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MSC's move to all in rates an ominous sign for carriers?

OVER the years we have witnessed a number of peculiar moves by the shipping lines. However, typically when we speak of peculiar moves in the container shipping industry, this does not necessarily mean surprising moves at all.

MSC's move to all in rates an ominous sign for carriers?
27 August 2013 - 17:23
MSC's move to all in rates an ominous sign for carriers?
OVER the years we have witnessed a number of peculiar moves by the shipping lines. However, typically when we speak of peculiar moves in the container shipping industry, this does not necessarily mean surprising moves at all.
Rather, one comes to expect the unexpected in this industry as shipping lines defy logic in the running of their operations on a daily basis.
For one, the lines order tonnage en masse when it is clear that shipping demand will not be able to match it. Carriers have also shown a proclivity to chase market share by lowering rates to unsustainable levels, even if it means losing pots of money.
Liner customers themselves have told this publication time and again about carrier salesmen offering a low freight rate first and then asking what the customer's shipping requirements were second.
It is mind boggling stuff, but it is hardly surprising.
But then we come to the recent decision by the world's second largest shipping line, MSC, to move to all-in rates on the Asia-Europe trade, as reported in the most recent DynaLiners Weekly report published by Netherlands-based consultancy group, Dynamar...
Dynamar, which is an organization with a long history in this industry, were clearly surprised as no doubt many others in the industry are at the ploy.
"The decision of MSC to include BAF, Piracy and Suez Canal surcharges into its Far East-Europe rates continues to surprise and rouse emotions. Carriers have always been dead against all-in rates for one simple reason: the general perception that base rates are negotiable, while surcharges are fixed.
"Because of that, surcharges were relatively easy [to introduce and] to increase, something practically impossible for the base rates whose only direction has been exclusively south over an extended period," it said.
Dynamar notes that this practice has allowed the carriers to offer "negative" freight rates, and then add on surcharges to protect their revenue.
Shippers we have spoken to over the years clearly believed this to be the case, and as such have been very outspoken on the issue of surcharges. However, some do acknowledge the need for a bunker tariff in times where oil prices have been at their absolute peak.
But again, this is all common knowledge in the industry. So the real question that remains is what is MSC thinking?
Could this in fact be a "new low" in terms of competitive carrier behaviour.
We know that Asia-Europe rates are close to an all-time low, at least on the spot market. Just two weeks ago the average freight rate from Shanghai to Europe Base Ports dropped below US$600 per TEU. And this rate is actually the all-in rate. Therefore the base rate shippers are now paying would be practically free of charge.
Therefore, it is clear that carriers cannot compete on price in the Asia-Europe trade anymore. So by offering all-in rates themselves, MSC has potentially given the impression to the market that surcharges are up for negotiation as well.
If this is the case, then it could turn the current rate war into a rate bloodbath of genocidal proportions. Surely if this does occur then the pool of carriers on the Asia-Europe trade will dry up fairly quickly.
At this stage it is all just speculation. Whether other carriers follow suit or not remains to be seen, and in all truth MSC's move could simply be a marketing gimmick to get the attention of potential customers.
Nevertheless, it is an interesting and surprising move to say the least. It will be very interesting to see how the market reacts, in particular how the competition takes the news.
One would hope that the shipping lines have learned from their past mistakes and that they will avoid any moves to further damage the current market. But then again with rates on the Asia-Europe trade now in freefall mode it would appear that the carriers are not the most avid students of history.

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