SPOT CONTAINER RATES --Some Thoughts on Curious & Curiouser--

There have been many stories, tweets, and posts about spot rates. Tracking them. Citing them. Citing them to predict a peak season import apocalypse.

First, some context. Context is what is missing in the spot rates stories. The rates are treated as if in a vacuum and are linear with little explanation and drill down of what drives them.

There are no problems getting empty containers and that can reduce pressure on spot rates.  

China exports were strong in July.

1)    What is the significance of these rates? How much volume moves under them? Maersk, one of the largest container lines, has over 70% of its volume locked up in contracts. That puts container shipping under spot rates, as a minor activity for them.

2)    There are two sets of shippers—forwarders and Beneficial Cargo Owners (BCOs). Does one group move more volume now using spot rates? This can reflect selling rates to get business or using contracts to get service to move products for supply chains.

3)    Some of the rate usage reflects how carriers see forwarders taking the rates they “gave” them and selling against them with end customers.  Also, some carriers have a different view of forwarders as customers. They like them.

4)    A note. Pre-Covid, market rates were often below contracts. So playing the spot game was considered a wise approach. Much volume moved with market pricing.

5)    The last two years have been highlighted by high rates and high carrier profits. This contrasts with pre-pandemic when rates were low, and carriers had little or no profits.

 The focus is the upstream/inbound supply chain—where the supply of supply chains begins. It is where suppliers and their suppliers are. Tiers of them. This is the where of the containers whose freight charge is spot or contract rate.

We have had 2+ years of supply chain and logistics continuous disruption. The pandemic. China lockdowns. Domestic issues with chassis and container transportation. Contract negotiations with West Coast dockworkers. Union dissatisfaction at ports in Europe. These have resulted in congestion and chaos worldwide at ports.

 

With disruptions ongoing—throw the Russia sanctions for its invasion of Ukraine and China, Taiwan, and the Taiwan Strait, how long disruptions will continue and, in turn, how long it will take to clear the port congestion are unknown.

 

These impact ship turnaround and the financial impact for highly capitalized container lines, vessel utilization, and, in turn, spot rates.

 

What does all this mean? There is a segment of shippers who want the carriers to renegotiate their contracts because of spot rates.  Why should the lines do it? Why should they give up their power?

 

Some of the renegotiate view reflects that shippers had the negotiating strength for so long. Many do not like the shift. And back when they had that power, container lines did lower contract rates. Implicit here is whether service contracts are really contracts. Take or pay. Or if they have been soft time volume agreements?

 

There are also questions on whether lines will cancel/blank sailings to control capacity and, in turn, prices. This applies to both shippers who want to buy cheap rates and those who want service for supply chains. Blank sailings are not new. Container lines used them pre-Covid--whether it was a reaction or part of a strategy to take control of their fortunes. 

Those who prioritize service know that not every container, not every product in a container is important. Their need for service reliability and speed varies with SKU, product category, demand, seasonality, and other reasons. Think of it as ABC services for ABC inventories And prices should reflect the differing services--and their value.  This would be a change in pricing for varying services. This is more than charging based on port pairs. The validity of this that the last two years validated the strategic and critical importance of supply chain management.

 

So there is more to watch in 2022 and 2023 as to how prices will look. And against a background of other disruptions, such as climate change, and potential lessening of globalization with reshore, nearshore, onshore, friendly-shoring, and supplier diversification. Each of these can mean supply chain redesign and realignment. In turn, this drives what carriers will do.

     All of this means forecasting prices have higher risks. There are so many unknowns and events at           play that the past may not be a strong predictor of the future. Remember too, after decades of cheap         rates and what they meant? McKinsey said the industry lost $100bil over 20 years. Will and why             should container lines give up their newfound power?