Transportation Pricing part 1 – Where Do We Stand?

Volatility of the transportation market, especially international ocean container costs, is always at the top of people’s minds.

It plays so much into how companies manage their supply chain, handle seasonal shipping demands, and try to forecast the best timing to fulfill the needs of their distributors and end customers.

We wanted to make a couple of points regarding international transportation pricing: 1) what the current market looks like from a high level, which we’ve outlined below, and 2) in a separate post, we discuss what international transportation rates can really mean, and how you can work to effectively manage them within your business. (Click here to read Transportation Pricing 2 – Rates Aren’t Everything)

The Market as we see it

Currently, there is significant excess capacity compared to the demand of U.S. Importers. This trend is expected to increase through the rest of 2011 and 2012, as more vessels enter the rotation, while consumer spending tries to work its way back. Over-capacity has driven rates down making a very competitive market for ocean carriers. With many new, smaller carriers entering over the past few years, the market is flooded with low cost options.

An illustration of these effects is a lack of a Peak Season Surcharge (PSS) thus far in 2011. Historically, PSS has been implemented in mid-June and often lasts through October. This year the carriers have been unable to implement the PSS due to lack of demand and over-capacity. The market simply will not allow it. Carriers keep pushing back the implementation date, currently sitting at August 15th. However, if the market holds, our feeling is carriers will have a rough time charging PSS this season. If they do manage to implement PSS, it will undoubtedly be at lower levels within the first few weeks. This is good news for U.S. importers this summer as they ramp up for Christmas!

There is a flip side to this, as we saw a few years ago when rates went dangerously low, and carriers lost millions, maybe even billions of dollars. If the market reaches these low levels again, we can expect the carriers to unite once more, in an effort to raise rates to a profitable level. Again, our gut feeling on this is that until the U.S. consumer goods market picks up, no shippers will be willing to take these increases, and likely the carriers will not be successful in raising the rates.

(click here to continue on with Transportation Pricing part 2 – Rates Aren’t Everything…)