FALLING RATES GIVE SHIPPERS LEVERAGE
Byline: Joanna Ramey
WASHINGTON — Ocean freight rates from the Far East to the U.S. and in the Caribbean Basin are taking an unprecedented tumble, and apparel and textile shippers are reaping big benefits.
“We’re now paying less in ocean travel in every trade lane than we did 10 years ago,” said Tom Eye, manager of international distribution, J.C. Penney, speaking of the average rates on all types of merchandise shipped by the giant chain.
“The current drop in rates has been the most significant I’ve seen,” said Hubert Wiesenmaier, executive director, American Import Shippers Association, which negotiates ocean-going cargo contracts for 250 textile and apparel makers and specialty stores, such as Liz Claiborne and Casual Corner.
Several factors have come together, resulting in these shippers having the upper hand in negotiations with ocean carriers.
In shipping lanes between the Far East and U.S. there’s a huge overcapacity of cargo space. Equally important is that independent carriers have improved their services and added sailing times, all at lower prices than those offered by a cartel of 14 of the world’s largest ocean carriers, known as a conference, which is granted antitrust immunity in order to set rates. Because it previously outperformed its independent competition, the conference, called the Asia North America Eastbound Rate Agreement, or ANERA, attracted the bulk of time-sensitive cargo like apparel.
The new market dynamics began eating away at ANERA’s business last year as ANERA executives realized that expectations of substantially increasing bookings weren’t materializing. Instead, its share of just more than half of the Pacific import market had fallen to about 48 percent. This accounted for roughly a $184 million loss in business, according to industry sources.
By last fall, some ANERA members, fearful of losing more business, broke from the pack and began individually offering deep discounts to customers.
For Wiesenmaier’s importers, rates began falling in September, first by $100 per 40-foot container. Now they’ve plummeted by $600, which means the base rate of a container to travel from Hong Kong to New York is $2,875, about the same as ANERA charged these importers in 1990. In return for lower rates, these importers increased their cargo commitment to the cartel.
“These rates are still higher than the independents, but ANERA has closed the gap significantly,” Wiesenmaier said
The turning point for Nike came when an ANERA carrier decided to drop apparel rates to match the lower rates on footwear cargo, a rate schedule followed by independents that treated both products equally. Until this offer, Nike had always shipped its apparel via independents.
Such flexibility on ANERA’s part is surprising, said Mark Storen, Nike transportation manager for international trade. “We’ve had ANERA and the independents come in and make other offers to us unsolicited. I think there is a lot of concern out there among the carriers,” Storen said. “It’s a real fluid time right now.”
In addition to increased competition from independents and overcapacity of cargo space in the industry, ANERA carriers are also faced with the impact slack retail sales in the U.S. have had on their business, a spokesman for the carriers said.
ANERA now is in the midst of rethinking its role in the industry and the way it does business. For example, the conference no longer is requiring customers to sign one-year contracts that begin May 1. These generally culminated several months of tough negotiations in which ANERA was reluctant to back down from rate increases. The conference is also more open to amending existing contracts easily to meet shippers’ changing needs.
“The conference can still be a stabilizing force in the trade,” the spokesman said, forecasting a continued need for the 10 carriers to work together in managing cargo, aside from setting rates.
The spokesman said ANERA, collectively, can still offer customers a wider range of shipping times and ports. This selling point is crucial in providing assurances of backup cargo space on another carrier should a vessel become disabled or there otherwise is a need for more space.
“Right now there is a lot of flexibility,” the spokesman said of ANERA’s desire to address shippers’ needs, acknowledging the conference no longer is “a benchmark for the trade.”
Similar issues facing cargo ferried from the Far East are also causing prices to fall in the Caribbean, particularly for Section 807 apparel and textiles. Companies involved in 807 apparel, in which garments are sewn from U.S.-cut textiles, have in the past faced among the steepest shipping rates.
The disbanding this fall of another ocean carrier cartel, the Latin American Shipping Service Association, initially triggered price declines of about 20 percent as members within the group began undercutting each other. Subsequently, another rate war broke out, this time triggered by one of the largest worldwide carriers, Seaboard Marine, which on Jan. 15 cut fees for Section 807 apparel by as much as $600 a container. Seaboard officials could not be reached for comment.
“It’s like a fire sale,” said Malcolm Robinson, logistics manager for Levi Strauss & Co., describing the bidding wars triggered between the varied carriers in the region. “They’re all saying, ‘Give us a chance to meet the rates.”‘
According to Tim Saling, director of Americas Service for Maersk Inc., another big worldwide carrier operating in the Caribbean, Seaboard’s move to undercut competition came as a surprise.
“I don’t know how a major line can drop prices like that and make a profit,” Saling said, adding that it’s too early to say how Maersk will respond. He did claim, however, that Maersk hasn’t lost business yet because of Seaboard’s move.
“And I don’t intend to lose business,” he said. “I intend to keep my customers competitive.”
How all this rate cutting will affect the price of goods at retail is unclear, but shipping officials expect prices for apparel not to be affected since any savings gained will likely go to offset other costs that are increasing. There’s also the question of how long freight-rate wars will continue, and how long low rates will be sustained before carrier costs dictate increases.
Penney’s Eye, who has seen rates drop on ANERA carriers by about 20 percent thus far, suspects rates have already hit close to their lowest level, although he cautioned that determining where the bottom will be is difficult. Wiesenmaier forecasts shipping costs going a bit lower.
Moreover, there is also the issue of how pending congressional deregulation will further affect competition. As proposed by the House, the deregulation bill would take away some of the authority shipping conferences have to set and negotiate rates.
“These lower rates will last at least through 1996,” Wiesenmaier said. “In 1997, with deregulation, it could be a whole new ball game.”