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Contract Guidelines


2015-16 Contracts: Fresh Challenges, a Fresh Approach

On October 1, 2014, TSA lines announced their 2015-16 eastbound service contract program, outlining recommended adjustments to freight rates and charges effective May 1, 2015. The program addresses key issues facing Asia-U.S. container lines- continuing short-term rate volatility; surging fuel prices; and inland intermodal congestion resulting in higher costs.

Main features of the rate and cost recovery program include:

-- Recommended minimum voluntary contract rate benchmarks instead of general rate increases (GRIs)

From North Asia ports:
US$2,000 per FEU, $1,800 per TEU to the U.S. West Coast
US$3,800 per FEU, $3,150 per TEU to the U.S. East and Gulf Coasts

From Southeast Asia ports:
US$2,150 per FEU, $1,935 per TEU to the U.S. West Coast
US$3,950 per FEU, $3,285 per TEU to the U.S. East and Gulf Coasts

Intermodal base rates will vary by destination, but as an example TSA is proposing CY rates to Chicago-area ramps of at least US$4,100 per FEU from North Asia and US$4,250 per FEU from Southeast Asia.

-- Intermodal rates to all other inland point CY destinations will be set at least $1,000 per FEU above May 1, 2014 levels; minimum rates are based on a Q2 2015 bunker charge level.

-- TEU rates set at 90% of FEU rates; high-cube FEU rates of $50 above standard 40-foot container rates to the West Coast and $100 more to all other destinations. The changes reflect increased handling costs for different equipment sizes as loading, and discharge patterns become increasingly complex and time-sensitive.

-- Revisions to TSA marine fuel surcharge formulas, effective January 1, 2015, to more accurately reflect changes in average vessel size, fuel consumption, transit times and other factors; additional revisions to the low-sulfur formula, also effective January 1, 2015, to recover sharply higher fuel prices going forward as emissions standards tighten.

TSA member lines have also individually adopted a US$100 per FEU, $90 per TEU intermodal door delivery charge - to take effect in the second half of November 2014, and by no later than December 1 - to help cover contingencies relating to inland rail, truck and terminal congestion that have pushed up inland rates and contributed to congestion delays.


How Rate and Contract Guidelines are Developed


Throughout the year, TSA member shipping lines conduct an ongoing review of the Asia-U.S. freight market. They study a broad range of economic indicators on both sides of the Pacific (GDP growth, manufacturing and retail inventory levels, wholesale prices, retail sales, consumer confidence and spending, exchange rates, trade and manufacturing investment patterns, and so on), along with specific trends in the movement of major commodities in the various country markets.

Lines next take into account the anticipated relationship between available vessel/equipment supply and cargo demand for the coming year — whether space and equipment availability will be tight or not, especially during peak shipping periods.

Carriers also conduct individual, internal analyses of their end-to-end operating costs, from the time a container is provided to the customer for loading or received at the port, to the point of delivery. This can involve the minimum basic port-to-port ocean transportation, or it can be part of an ongoing, full-service supply chain partnership covering value-added shipment planning, tracking, consolidation and distribution services.

Terms and price for these services have typically been set out in 12-month service contracts, which have run from May 1 through April 30 of each year (although some contracts are timed to calendar or fiscal years, and may run for shorter or longer time periods, depending on terms).

More than 90% of total Asia-U.S. container traffic moves under such service contracts, although a small number of contracts may have different start dates and longer or shorter durations. Cargo that does not move under contract is covered under the publicly posted tariffs of the individual shipping lines. Most contracts involve a specified volume commitment in exchange for favorable service terms and price.

All rates and service contracts are negotiated individually by container lines and their customers. Some contracts, in addition, are confidential by mutual agreement of the parties. TSA provides guidance for its member lines through its research capability and the limited authority for members to meet and exchange information. Specifically, TSA adopts an annual program of voluntary, non-binding guideline rates and contract terms which members and carriers outside the agreement may follow or not as they see fit according to their needs.

TSA has typically announced its annual rate programs for upcoming May 1 contract renewals during the previous October or thereabouts, in order to provide ample time for negotiation and shipment planning, even with the few contracts that have earlier renewal dates.

Most contract negotiations begin in February and March, after carriers and their customers have had an opportunity to reassess market prospects following the traditional December-February “slack” season. A brief peak period appears in March and April, with “back-to-school” merchandise that will be sold during the summer. The primary peak season runs approximately from July through October, when holiday inventory is shipped, with carriers beginning to ramp up service levels during June.

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