Some carriers will resist giving free time to shippers in 2016 contracts

Some container lines will seek to avoid agreeing to extended free time for containers on terminals in 2016 service contracts, but they face sharp resistance from shippers still sore from West Coast port congestion and fearful of future flare-ups.

Because of free time clauses in contracts, some carriers were forced to pay huge sums of demurrage to terminals for containers that sat idle, sometimes for weeks, during the West Coast longshore labor disruption in late 2014 and early 2015. Even though there is expected to be little longshore disruption next year, the experience will lead some carriers during 2016 negotiations to avoid any contract term that grants shippers free time. Carriers will resist giving shippers more than the typical four or five days that the terminal operators allow a container to sit on the terminal before they start charging for demurrage.

“I don’t want to see any contracts this year where the demurrage is more than what the terminal gives us,” Howard Finkel, executive vice president for Cosco Container Line North America, told the third annual JOC Port Performance North America Conference on Tuesday. “Whatever the terminal gives us is what we can give the shipper. I don’t think any carrier should be offering more than what the terminal gives us.”

Finkel said it was only a few shippers that got extended free time in contracts, but they tended to be the largest ones.

“We have very, very few contracts that had demurrage, but some of those contracts had huge volumes that cost us millions of dollars. Most the carriers that did give away demurrage, if they are anything like what I’ve seen internally, they got religion. It’s a total and complete loser,” he said.

Finkel said the issue applies primarily to demurrage, which are charges for containers sitting on terminal grounds beyond the number of free-time days, not detention, which are charges to the shipper for containers returned late to the carrier. When a carrier grants free time at terminals to a shipper, it’s the carrier that pays the demurrage to the terminal. If the terminal has five days of free time at the terminal after the container is unloaded from the ship, the carrier may offer an additional two to three days in some contracts, Finkel said.

Often the shipper wants the cargo and doesn’t utilize the extra free time. But during the longshore labor slowdowns tied to negotiations for a labor contract between waterfront employers and the International Longshore and Warehouse Union, which concluded in February, containers sat for much longer, occasionally up to two to three weeks, inside massively congested West Coast marine terminals.

Getting containers moved quickly through terminals is a priority of port authorities, with free time limits set by port tariffs. There was no penalty for keeping containers on terminals indefinitely in prior years but as congestion and delays have grown, ports have clamped down. But the ports have difficulty controlling situations where the carrier agrees to more free time for its customer and the terminal isn’t turning away the additional revenue. “It’s revenue to the terminal operator,” said Dean Tracy, a former logistics director and now head of Global Integrated Services LLC, a consulting firm.

A carrier that wishes to avoid extended free time in service contracts may run into the reality of the market, where large shippers may insist on it and will take their business to other carriers that agree to free time. Carriers negotiate both on price and on contractual elements like free time, and trans-Pacific spot rates currently at historic lows of $800 per 40-foot container from China to the West Coast point to a supply-demand scenario where carriers won’t be in the driver’s seat in negotiations for 2016 contracts, most of which renew on May 1. Finkel said it’s “a very difficult question to answer,” in terms of how much pressure there will be on carriers next year to accept free time provisions in contracts. “Free time should not be used as a commercial issue but it is.”

Allen Clifford, executive vice president of MSC USA, told the conference that one issue with free time is that some shippers are used to receiving it in contracts. “Once you’ve given something it’s hard to take it away,” he said.

Dean Tracy, a former logistics director and now a consultant, said that the memory of the 2014-2015 labor difficulties will make some shippers even more likely to insist on free time as a hedge against future potential labor troubles. Additional disruption, at least at West Coast ports, may be unlikely now that a new five-year contract is in place. The contract includes a new arbitration system that will result in “a lot fewer slowdowns,” Pacific Maritime Association president James McKenna told the Port Performance conference.

But memories of the 2014-2015 disruption won’t fade easily. “It will guarantee that the BCOs (beneficial cargo owners, including retailers) will push very hard for extended free time, the reason being that the demurrage bills that have been levied upon the BCOs were astronomical and a lot of them were for circumstance beyond their control,” Tracy said.

Such circumstances include the terminal unable to locate the container, or the chassis being flagged by dockworkers for repairs, a so-called bad order chassis, or the truck unable to enter the terminal due to lengthy truck lines. The Federal Maritime Commission is investigating many such situations in which shippers say they were unfairly charged demurrage when it was impossible for them to retrieve the container from the terminal. That is going to inform the negotiations from the shipper side next year, Tracy said.

“The smart BCO is going to bring demurrage and free time into the contract discussion, as one of the negotiating items, and now more than ever because of the large sums that have been paid by the BCOs,” he said. “Demurrage will be a stronger part of the contract than it has in the past, and if it’s not, it should be.”