As we have been experiencing in the last few months, ocean freight rates from Asia into the U.S. have been falling drastically. This week on the West Coast we’ve seen ocean freight rates dip below levels that are less than one-third of what was observed at the peak of the pandemic.
In the meantime, during this two-year period, when freight levels peaked and space was extremely scarce, ocean carriers offered contracts with 2-3 year commitments to importers. $8,000 to $9,000 per 40’ container with space was a pretty good rate when considering the rest of the market was paying $15,000 to $16,000.
The risks? When would the market turn around? Would these levels ever become more expensive than the spot market, and if yes, when?
Well, the market did turn around much faster than many forecasted – it was predicted “at the earliest” the end of 2023. So, now there are many companies that are bound to their contracts which are already 100 to 150% more expensive than the market levels.
I think the more concerning part is:
- Ocean carriers like Maersk and Hapag already announced that they will not amend those contracts nor rates, and importers must keep their commitments.
- We are not sure where the spot market levels will stabilize. Alphaliner estimates that about 900 ships totaling 6.8 million TEUs are due to be built and this capacity will be on the water in 2023 and 2024. To give a perspective, this type of capacity is larger than combined existing fleets of Cosco, Hapag-Lloyd, and Evergreen.
This takes me back to the question – is signing long term contracts good or bad? Just like many things in our industry, there are grey areas to this subject.
The Pros and Cons
If you are a large importer selling to big-box stores with commitments, stability is one of the main components you are looking for. You do not want to be penalized by your final customers and you would like to have your risk minimized. Just like everything, this stability comes with a price. As of now, for these types of agreements, the price tag is very high.
In my experience, for a medium to larger-size company to have a good mix of NVOCCs and freight forwarders can be a safer and more-effective way when looking at the lifespan of a contract. Because with a forwarder, companies can do all they can with the ocean carriers, just with extra options and tools.
- If a company prefers to work with a fixed commitment, freight forwarders can commit to a lane with a specific allocation. If there is a fall on the customer’s side because of demand, supply, or other issues, they may back this commitment up with another customer from their portfolio.
- If a company prefers to work with a half commitment and half spot (one of the best ways), freight forwarders can give access to all ocean carriers for the uncommitted volume, this way risk will be distributed.
- Companies can prefer to work on the spot market exclusively. By choosing the right partners based on their strength on the geographical regions, ocean carriers contracts, market know how, and network capabilities, they can bring in the best options and do not even need to commit.
I think it is very important to mention that, for all these to work, the key is choosing the right companies. Regardless of whether there is a written commitment or not, the freight forwarders that are chosen should be committed to the work they do and deliver on the promises they make.