Global News April GRIs, service contract moves to reveal ‘new’ trans-Pacific

The next three weeks will give a sense of what the so-called new normal is for the trans-Pacific trade. On April 15, container lines will seek another general rate increase (GRI) in a bid to push up sagging rates while accelerating efforts to recalibrate capacity with depressed demand by blanking more sailings.

A general rate increase is hardly noteworthy, as they have historically shown little staying power in down markets. Success, or lack thereof, of this GRI — ranging from $600 to $1,200 per FEU — will show whether the carriers can rally a spot rate recovery. The GRI, carriers hope, will also nudge US importers to finalize trans-Pacific service contracts by the end of the month, with 12-month contracts generally beginning May 1.

Carriers have been known to refuse future loadings until deals are signed, and forwarders recently began reporting an uptick in rolled cargo, when carriers prioritize higher-paying spot cargo over cargo paying less. That recently started happening out of several ports in China, forwarders tell the Journal of Commerce.

Container lines are being particularly aggressive in the levels of GRIs they’re seeking this April, said Marc Bibeau, chief executive at OEC Group.

“The current market conditions are not conducive to any cost escalations,” Bibeau said. “But the carriers are now back in a loss-making position with the FAK (freight-all-kind) rate and need to get a break-even rate where service won’t be compromised.”

There’s some momentum for a GRI push as reflected by rising utilization of ships. Ocean carriers on the Asia-US West Coast trade in the last two weeks have been sailing ships more than 85 percent full, according to maritime analyst Linerlytica. The trajectory of utilization is sharper than it was ahead of the April 15 GRI two years ago, but this year, ships still aren’t as full as in 2022, when utilization was in the high 80s.

Kurt McElroy, executive vice president at forwarder APEX, isn’t seeing any so-called green shoots of demand on the eastbound trans-Pacific. Importers, in general, are telling him they’re pulling back on ordering, with many trying to determine the direction of the economy amid high inventories, slowing retail sales, and tighter lending to small business owing to the collapse of Silicon Valley and Signature banks last month.

"All of this points to a very tepid volume shipping year for the ocean carriers,” said McElroy. “Blank sailings are proliferating, which is really the tool of last resort for carriers to maintain some level of operating profitability.” Emboldened shippers US retailers are holding to their forecasts, telling Hackett Associates in its Global Port Tracker (GPT), released April 7, that they're ordering moderately. US retailers will likely keep importing more through the summer, but US imports will remain below year-ago comparisons through August, according to GPT.

With such damp expectations and Asia-West Coast container spot rates per FEU hovering over $1,000, it’s not surprising more US importers haven’t pulled the trigger on annual service contracts. There were some expectations among forwarders that the biggest US retailers would lock in contracts around April 1, helping set the floor for their smaller counterparts and the rest of the industry. But that didn’t seem to happen, according to discussions with forwarders.

Several shippers told the Journal of Commerce that, in fact, carriers in April have come back to them offering larger minimum quantity commitments. Those same importers are not only considering bids well below last year’s levels, but they’re confident they’ll be able to wrestle more so-called free time before they must return containers. Container lines, however, have been far more resistant to giving up free time at marine terminals.

After the flurry of April contracting action and rush of cargo to avoid April GRIs, carriers in May will show the industry the extent of their capacity control for their second half of the year. Until then, shippers are grasping for the so-called right contract rate. It can’t be too high and draw the ire of the C-suite — which, shippers say, is increasingly pointing to spot rate indices showing steep declines from last year and asking, “Why don’t we have that rate?” Nor can the contract rate be too low, so that containers find themselves on the loading manger’s cargo roll list when space gets too tight.