Ocean freight charges have crashed to an all-time low over the past two years, but operators won’t be able to sustain these rates for much longer. Liz Morrell reports
For retailers that have been looking hard at cost cutting, there has been some welcome relief within the supply chain of late.
A number of factors have meant that for anyone importing goods by sea, the cost of doing so has rarely been cheaper. Going back to 2007, rates had pretty much peaked. “It was a seller’s and carrier’s market. They dictated the rates and it was a case of whoever bid highest,” says Grant Liddell, retail development director at logistics and supply chain management provider Uniserve.
But in two years these rates have slumped to their lowest: they are now less than a quarter of the original price, as the fall in demand caused by the recession has been exacerbated by
the effects of new vessels coming out of their three-year build cycle into service . In addition, last October heralded the abolition of a cartel that had effectively allowed shipping lines to fix their rates between them for routes between the Far East and Europe.
By last summer supply overtook demand. Furthermore, as retailers began pushing back their orders in the autumn – traditionally the busiest period for the shipping lines – rates went into freefall. In less than two months, container prices tumbled from around $2,000 (£1,217) for a 20ft equivalent unit (TEU) to around $600 (£365), and shipping lines that would normally have added on a peak season surcharge were not even able to do that.
Paul Goodrich, sales director of shipping company Maersk Line UK & Ireland says: “Key rates on some of our westbound routes from the Far East to the UK have decreased by over 50 per cent from their peak 18 months ago.”
For retailers, the decline in rates has offered a welcome respite. Gary Grant, chief executive of toy retailer The Entertainer, says he has been able to use the plummeting price of shipping to offset the effects of exchange rate rises to allow him to keep inflationary price rises to a minimum. “For the first half of 2009 oil prices have been lower, shipping rates have been lower and
factory costs have been lower. That has helped us manage the exchange rate changes. Shipping rates are probably half what they were a year ago and have helped us to keep price increases to a minimum,” he says.
But it is only a temporary win. The major shipping lines are losing hundreds of millions of dollars a quarter and can’t sustain such low rates. Goodrich says: “The current rate levels in several corridors do not fully cover our variable costs.”
The shipping lines have tried to talk rates up, but they have nevertheless remained steady over the past three or four months. “Rate improvements are imperative for the industry to create a sustainable environment and are necessary to continue to operate our services with the high level of reliability our customers have come to expect,” Goodrich adds.
In June the company announced a rate increase of $300 (£182) per TEU to its Asia Westbound services to the UK and a peak season surcharge of $150 (£91) per TEU will also be effective from August 1.
Vessels are being moored out at sea to try to overcome the supply glut, but with additional vessels still being completed after a lengthy period of construction, there is still likely to be excess capacity even as and when demand returns. Others are pulling out of routes or entering into joint ventures to try to share costs.
It is easy for retailers to think that shipping lines are overstating their plight. However, the consequences of the current situation could be disastrous. Goodrich explains: “As we enter the peak season and valuable inventories are being shipped and built up over the next few months, retailers need to be certain that their supply chain partners have the financial stability to survive. We are confident we will weather this storm and emerge even stronger – but others may not,” he says.
At The Entertainer, Grant says he is braced for a rates increase. “We are expecting rates to go up around 25 per cent for the second half,” he says. However they will still be below what they were a year ago. “For 20ft containers our port-handling costs are more than shipping rates. The biggest plus or minus for our business is the exchange rate because that directly affects everything,” he adds.
With a general feeling that prices have fallen as low as they can go, many of the biggest retailers are starting to fix rates. Freight Transport Association head of rail freight and global supply chain policy Christopher Snelling says: “Shippers [retailers and manufacturers] are looking to lock the shipping lines into longer-term deals to take advantage of these lower rates because people are seeing this as the bottom of the market.”
Snelling adds that current market conditions offer great opportunities for renegotiating. “Even if you have outsourced it to a forwarder it’s a good time to revisit rates and terms,” he says. However, he warns that effective due diligence is more important than ever given the uncertainty in the market.
Other retailers are going for the direct approach. “People are realising you can get some great deals if you do go direct. You need to protect yourself but by talking directly about your volumes you can get great deals,” says Snelling.
However Jonathan Wright, global director for supply chain fulfilment at Accenture, doesn’t agree that fixing rates is necessarily the best option. “Rate fixing and hedging are two options for organisations that have to increase the certainty in their cost base, but hedging is ultimately gambling and while you are locking in some certainty, who knows what’s round the corner? I would prefer to look at the fundamentals of the business and look at how you make decisions in a timely manner,” he says.
He says that retailers should be increasing their use of analytics within the supply chain to understand the trigger points for moving goods from one flow path or channel to another – such as sea versus air – and ensuring their supply chain is as reactive and lean as it can be.
But whatever retailers choose to do, there is one certainty: price rises, at some point down the line, are inevitable. Liddell says: “In the future rates have got to go up or lines will go bust. Previously, shipping lines would have redeployed their vessels on a more stable route, but every market has fallen over.”
While price increases might be on the cards, though, the precise shape and form they will take is less clear. As Alan Smart, a lecturer in logistics and supply chain at Cranfield School of Management, says: “Retailers have to budget for rates going up, but as to how and when, you have to look into a crystal ball for that.”
Top 10 Operated fleets
|Rank||Operator||TEU||Order book (TEU)||Market share|
|2||Mediterranean Shipping Co||1,517,543||632,204||11.30%|
|3||CMA CGM Group||1,031,289||505,688||7.70%|
|6||COSCO Container Lines Company||508,841||425,102||3.80%|
Globally, there are 5,985 ships active on liner trades, for 13.4 million 20 ft equivalent units (TEUs). This table shows the top 10 liner fleets in TEU terms, as at July 16.