Factors Contributing to Rising Ocean Freight Rates in 2017

Port with container ship from a bird's eye view

Ocean freight rates are expected to increase significantly in 2017

2017-ocean-freight-rate-expectation

Based on a survey conducted by our benchmarking partners Xeneta, more than half (56%) of the respondents expect rates to increase while 44% believe rates will remain stable. Most importantly, no one expects that rates will decline in 2017.

Charts for the freight rate spread

Historical ocean freight rates were very volatile in 2016. Asia-Europe Trade had the highest spread from lows of $180 per FEU average to highs of $2,600 per FEU—representing an increase of more than 14 times. Trans-Pacific East Bound Trade saw an increase of about three times from lowest to highest record of ocean freight rates.

Chart of the shanghai containerized freight index

2015 saw a gradual overall decline of approximately 50% in the SCFI, from around the 1,000 mark, to just under 500. In 2016 (notwithstanding the post-Christmas tumble in Q1), the overall trend has been upward.

Capacity reduction in the face of weaker demand

Many blame overcapacity for deteriorating freight rates throughout the last couple of years—with ocean liners racing to build more vessels and the introduction of mega vessels with unprecedented capacities—in addition to declining demand due to stagnant growth in various economies.

Capacity reduction is another factor that will contribute to rising rates. Alphaliner notes that the number of weekly services on Asia-Europe routes has been reduced from 21 loops in 2015 to a maximum of 17. Meanwhile, at least three loops have been suspended on the Trans-Pacific route.

Scrapping of vessels accounts for additional capacity reduction: 1,000 ships with a combined capacity of 52 million metric tons of cargo will be sold for scrap metal this year. 2017 will be second only to 2012, in which a record amount of 61 million metric tons of capacity was scrapped and recycled that year.

Ocean carrier pool continues to shrink

2016 is a year that saw historically high merger and acquisition activity within the shipping industry: Maersk just announced they will be acquiring Hamburg Sud – Dec, CMA CGM officially acquired APL (NOL Group) in June, China Shipping and Cosco officially merged in May, Hapag-Lloyd signed a business combination agreement to merge with United Arab Shipping Company (UASC) in July—and the industry is expecting even more M&A activity in 2017. The consolidation in the shipping industry will mean less competition as each carrier now controls a greater market share with the ability to better price and plan, with potentially rising freight rates as a consequence.

Additionally, instead of four shipping alliances currently in operation, there will be only three as of April 2017: 2M – Maersk and MSC; Ocean Alliance – CMA CGM, China Cosco, Evergreen, OOCL; The Alliance – NYK, K Line, Hapag-Lloyd, MOL and Yang Ming.

How the new alliances will affect capacity and rates is uncertain—but, with fewer alliances to choose from, it becomes a little harder to drive competition and balance cost with service: When your chosen carrier’s alliance partner omits your port of load, how do you ensure that your backup provider is not a member of the same alliance? Likewise, as we saw with Hanjin, what happens when your chosen carrier has a vessel-sharing agreement with a financially unstable partner?

A tough market environment highlights the need for a solid shipping procurement strategy, which always comes down to three “Rights”: the Right Rates, the Right Schedules and the Right Amount of Allocation. Here are six ways to ensure the three “Rights” to minimize the impact of volatile ocean freight rates on your logistics spend in 2017:

Streamline your RFQ process: Don’t get bogged down by mundane tasks like copy and pasting Excel files, which introduce potential points of risk for human error. There are technology platforms that can help you launch bids, consolidate submissions, analyse allocations and communicate effectively with your carriers.

Add more value to your supply chain procurement: Being able to forecast more accurately using granular data rather than a per annum forecast makes it easier to negotiate with carriers.

Check out a carrier database: Procuring from fewer than five carriers might signal a need to re-evaluate whether you are casting your net wide enough and making the best buying decisions for your organization. Do a quick search on the TICONTRACT carrier database of more than 34,000 unique carriers to find additional providers.

Evaluate RFQ frequency: Timing your RFQ, the negotiation and the signature is crucial—if you begin the process during a time when a carrier’s outlook for the year is optimistic, you are unlikely to get the best deal. Take control and RFQ more frequently and evaluate spot rates from time to time.

Drive better rates from your carriers with a customized RFQ structure: An effective RFQ structure can help set the tone and assert to your carriers that you are in control of the process, obliging them to bid more competitively for your business.

Benchmark rates: The only way to really know you are paying above or below market for your ocean freight is to access benchmark rates from shipping and procurement experts.

Since 2005, TICONTRACT has been a trusted advisor to global shippers worldwide for more than 8,500 managed transportation RFP events per year. With an experienced team of consultants from various geographies, industries and transport modes, our experts can advise you on current best practices in tendering for complex shipping environments like the unstable 2017 ocean freight market and help ensure your three “Rights.” Contact us today.

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