Using technology to tame Fluctuating container rates
A computer platform “where shipping lines and their customers can negotiate forward contracts could help improve vessel utilization levels and reduce freight rate volatility,” says a white paper based on research conducted by the London-based shipping consultants Drewry and the supply chain software company CyberLogitec.
“The market for ocean freight services remains exposed to the inherently dynamic nature of demand and fixed nature of supply which results in oscillating vessel load factors and freight rate volatility,” says the report.
“Many of the market’s pain points could be addressed through a capability to flexibly buy or sell ocean freight services in advance, using a neutral, global platform,” says Philippe Salles, head of e-business, transport and supply chain at Drewry Supply Chain Advisors. “Volume commitments and capacity guarantees would provide an early visualization of demand to the market, thereby reducing the supply-demand mismatch and rate volatility, to the benefit of all market participants.”
Jas Foo, senior marketing manager at CyberLogitec, says, “We do have a new platform that answers the issues of the white paper that we co-researched with Drewry. The platform is currently at the final stage of approval and we are looking to release the service latest early next year.”
CyberLogitec is headquartered in Seoul, South Korea, and has offices in the U.S., China, Spain, Singapore and Vietnam. It is owned by EUSU Logistics Holding.
The product that CyberLogitec says it is planning to launch could be a competitor to the New York Shipping Exchange (NYSHEX), a multi-carrier platform that allows shippers to secure space, equipment and fixed rates up to six months in advance from six carriers: Maersk, COSCO Shipping and its OOCL affiliate, CMA CGM, Hapag-Lloyd and Hyundai Merchant Marine.
Gordon Downes, the chief executive officer of the exchange, says the Drewry study is “validating what we said from the beginning — that a two-way commitment, forward contracting has benefits for carriers and shippers. It benefits everyone.”
Philip Damas, head of Drewry Supply Chain Advisors, notes that a number of container individual carriers also have created services that offer space commitments. These include Maersk Spot, APL’s Eagle GO.Guaranteed, Hapag-Lloyd’s Shipping Guarantee, and Kuehne + Nagle’s KN Pledge.
Damas believes there is a need for an industry-wide platform “for the convenience of the customer” and that such a system should have “a link into the carriers’ operation. … To get all this to work and to be synchronized you need the bookings and the carriers’ own operational systems to be integrated.
“You need a system where even a small shipper should be able to book weeks in advance and know at what price they will move their cargo,” he says.
He says while large shippers can sign annual contracts in which freight rates are more or less fixed for a year, “medium and smaller shippers don’t have any of this predictability or stability” and must book in the spot market, where prices can change week to week or even day to day.
The white paper explains, “Shippers and intermediaries like forwarders and NVOCCs that are large enough will try to ring-fence those volumes they can forecast with reasonable certainty and secure long-term service contracts for those volumes. This way, the ‘contract market’ provides some stability and predictability to the current markets. Still Drewry estimates that the ‘spot markets,’ where cargo is booked on the short term and with very little visibility or predictability, account for about 45% of the volumes on the Asia-West Coast North America trade and even 70% on the Asia-North Europe trade.”
Freight rate fluctuations in the spot market can be huge.
Drewry says, “On average, the two-week freight rate variations are 9.0% on the trans-Pacific eastbound trade and 24.6% on the Asia-North Europe” lane.
Reviewing rates since 2011, Drewry and CyberLogitec found instances in which “even in a two-week time frame, prices on the trans-Pacific trade may change by as much as 94% and on the Asia-North Europe trade even by 324%.”
Those yo-yoing prices are, of course, a major problem for manufacturers and retailers.
Drewry notes, “Typically, ocean transport cost makes up about 3% to 5% of the landed cost of a consumer product. So a shipper’s exposure to the effects of freight rate volatility is smaller than for a shipping line but because most shippers fix their sales prices six to 12 months ahead, their product margins can be compromised by sudden ocean cost fluctuations.”
Drewry says a platform allowing for forward selling also would benefit carriers.
“For shipping lines, forward selling of vessel slots, underpinned by volume commitments, would put them in a stronger position to forecast their revenues and reduce their cost of capital. The early visualization of demand could also be linked to collaborative, dynamic capacity management and increase vessel load factors. The reduced freight rate volatility would assist in stabilizing vessel P&Ls and improve invoice accuracy. The ability to ‘sell forward’ will provide an effective hedge against freight rate decreases.”
It also notes that “at the operational level, freight rate volatility poses challenges to shipping lines: The multiplication of quotes also multiplies the number of manual errors, and Drewry’s 2018 Shippers Survey found that 66% of shippers are not satisfied with their shipping line’s billing accuracy.”
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