Shippers and carriers must fact consequences of non-compliance

Carrier’s CEO’s attending JOC’s virtual TPM21 conference have called for more enforceable commitments in container shipping contracts after Covid-driven supply chain disruptions have resulted from their short comings.

Carriers and shippers are preparing to sit down for annual service contract negotiations in the transpacific amid a chaotic environment upended by months of strong demand, severe port congestion, and an overloaded US inland logistics system.

But executives from Hapag-Lloyd, Ocean Network Express (ONE) and Maersk told the conference that the way service contracts were structured has left both carriers and shippers more exposed to the supply chain upheaval.

“In the perfect storm that we have seen in the last couple of months, we have seen that the traditional contracts give us increasing challenges,” said Hapag-Lloyd CEO Rolf Habben Jansen.

Two-way commitment models should deal with customer expectations

“On the one hand, you see a lot of changes on the carrier side with ships that need to be changed and voyages that need to be altered, and on the other hand, no-shows have been as high as 30 to 40 per cent, which makes it very difficult to plan, especially when the market is already very hectic,” he said,Mr Habben Jansen said shippers and carriers had to commit to what was agreed on their sides of the contract, and face the consequences of non-compliance.

AP Moller-Maersk ocean and logistics CEO Vincent Clerc said two-way commitments were the way forward, and the goal was to have 100 per cent of the carrier’s cargo transport business structured that way in the coming years.

“It makes sense that we have a clear view on what we are going to do for each other,” Mr Clerc said in an interview. “There are ways to do that which are very compelling for our customers. It is not [the spot market] that is the future, but two-way commitment models, across a family of products that deal with customer expectations.” He advised shippers not to approach the upcoming 2021-22 service talks as contract negotiations, but rather as business negotiations.

Carriers acknowledge poor service levels

Ocean Network Express (ONE) CEO Jeremy Nixon said in the current environment of heavy demand, port congestion, and equipment shortages, it was a challenge to honour all the space commitments made to shippers.

“We sit down at the beginning of the year and try to work out a volume contract agreement into how many containers that means a week, out of which port on which particular loops, and we commit to make the space available,” Mr Nixon said in a separate TPM21 interview.

“We accept that sometimes factory production can change, and sometimes weather issues mean the ships can’t always come in on schedule,” he added. “It is unfortunate that when we get situations like this it is very difficult.”

But Mr Nixon said the industry was slowly moving in the direction of enforceable contracts. “On the spot market now, there are specific mechanisms that say: ‘I commit to move this many boxes on this particular ship, at this particular time at this particular rate, and if I fall short of that, this will be the consequence, and this will be the financial compensation’,” he said.

The three executives acknowledged the poor service levels being provided by their carriers, with schedule reliability on the transpacific falling to an incredible 13.8 per cent in January, according to Sea-Intelligence Maritime Analysis.

Mr Nixon said a key part of restoring schedule reliability would be for carriers to be able to make more accurate operational forecasts.