do: To achieve a paper-win at the negotiating table, or to get your stuff to a place where customers can buy it?

In my (these days virtual) travels around the world, I hear all kinds of predictions: “The pressure will abate after Chinese New Year” (CNY); “we will be back to normal at the end of summer, when we are all vaccinated”; “regulatory authorities will step in”; “more capacity will be deployed”.

None of those is true, in my opinion. I’m not taking sides, but this year in particular, buyers of this service are not going to have a lot of fun!

Because it is my considered opinion that, no, this will not abate after CNY, nor will we all be vaccinated at the end of summer; no, the authorities will not step in (because they have no basis for doing so), and there is no more capacity to be added, short of row boats.

Perhaps it’s time to bring the Cutty Sark out of her dock. She was faster than most container ships are today anyway, so with a bit of retrofitting, who knows? And she doesn’t even need a scrubber!

Inevitably, the question of enforceable contracts, futures, derivatives, index-regulated contracts etc. re-emerge. It would be a wonderful, and indeed sane, world if this were to happen, but it won’t, at least not in a permanently market-changing way.

Why? Because of that “9 times out of 10” – thing! That mindset is so heavily ingrained in this industry that a black swan event like this is not going to disrupt the market dynamics in the long term. It didn’t in 2010, and it won’t in 2021. I wish it would, but, as Benjamin Ola Akande said, “hope is not a strategy”

So, what is?

Firstly, while those enforceable contracts and indexes have their place, and are to some extent used, on various platforms, they will not be the cure for all that ails you, because the devil is in the details; exactly which index? at what starting point? exactly how enforceable? full refund? full dead-freight? review period frequency? Floors? Ceilings?

I once (I swear I’m not making this up!) had a carrier propose a home-made index, in which the fluctuating price of Camembert cheese was an element!

What happens when transit times are not honored? if you read our monthly GLP report on schedule reliability, you’ll find that you’re better off betting on Bitcoin going to 500,000 than on quoted transit times being even remotely reliable.

Still, you may want to consider placing some volume there, if you can reach agreement on the above. Set aside a year or so to try and make it happen, but don’t count on it.

Neither shippers nor carriers are blameless. Shippers have exploited the carrier-created over-supply for years (although, it must be said, with willing sellers, and therefore I make no apologies for having been one of those buyers). When it comes to spot cargo, however, carriers are now acting like sharks around a whale carcass.

And who can blame them? They’ve lost untold billions over many years. Everyone makes hay while the sun shines, if they know what’s good for them. If in whatever industry you’re in, you find yourself in the position of having supply available in a tight market, then you’ll adopt the principle that “everything is for sale if the price is right”. There’s that pesky free enterprise-thing again. And so long as you don’t hold a monopoly, that’s exactly why the regulatory authorities will not step in. Free enterprise is just that: in the absence of a monopoly, the market sets the price.

But there’s much more to this than rates alone. Shippers of all kinds had better get used to the idea that this year, it’s not just going to be about rates; many commercial terms that were (admittedly often reluctantly) accepted by carriers in the past will be challenged or outright declined. The “like it or lump it” shoe will be on the other foot this year.

There is much talk about carriers sacrificing customer relationships for short-term gain, and to a large extent, this is true. I’ve often counseled carriers with the old adage, “be careful of the toes you step on on your way up; they are connected to the backside you will have to kiss on your way down!”

But that argument doesn’t get much traction these days. Why? Because the carriers know full well that the “9 out of 10” won’t go away, and they have to survive. They have to build a nest-egg, and they have to retain their credibility with investors and boards, who will not look kindly on a management team that fails to capitalize on a rare golden opportunity.

And by the way, if they don’t survive, and add some padding for leaner times, then shippers’ global supply chains go down the drain. Which is why carriers are pursuing the quick-win strategy. In a perverse way, shippers should be grateful that market forces prevail. The alternative for them is actually highly dangerous.

The one and only real pressure point that shippers have this year is schedule reliability, which is absolutely nothing short of woeful. If you’re being asked to pay top dollar, you should also be entitled to top service – and on the main trades, no carrier offers that, outside of a few premium services.

So, my advice to shippers would be to accept that this is just that 10^th year. Adjust your budgets accordingly, find efficiencies, near-shore if you can, and if it makes economic sense. By all means, negotiate as hard as you can, but be prepared for a year like no other in that game.

And if you must (and many must), then pass on the cost increase to your own customers. This should be relatively risk-free, since most of you are in the same boat – as it were! You did it when trade tariffs went through the roof. Do it again.

For shippers, there is no silver bullet this year. But the next 9 are coming. In the meantime, taking a look at the TOTAL supply chain cost, rather than narrowly focusing on ocean freight or air freight rates, is going to be key. And that will be the focus of our next piece…