NVOCC Fixed Rate Allocations Cut As Spot Rates Soar

 In Industry News, Trans-Border Global Freight Systems, Inc.

May 16th 2024 – Trans-Pacific container carriers are significantly reducing or even eliminating allocations to non-vessel-operating common carriers (NVOs) for fixed-rate bookings. Instead, they are focusing on securing cargo at much more lucrative spot rates, which have surged by over 50% since early April.

Typically, forwarders secure about 20% to 25% of container volumes in their annual trans-Pacific service contracts as “named-account” bookings. However, some of the largest NVOs manage to get 30% of their minimum quantity commitments through these fixed-rate agreements, while smaller forwarders often get less than 20%.

With the rise in spot rates in the Asia-US trade, forwarders’ fixed-rate bookings are expected to decrease further. Starting Wednesday, carriers plan to implement a general rate increase (GRI) of up to $1,000 per FEU, potentially raising average spot rates from Asia to the US West Coast to $5,000 per FEU. This is a significant increase from $2,680 per FEU on April 5, as reported by Platts, a sister product of the Journal of Commerce within S&P Global.

Carriers have the leverage to enforce these rate hikes while limiting the number of containers booked under NVOs’ lower named-account rates because space on vessels leaving Asia in May is extremely tight. Some shipments are being rolled over to subsequent voyages, according to Jon Monroe, an adviser to NVOs.

Monroe mentioned that some containers might face “two to three rolls,” meaning it could take two or three weeks for these containers to be loaded onto vessels leaving Asia.

The exceptionally high spot rates are prompting carriers to limit NVOs’ named account bookings to well below 20% of their total liftings, according to Christian Sur, executive vice president of ocean freight contract logistics at Unique Logistics International.

Another forwarder, who chose to remain anonymous, noted that some carriers are entirely cutting off named-account bookings for small and midsize NVOs, while also reducing the named-account bookings that larger forwarders had already negotiated in their annual service agreements.

Eastbound trans-Pacific spot rates are rising again in anticipation of the May 15 GRI, following a similar trend after the May 1 GRI. Carriers have also filed for another GRI effective June 1.

This rapid price escalation is reminiscent of the spike in spot rates during the COVID-19 pandemic in 2021–22, driven by strong consumer demand and supply chain bottlenecks that reduced effective capacity, according to Monroe.

“This is the basic COVID environment without COVID,” he said.

Forwarders are bearing the brunt of carriers’ preference for spot rate bookings over fixed-rate bookings because carriers complete most of their annual service contract negotiations with retailers and other importers before signing contracts with NVOs, Monroe explained.

“It’s not a level playing field,” he said.

As a result, NVOs’ share of the eastbound trans-Pacific trade is declining. Through April, NVOs handled 46.7% of containerized US imports from Asia, excluding less-than-containerload volumes, down from 49.7% for the full year in 2023, according to PIERS, another sister product of the Journal of Commerce within S&P Global.

The pricing environment is becoming more complicated as the gap between spot and named-account rates widens, noted James Caradonna, executive vice president of M&R Spedag Group. The current differential of approximately $3,000 per FEU is already “unhealthy.”

This gap between fixed and floating rates is likely to increase further if growing demand and shrinking supply drive spot rates even higher.

US imports from Asia surged 19.1% year over year to 5.6 million TEUs in the first four months of 2024, according to PIERS. Retailers are forecasting continued year-over-year import growth through the first half and into the traditional fall peak shipping season.

Meanwhile, vessel space at load ports in Asia is tightening as carriers continue to cancel sailings, according to Alan Murphy, CEO of Sea-Intelligence Maritime Analysis.

“Trans-Pacific capacity into the West Coast has seen a reduction versus plan of some 14%, whereas the trade into the East Coast has seen a reduction of 11%,” Murphy said in Sea-Intelligence’s Sunday Spotlight newsletter.