Date: 2013-08-05

Import Ocean Freight Rates: Rethinking the Status Quo

The World Trade Organization (WTO) estimates that global trade will be lower by about 9% in 2009. That is bad news for us all, especially those of us who depend on trade for our incomes.

There is a glimmer of light inside this gloomy number for those of you responsible for negotiating your inbound ocean rates. Ocean freight rates are plummeting! For those of you not involved with ocean shipping, spring is ocean contracting season.

During most years ocean contract negotiation time is akin to a game of chicken. Because the international ocean industry is exempt from many of the U.S. antitrust regulations, the lines are allowed to collude with one another. Contracting season typically begins with the steamship lines collectively and with a certain amount of bravado drawing a line in the sand with a proposed and sizeable general rate increase. Shippers collectively balk at the pricing. With that the contest begins. Eventually somebody blinks. The largest shippers and carriers come to an agreement, the market rates are set, and the remaining contracts are settled.

From the sidelines this contest is great sport. It is exciting to bet on your favorite contestants and to watch this high-stakes market at work. As a participant this process can be a real nail-biting experience. Ocean freight can be one of the larger cost inputs for importers affecting their pricing and profitability. On an individual level import transportation managers frequently are held accountable for the level of the rates and faulted personally for any rate increases.

This year’s ocean contracting season is shaping up to be much different. With the downturn in global trade has come a softening of the shipping industry. Instead of being a game of chicken, this year’s ocean contracting season feels much more like a limbo dance contest with carriers competing creatively on price to maintain market share.

How Low Will They Go?

The bottom is the limit! Each of you will have different experiences with your carriers. The following are anecdotal examples of what is happening in the market this year.

Reduced rates

One carrier shared with me that his all-inclusive rates into the Midwest have fallen from 2008 levels of $4,000 per 40-foot standard container to $2,800 in 2009. That is a drop of 30%!

Sacred cows slaughtered

As we all know freight rates are only part of the equation of ocean freight costs. Carriers appear to be open to negotiating the following previously non-negotiable items.

Peak season surcharge

It seems hard to believe, but the peak season surcharge is being suspended by some carriers this year. It is, after all, tough to charge for a market condition that will likely not occur.

Container size premiums

Traditionally carriers have charged a 12.5% premium for a 40-foot high cube container and a 25% premium for a 45-foot container over the base cost of a 40-foot standard container. In one example a steamship line has waived these premiums completely. In another the charges have been lowered considerably.

Detention fees

Carriers also seem to be more willing to negotiate longer free periods before charging detention or per diem fees for holding onto their containers.

Holding the line on BAF

Most surprising is word that one carrier has agreed to lock in its bunker adjustment factor (BAF or fuel surcharge) for the duration of the contract. This is especially noteworthy coming so shortly after the global fuel crisis.

What is Next?

One can only presume that all points within an ocean contract are open for negotiation in 2009. As import transportation managers it would be worth investigating other cost items within a contract such as:

• Minimum Quantity Commitments (MQC)


• Short-fall or “dead freight” penalties


• Demurrage times and fees


• All accessorial fees

There is a certain level of relief import transportation managers feel as the market works in their favor. (Who am I kidding? It feels awesome!) While taking advantage of this down-turn import managers are cautioned to take a longer-term view of the market as well and to keep in mind the following:

1. Don’t set yourself up for failure. While you might look like a hero in your boss’s eyes this year, you might be setting the stage to be the villain next year. Make sure your management understands that this market is highly volatile and the rates will rise again.
   
    


2. Be humble with the carrier sales representative. You will need to sit across the table next year and negotiate with the same person. Gloating this year will not win you any negotiating points next year.
   
    


3. Don’t put your eggs in one basket. Market analysts predict there will be further consolidation in the steamship line market accelerated by the current economy. The low-ball rates you get from a carrier may not be helpful if that carrier is no longer around. Make sure you divide your business to ensure you have service coverage in the event one of your logistics partners exits the industry.
   
    


4. Don’t be penny wise and pound foolish. You may have a good rate on paper but not be able to get your cargo onboard the vessel. Carriers naturally gravitate towards higher revenue cargo. Carriers will meet the terms of their contract with you, but any excess cargo you tender beyond your minimum quantity commitment may be delayed at origin in favor of higher revenue cargo.

Some of you do not contract directly with a carrier but work through freight forwarders. These cost benefits should accrue to you as well as your forwarders obtain lower pricing through their carrier contracts.

Regardless of how you buy your ocean transportation services, 2009 is not the year to stay the course. You owe it to yourselves and your employers to explore the market and ensure your freight rates are competitive.

( linda )15 Feb,2012

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