JULY 2016: Ocean Freight Market Updates (Asia – USA Trade Lanes)

The last few quarters were very bad for carriers financially. Q2 is expected to be even worse with industry analysts forecasting over $6 billion in total losses for 2016.

In an attempt to drive up prices and stem this long period of industry-wide decline, carriers have begun to reduce their total container carrying capacity.

In summary: carriers’ reduction of total container space + a rising demand for shipping services = higher container costs.

Below, you will find:

  • The announced General Rate Increase (GRI) and Peak Season Surcharge (PSS)
  • High level ocean freight market analysis
  • Recommended steps

 

GENERAL RATE INCREASE & PEAK SEASON SURCHARGE

The following rate increases are scheduled to take effect in July for cargo moving from Asia into all U.S. Ports:

Announced for July 2016 and August 2016 (in $USD)

DATE 20’ 40’ 40HQ 45’
General Rate Increase Jul 1, 2016 $540 $600 $600 $760
Peak Season Surcharge Jul 15, 2016 $320 $400 $450 $506
General Rate Increase Aug 1, 2016 $900 $1000 $1125 $1265

OCEAN FREIGHT MARKET ANALYSIS: JULY 2016

Our pricing team continuously monitors the status of proposed rate hikes to ensure that we are able to mitigate increases as quickly as the market conditions allows.

To better understand these rate increases, here are the key market factors at play:

  • Stormy financial waters for carriers
    • To stem the tidal wave of financial losses (forecasted to exceed $6 billion) carriers are trying to increase rates.
    • The July increase appears to be the first rate increase to “stick” in the pricing game between the carriers
    • For more context, read our game theory analysis of ocean carrier competition
  • Carriers are actively reducing supply (to drive up demand):
    • Cancellation of services – CMA-CGM the world’s third largest ocean freight carrier recently announced the cancellation of their “Taiwan Strait” service between South China and the US East Coast
    • Merger of sailing schedules – CMA-CGM merged their “Yellow Star” and “Bohai” services between China, Southeast Asia and the US West Coast
    • Blank sailingscarriers (including the G6 alliance) had a few “blank sailings” – basically cancelling a ship or port of call on a given route to further reduce capacity for Transpacific trade
    • Ripple effects on alliances – UASC and CSCL (CMA’s alliance partners) as well as all other carriers buying slots on these vessels will also be affected by this change

 

What do these carrier updates and changes in the market ultimately mean for you?

Delays. When ships are full, containers are rolled to subsequent sailings, which are likely to also be overbooked.
Increased costs. Container slots go to highest bidder — it’s as simple as that — be prepared to pay more to keep your supply chain full (even if you have a contract!).
Inflexibility. When this space reduction is compounded with the normal volume increase of the “peak season” months of July-November, it will become extremely difficult to reserve last-minute space on ships.

 

RECOMMENDED STEPS

  • Plan ahead! – Make bookings as far ahead as possible and at a minimum of 2.5 weeks ahead of your desired sailing date. Carriers expect an accurate booking forecast at least 14 days prior to vessel departure.
  • Communicate Work closely with your vendors and ensure that they can meet the deadlines. When space is tight, carriers will put you at the end of the line, if you cancel bookings.
  • Lean on Flexport – Your dedicated Flexport Team will keep you abreast of shipment status and update any changes at origin, empowering you to make real-time business decisions to manage your supply chain.

Following this protocol will go a long way to facilitate your shipments with minimal disruption and to the greatest extent possible, avoid delays at origin due to space issues.

If you have any questions, please feel free to contact nerijus@flexport.com (Flexport’s Director of Pricing & Procurement) or your Logistics Manager & Account Executive.

Thank you for shipping with Flexport!

High Temperatures Troublesome for Air Cargo

A heat wave crushed Northern China last week, with temperatures surpassing 105° F in major cities like Beijing and Shanghai. The extreme weather grounded hundreds of flights and led to significant delays for air cargo shippers. Why?

aircraft-513641_640

Air temperature and density have an inverse relationship. Lower air density limits engine performance and aerodynamic capabilities, meaning an aircraft requires a longer runway distance and faster acceleration to attain the same lift when climbing.

In other words, high temps result in weight restrictions, and since the majority of air cargo now travels in the belly of passenger planes, the preferred solution for airlines is to bounce cargo to the next flight. These occurrences are rare and typically don’t add more than a day or two to transit time, but with global temperatures rising across the board it may become an increasingly inconvenient supply chain risk.

Fighting Unnecessary Detention and Demurrage

Port_of_Oakland_(Oakland,_CA,_USA) (1)

The recent West Coast port congestion disrupted nearly every supply chain stakeholder in the US. Adding insult to injury were exorbitant detention and demurrage fees imposed on drayage providers, importers and exporters as equipment and space became increasingly scarce.

The Federal Maritime Commission released a report in April to examine this issue in depth, and last week a group of 95 organizations wrote a letter to the FMC pressing the agency to use its authority to prevent ocean carriers and terminals from imposing these additional charges during periods of port congestion. Spearheaded by the Pacific Coast Council, a lobbying group made of the members of the five west coast brokers/forwarders associations, their chief request is that “penalty payments should be prohibited when factors beyond the control of the shipper, receiver, or motor carrier make it impossible for them to return chasis or empty containers, or pick up or drop off loaded containers within free time limits.”

Importers, exporters, brokers and forwarders alike hope this continued pressure will lead the FMC to implement preventative measures.

See contents of letter below:

Image 2015-06-18 at 3.14.17 PM

 

Court Ruling Lowers Duties on Mobile Phone Cases

«PhoneCases»

Great news for importers of mobile phone accessories: the United States Court of International Trade has ruled that several models of mobile phone cases will now be classified under a different HTS Code with lower duty rates.

Previously, US Customs and Border Protection had classified such cases as “containers” with a 20% duty (4202.99.9000), but as a result of the ruling they can now be considered “articles of plastic and other materials” at 5.3 % (3926.90.9980). The CIT rejected CBP’s classification as the functionality of mobile phone cases only reflects one of the primary characteristics of that of a container: they protect what is inside, but neither store nor organize anything. Furthermore, while items stored inside of a container are unavailable to use, an encased mobile phone is fully functional.

With over 300 million mobile devices in use in the US, importing mobile phone cases just became a whole lot more exciting. Full text of decision available here.

First Round Review: Small Always Wins

Flexport is mentioned in First Round Review today! Tech veteran Mark Leslie highlights how startups like Flexport, Harry’s and Ring are devouring market share of massive incumbents in their respective industries. This cyclical unbundling process, or Leslie’s Law, occurs when giants grow too slow to adapt and fall victim to agile startups.

“Inevitably, by the time the threat becomes compelling, it’s too late,” writes Leslie. “The small company has taken root, developing the advantages of a lower-cost structure with a simpler, lower-friction product. A new ecosystem has already sprung up around its core offerings. It’s here to stay and its inroads into the incumbent’s territory can’t be stopped.”

Small, simple and cheap will beat large, complex and expensive. Check out the full article here.

4 Aesthetic Concepts Every Non-Designer Should Know

Today we’re excited to share a blog post that our all-star Product Design Lead, Andrew Coyle, wrote for Salesforce! In the blog, Andrew discusses the challenges many non-designers face when approving the final design of an app, website, or feature. Most non-designers know when a design is aesthetically pleasing, but have a hard time explaining why.  Andrew outlines the concepts of typography and layout, and provides tips to help non-designers have a more constructive conversation with their designer.

Check out the full blog post here!

Start-Ups Unbundling the Logistics Industry

CB Insights mentioned Flexport in an interesting article on start-ups disrupting FedEx, UPS, and the logistics industry!

Check out the full CB Insights article below:

Are shipping & logistics titans like FedEx and UPS being unbundled by startups? Drawing inspiration from Andrew Parker & David Haber’s Disaggregation of Craigslist (both of Spark Capital), as well as the Disaggregation of a Bank by Tom Loverro (RRE) and Alexander Pease (Union Square Ventures), we looked at today’s US startups targeting shipping and logistics companies to visualize the Unbundling of FedEx.

The graphic below includes startups like Shyp, which simplifies the process of shipping packages using a mobile platform and a fleet of “Shyp Heroes”, to freight rate comparison products like Pivot Freight, to on demand delivery/courier options such as Postmates andUber.

disaggregation of fedex viz v2

With the clear rise of US-based companies targeting various verticals within shipping and logistics, we used CB Insights data to analyze the investment activity around the space as well. We found that deals reached a three year high in 2014 and were up 65% year-over-year. Through the first 2 months of 2015, there have already been 6 deals to FedEx “unbundlers” so the space is heating up.

Disrupting fedex deal activity

 

https://www.cbinsights.com/blog/startups-disrupting-fedex-ups/

West Coast Ports Return to Normalcy

Update: West Coast ports from San Diego to Seattle resumed business as usual on Monday, concluding a nine-month saga of negotiations and slowdowns that left a long trail of economic damage in its wake. Both importers and exporters breathed a huge sigh of relief on Friday evening when dock workers and port owners finally agreed on a tentative labor contract.

ShippingContainerSFBay

However, a full recovery will not happen overnight. The five-year contract, brokered by Labor Secretary Tom Perez, still needs to be ratified before it can cover thousands of employees across 29 ports. Despite dock workers returning to work on Monday, operations have been far from smooth, with hiccups in Oakland ranging from absent crane operators to disputes over break times. Not to mention the ports are still facing their worst congestion since 2004–dozens of ships are anxiously waiting to berth in Long Beach, Los Angeles and Oakland. Estimates range from four to twelve weeks before the backlog is completed and port operations are once again able to handle a steady flow of vessels.

Until then, many retailers will likely continue to divert cargo to ports on the East and Gulf coasts or ship by air freight, incurring higher shipping costs on top of billions in lost sales to date. While the worst seems to have passed, the long-term impact on the competitiveness of the West Coast ports remains to be seen.

PMA says to expect lockout if contract not accepted

Update, as of 2/4, 4pm: the Pacific Maritime Association President James McKenna said today that the ILWU should expect a lockout if they do not accept the labor contract offered Tuesday.  The lockout would be fully in effect within 5 days, he says.

The lockout would mean productivity at the ports will ultimately grind to a halt as more and more people will be barred from working at the ports.

Fortunately, at least, the State of Washington’s representatives have appealed to Congress to get involved and assist in the negotiations between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA).

You can view their memorandum here.

If you are importing products across the sea to or through the West Coast, expect heavy delays.  We do not know how long a potential lockout would last, but we do know that until the ILWU and the PMA come to a resolution, traffic at the ports would be at a complete standstill.

In the meantime, we would strongly urge you to consider air freight until the disputes are resolved, lest your supply chain suffer doubly from both the ports situation and the upcoming Chinese New Year holidays.

The ports last shut down in 2002, when an 11-day lockout caused ripple effects across the ports and the entire U.S. economy for 6 months.  Work resumed only when the President invoked the Taft-Hartley Act and obtained a court order to open the ports.

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