Rate Volatility to Continue on Sea Freight
Since shipping conferences were banned by the European Union in 2008, container rate volatility has increased and more resources are spent to negotiate the rates. Some market players are trying to change the trend. What are the alternatives?
From the 1stof January 2008 the European Union banned the centuries-old shipping conferences on the argument that they reduced competitiveness and made container sea transport more expensive. Four years have passed and the industry is still arguing whether the change has been for the better or worse. What is certain is that greater rate volatility is seen and is expected to continue.
The initial effect was a significant drop in container rates to a level that made 2009 the worst year in history for the container shipping lines. Many market players put this down to the ban; however, during 2010 rates rebounded and generated top results for most shipping lines. The rate increase was partly due to increased volumes and partly as shipping lines laid up many vessels as a cost-savings initiative. During 2011 the rates again started to slide, in some corridors even below 2009 levels. In 2012 carriers have again withdrawn capacity resulting in increasing freight rates. From February to May 2012 alone the freight rates from Asia to Europe have increased by more than 250%. Whatever the reasons, the volatility has increased and is also seen in trade lanes where conferences remain active.
A majority of shippers believe they have obtained lower transport costs due to the ban; however, an increasing number is also realising that they are spending more and more time negotiating competitive rates. It is becoming increasingly rare for contracts to be honoured for 1 year or more. Either shipping lines are pushing to increase rates to improve their margin or shippers are pushing for lower rates to remain competitive. The result is a growing tension in the shipper – carrier relationship and an increasing amount of time spent on negotiations rather than supply chain optimizations.
There are no signs that traditional contracts will be honoured for longer in the future. Companies who wish to limit the resources they spend on negotiations while remaining competitive are therefore seeking new alternatives. Two of these are derivatives trading and index-linked contracts.
The freight derivatives market is still small and young. Despite some companies feeling uncertain about using financial instruments in their supply chain, the demand is growing. So are index-linked contracts.
World Container Index (WCI), a leading freight index supplier, has recently conducted a survey showing that an overwhelming 80 % of respondents saw a benefit in index-linked contracts and more than 50 % have already entered such contract or are planning to do so. Richard Heath, Director at WCI says “It is clear that a growing number of parties are tired of the constant rate negotiations and want to focus on optimisation of their supply chain”. He continues “We are experiencing an increasing interest and confidence in our indices.”
Personally, I think that many companies are still to realise how many resources they spend on keeping their rates in line with the market. If they want to avoid this non-value adding activity I see index-linked service contracts as a real alternative. The benefit of index-linked contracts is a certainty for both carriers and shippers that their rates remain as attractive, relative to the market, for the duration of the contract. They can both then focus on value-adding projects.
The shipping industry has proven vulnerable to the development in the global economy. Market analysts broadly agree that the economy is changing faster than ever before and will continue to do so. This means continued rate volatility. Companies with transport needs have to decide how they wish to manage the uncertainty. Do they have the manpower to ‘beat the market’, do they wish to focus on true value-adding activities or do they dare to continue as they always have done. History shows that those seeking innovative solutions are the ones who move ahead.
From the 1stof January 2008 the European Union banned the centuries-old shipping conferences on the argument that they reduced competitiveness and made container sea transport more expensive. Four years have passed and the industry is still arguing whether the change has been for the better or worse. What is certain is that greater rate volatility is seen and is expected to continue.
The initial effect was a significant drop in container rates to a level that made 2009 the worst year in history for the container shipping lines. Many market players put this down to the ban; however, during 2010 rates rebounded and generated top results for most shipping lines. The rate increase was partly due to increased volumes and partly as shipping lines laid up many vessels as a cost-savings initiative. During 2011 the rates again started to slide, in some corridors even below 2009 levels. In 2012 carriers have again withdrawn capacity resulting in increasing freight rates. From February to May 2012 alone the freight rates from Asia to Europe have increased by more than 250%. Whatever the reasons, the volatility has increased and is also seen in trade lanes where conferences remain active.
A majority of shippers believe they have obtained lower transport costs due to the ban; however, an increasing number is also realising that they are spending more and more time negotiating competitive rates. It is becoming increasingly rare for contracts to be honoured for 1 year or more. Either shipping lines are pushing to increase rates to improve their margin or shippers are pushing for lower rates to remain competitive. The result is a growing tension in the shipper – carrier relationship and an increasing amount of time spent on negotiations rather than supply chain optimizations.
There are no signs that traditional contracts will be honoured for longer in the future. Companies who wish to limit the resources they spend on negotiations while remaining competitive are therefore seeking new alternatives. Two of these are derivatives trading and index-linked contracts.
The freight derivatives market is still small and young. Despite some companies feeling uncertain about using financial instruments in their supply chain, the demand is growing. So are index-linked contracts.
World Container Index (WCI), a leading freight index supplier, has recently conducted a survey showing that an overwhelming 80 % of respondents saw a benefit in index-linked contracts and more than 50 % have already entered such contract or are planning to do so. Richard Heath, Director at WCI says “It is clear that a growing number of parties are tired of the constant rate negotiations and want to focus on optimisation of their supply chain”. He continues “We are experiencing an increasing interest and confidence in our indices.”
Personally, I think that many companies are still to realise how many resources they spend on keeping their rates in line with the market. If they want to avoid this non-value adding activity I see index-linked service contracts as a real alternative. The benefit of index-linked contracts is a certainty for both carriers and shippers that their rates remain as attractive, relative to the market, for the duration of the contract. They can both then focus on value-adding projects.
The shipping industry has proven vulnerable to the development in the global economy. Market analysts broadly agree that the economy is changing faster than ever before and will continue to do so. This means continued rate volatility. Companies with transport needs have to decide how they wish to manage the uncertainty. Do they have the manpower to ‘beat the market’, do they wish to focus on true value-adding activities or do they dare to continue as they always have done. History shows that those seeking innovative solutions are the ones who move ahead.
Analyst Summary
Hans-Henrik Skonning Hansen har 20 års erhverserfaring indenfor transport og detail brancherne. 17 af årene har været i forskellige stillinger i A.P.Møller – Mærsk Gruppen i Danmark, USA, Vietnam, Hong Kong og Indien. Senest har Hans-Henrik været chef for APM Terminals aktiviter i Sydasien, eksklusiv havne.
Fra oprindelig at være sælger har Hans-Henrik udvidet sin kompetenceprofil med generel ledelse og indkøbserfaring. En stilling i den interne revisionsafdeling har endvidere udviklet evnerne til hurtigt og præcist at identificere de bedste muligheder for optimering af forretningsgangene, inklusiv omkostningsreduktioner.
Det praktiske arbejde er suppleret med uddannelse fra Copenhagen Business School og IMD i Schweiz.
Som partner påtager Hans-Henrik sig opgaver indenfor all Expense Reduction Analysts fokusområder.
Fra oprindelig at være sælger har Hans-Henrik udvidet sin kompetenceprofil med generel ledelse og indkøbserfaring. En stilling i den interne revisionsafdeling har endvidere udviklet evnerne til hurtigt og præcist at identificere de bedste muligheder for optimering af forretningsgangene, inklusiv omkostningsreduktioner.
Det praktiske arbejde er suppleret med uddannelse fra Copenhagen Business School og IMD i Schweiz.
Som partner påtager Hans-Henrik sig opgaver indenfor all Expense Reduction Analysts fokusområder.
