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IHS Column(35)/The trans-Pac co-load factor
Peter Tirschwell, senior director, IHS Markit
Thursday, November 16, 2017, 13:50:52 Maritime Press chaser@mpress.co.kr

▲ Peter Tirschwell, senior director, IHS Markit
The willingness of container carriers to sell capacity to resellers who openly distribute rates to the market is fueling the rate volatility that threatens direct contracting relationships between the carriers and shippers.

So-called co-loaders, a niche category of large-volume non-vessel-operating common carriers (NVOCCs), are able to buy wholesale capacity in bulk directly from ocean carriers. Instead of reselling the space privately to their own beneficial cargo owner (BCO) customers, as other NVOCCs do, they largely resell it to hundreds of forwarders, largely Asia-based. Those forwarders openly market the co-loaders’ rates with ubiquitous daily emails blasted out to virtually the entire industry. The growth of co-loading stems from overcapacity and the chronic intense rate competition among carriers who frequently prioritize volume and market share over profits.

The emails containing specific rates go beyond weekly rate indices published by Drewry, Freightos, the Shanghai Shipping Exchange, and others in showing actual rates on offer between specific port pairs, which allow for direct comparisons with contract rates. Of course, contract rates between BCOs and carriers are usually annualized rates that come with capacity assurances; depending on negotiated terms, they can be adjusted downward if spot rates decline. However, the volatility in rates can still be vexing to BCOs who seek stability in their sourcing of ocean container services, and in recent weeks, some BCOs have openly stated that the volatility is undermining their direct relationships.

Co-loaders – sometimes called master loaders or neutral NVOCCs – have become significant players in the trans-Pacific in recent years, based on carrier willingness to sell their space in bulk with the knowledge that it will be openly re-marketed. Local, often Asia-based, forwarders sell space largely into the market of Asia-controlled cargo to Western buyers on a CNF basis. CNF refers to cost and freight, meaning the seller is responsible for paying the ocean freight to the buyer’s location.

Estimates are that about 10 percent to 15 percent of the roughly 15 million TEU in annualized eastbound trans-Pacific volumes (to the United States), according to IHS Markit data, is sold on a CNF or “pre-paid” basis, with the ocean freight arranged by local Asia-based forwarders. Since a neutral NVOCC is generally only a wholesaler and not often interested in building direct customer relationships, forwarders are willing to buy from them without exposing their customer to the risk of back-selling.

Co-loading players such as Honour Lane Shipping, OEC, and Seamaster were among the largest NVOCCs in the eastbound trans-Pacific in the first half of 2017, each shipping well more than 100,000 TEU during the first six months of the year, according to IHS Markit.

The public marketing of rates creates pricing transparency, which can be positive, but also can exert downward pressure on the market; newly published rates, especially if they are lower than existing rates, get rapidly shopped across the market and can set a new and lower benchmark.

In a fully commoditized market where service is irrelevant, such pressure would be positive for buyers, but in ocean freight, low rates have served to undermine the service quality demanded by large shippers who depend on ocean freight to operate their supply chains.

As Ken O’Brien, chief operating officer of Gemini Shippers Group, said recently: “Supply chain managers have to be able to defend decisions to make long-term commitments to carriers in contracts when at certain points in the year NVOCCs and carriers collectively drive spot rates to levels well below their contracted rates.”

The phenomenon of rates marketed through co-loaders affects not just carriers in their attempts to create stability around their BCO relationships, but also other NVOCCs who themselves sell to BCOs.

“The frustration that Apex and other similarly situated forwarder/NVOCCs experience, where we have the proprietary relationship with the end-customer in North America, is the disruption often caused by the volatile and often extremely low rates proliferating from the co-load market. Our contract rate relationship with our carriers is confidential, as is our rate relationship with our customers,” said Kurt McElroy, executive vice president at Apex. “But carriers that increasingly solicit volumes from master co-loading forwarders can’t control the transparency of those rates in the market, as forwarders generally will shotgun out rates to other forwarders/BCOs to generate business. This becomes a significant factor in how carriers can’t keep a floor on rates when utilizations soften.”

The co-load market is the focus of a New York-based startup, called CoLoadX, which aims to open up the co-load market to traditional NVOCCs that normally do not resell capacity to other intermediaries. Its recipe is to make the transaction anonymous to both sides, which it said it is able to do and still keep the transaction legal, so that a forwarder would not fear exposing its own customer to a traditional NVOCC, perhaps a Kuehne + Nagel, Panalpina, or Expeditors, that seeks to develop direct customer relationships and sell them a range of logistics services as part of its core business.

Fauad Shariff, the CoLoadX CEO, said: “We enable NVOCCs of all sizes to offer the best service and price options to other NVOCCs and freight forwarders. We are uniquely set up to do this in a neutral manner that protects vital data such as shipper and consignee details for freight forwarders.”

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