Issue 7: Shippers Brace for High Rates as Contract Negotiations Begin

Welcome once again to the Legacy Monthly shipment, your one-stop shop for the latest industry topics, trends, news and insights from a team of logistics professionals you can trust. In this month’s edition, we look at prospective rate hikes, cybersecurity, economic recovery and so much more.

Let’s get right to it.

Today’s Shipment: 

• With annual contract negotiations looming, shippers prepare for rate increases.
• Global parcel volume is exploding, and parcel carriers are paying the price.
• Increased third quarter demand leads to rolled cargo and significant port congestion.
• Despite collapse in travel, Anchorage airport finds a way to stay busy.
• CMA CGM is the latest victim in a long line of cyberattacks on the logistics industry.
• Cargill, Shell and others unite to take action against climate change.

OUTLOOK

Substantial Increase in Annual Contract Rates on the Horizon

Following an exponential increase in container spot rates, importers are advised to anticipate a rise in rates for long-term contracts as they head into annual contract negotiations.

Despite reporting that roughly half of all business still comes from annual contracts, many carriers have turned to short-term contracts and spot business in order to withstand pandemic-induced freight rate volatility. This shift has caused container spot rates to spike, with a 200% increase on the China to U.S. West Coast route and a 70% increase on the Asia-North Europe route compared to just a year ago. According to experts at Drewry, “Because spot rates tend to be indicators of contract rates, contract shippers and BCOs should start to budget for higher contract rates on most routes in 2021.”

Volumes have remained strong all year due to carriers’ ability to manage capacity issues related to COVID, and demand has pushed rates even higher. We expect strong volumes and higher rates to continue into Q1 as we approach the holiday season and as large importers replenish inventory and plan for more eCommerce sales and economic strain as a result of COVID. Demand may begin to soften in mid-to-late Q1, but carriers will likely continue to manage capacity by either pulling capacity out of the market or blocking out space on vessels to keep rates up. As we head into the new year, we expect that new contract rates will not be signed at the same levels — we could see anywhere from a 20%–35% drop over current spot rates — however, they’ll most likely be higher than historic levels over the past several years.

It’s in shippers’ best interest to start preparing for Q1 negotiations by gathering volumes and reanalyzing their supply chain. By establishing a strong informational database, they can better forecast for the future and be well prepared heading into any rate negotiations. Based on where offers from carriers eventually land, it might not make sense for shippers to lock in volume until the spot market softens dramatically.

INDEX

Global Parcel Volume Exceeds 100 Billion for First Time Ever

According to the Pitney Bowes 2019 Parcel Shipping Index — released Monday, October 12 — parcel shipping has reached 103 billion volume globally and is expected to more than double by 2026. Unsurprisingly, the U.S. and China lead in parcel volume by country at 14.7 billion and 63.5 billion parcels shipped, respectively. The U.S.’s parcel market revenue is the highest in the index at $130.3 billion; Amazon has played a major role in the country’s YOY growth, with 1.9 billion parcels shipped and 155% parcel growth volume YOY. According to the Index, 2019 marks the first year that global parcel volume has exceeded 100 billion.

According to a poll conducted by Morning Consult, as of September 2020, nearly one-third of U.S.-based SMBs reported an increase in shipping volume; that said, only 12% of SMBs reported adding new carriers to their rotation during the pandemic.

This dramatic increase in volume has placed considerable strain on parcel carriers, which were already under significant duress trying to serve the new homebound economy, itself a product of the pandemic. With the holiday season just around the corner, major carriers such as FedEx and United Parcel Service have started to place limits on and, in some cases, have even turned away shippers in order to prevent their networks from being overwhelmed. Even smaller carriers, such as LaserShip Inc. and DHL, report to having reached capacity. According to some estimates, the capacity shortfall could average as much as seven million packages a day between Thanksgiving and Christmas.

Although parcel carriers are looking for pragmatic ways to manufacture extra capacity, such as extending pickups to seven days a week, there’s no telling whether it will be enough to accommodate seasonal demand.

REPORT

High Rate of Rollovers at Asian Hubs Causes Congestion in US & Canadian Ports

Unexpectedly high third quarter demand has overwhelmed major transshipment hubs in Asia, resulting in a high rate of rollovers — that is, of cargo arriving at port for transshipment and leaving on a different vessel than scheduled. Although rolled cargo ratios have decreased from August to September, one in every three containers was rolled in September, and experts expect these rollovers to continue well into Q4.

Import delays resulting from these rollovers have led to congestion at many U.S. and Canadian ports, especially those along the Southern California supply chain, which are struggling to flex with demand. Importers are experiencing delays in transit as nearly 30% of cargo loaded to a transship point is rolling, missing its mother vessel connection to destination. Import containers are piled high at U.S. and Canadian ports, making it difficult to retrieve containers at the bottom of the stack and slowing transfer to truck or rail for final delivery. Backlogs at U.S. distribution points are delaying the unload of import containers, tying up the containers and chassis needed for the next load.

Legacy’s infrastructure is built to handle predictable demand, however, 2020 has been anything but. Rollovers in Asia have downstream effects on North American trucking, rail and distribution, particularly from the West Coast. Inland transport by rail and truck is currently in short supply; we expect these delays to continue into Q1 2021. In light of this, we’re advising clients to work with carriers and forwarders to consider alternative routings for interior points. Plan shipments as early as possible to mitigate delay impact to customers, build safety stock levels and continuously reevaluate your supplier network to maximize your ability to deliver competitively while maintaining contingency options.

COMMENTARY

ANC Remains One of the Busiest Cargo Airports Even Amidst Global Pandemic 

After taking a substantial hit due to the collapse of vacation and business travel, Alaska has found a way to come out on top. Even prior to the outbreak of COVID-19, Ted Stevens Anchorage International Airport (ANC) was a hub for international trade due to its advantageous location. Now, a steady stream of air cargo in the form of eCommerce imports and medical supplies from Asia to the lower 48, as well as “gas-and-go” layovers from air carriers, has enabled ANC to weather the worst of the pandemic.

Looking ahead, Alaska aims to diversify beyond landed cargo by using a recently awarded discretionary grant to build a cold storage facility on ANC’s grounds. This facility will enable ANC to capitalize on its network of destinations and take advantage of unique air cargo transfer options originally granted in the 1990s.

Though most eCommerce cargo continues to move via commercial airline, a growing number of suppliers in Asia are using direct fulfillment, which has shifted product to parcel carriers such as UPS and FedEx. We can likely expect to see more activity through ANC as a result of that, enabling the airport to continue its steady rebound.

NEWS

CMA CGM Struggles to Resume Normal Operations in Wake of Cyberattack

French container shipping line CMA CGM recently confirmed that it was the victim of a cyberattack that affected the group’s peripheral servers. Despite restoring functionality to its network and assuring customers that it was business as usual, the group was still struggling to bring systems back online days after the attack. This has prompted some shipper representatives — notably, the Freight & Trade Alliance and Australian Peak Shippers Association — to demand reimbursement for members due to CMA CGM’s failure to “adequately provide contingency services.”

Here at Legacy, we can speak from personal experience about the downstream effects of the CMA CGM attack: We’ve been in the process of trying get cargo released from carriers whose systems have been locked up by this attack.

CMA CGM is just the latest victim in a long line of cyberattacks on the maritime and logistics industry, starting with the 2017 NotPetya cyberattack against the Ukrainian government, which crippled A.P. Møller-Maersk’s global network. As recently as February 2020, Total Quality Logistics was rocked by a cyberattack that compromised its carrier portal. Although CMA CGM announced that its eCommerce sites were operational on October 11, the full extent of the attack remains unknown, and industry analysts speculate that it could take the group months to fully recover.

Unfortunately, with fewer carriers in the market and more alliances between multiple carriers moving cargo on the same vessel, cyberattacks of this nature are bound to have a more widespread impact. In fact, they’re quickly becoming a new form of supply chain risk, prompting companies to reevaluate their infrastructure and the potential threat such attacks pose to their customers. In order to protect themselves, we encourage shippers to carefully evaluate providers — specifically, what assurances they offer that their systems are protected — as they begin the process or renegotiating contracts and rates heading into 2021. For our part, we’re working with carriers within the Legacy base to get a better understanding of what they’re doing to protect shippers and advising our clients accordingly.

ANNOUNCEMENT

Major Shippers Team up to Reduce Ocean Shipping Emissions

In last month’s edition of the Shipment, we covered the environmental effects of online shopping. Today, we turn our attention to another climate-related issue with a bit of good news to share. Earlier this month, Cargill Ocean Transportation, Dow, Shell and 14 other major shippers from the energy, agriculture, mining and commodity trading industries united to form the Sea Cargo Charter. This supergroup aims to “[provide] a global framework aligning chartering activities with responsible environmental behavior to promote international shipping’s decarbonization.”

The group aims to implement a standardized greenhouse gas emissions reporting process and reduce ocean shipping emissions by 50% by 2050 in accordance with the International Maritime Organization’s goals for climate change mitigation. By establishing a standardized reporting process, the Sea Cargo Charter also intends to promote transparency into the effects of ocean shipping on greenhouse gas emissions. It’s a lofty goal but, given that the 17 companies that make up the Sea Cargo Charter’s membership account for 80% of all ocean cargo, it should be an attainable one.

Those of us on the Legacy team are excited to see so many industry leaders take what is a definitive step in the right direction and hope that the Sea Cargo Charter sets a new precedent in the fight against climate change.

What stories have caught your attention recently? Is there anything you’d like to see us talk about in future issues? Send us an email and let us know — we want to cover the news that’s important to you.

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Until next time, stay safe out there.