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Logistics Executive Briefing
Maritime Financial Research

Risk of higher contract rates in new annual tenders

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Following the surge in spot ocean freight rates on most lanes since the start of the COVID-19 crisis - and pro-active management of shipping capacity by the major lines - it now seems likely that a significant number of contract shippers will see increases in their newly negotiated 2021 freight rates. What can BCOs do to prepare for this season’s tender rounds and mitigate these risks?

 

Drewry’s shipper customers are increasingly asking if they should expect higher contract rates in their forthcoming tenders for 2021 contracts. Our strong recommendation is to prepare for this and take steps to bring as much visibility to the process as is possible.

 

In the first of this week’s Logistics Executive Briefings, we provide some recommendations and observations to help inform shippers on the current market instability and its potential outlook.

 

1. Spot rates on most routes are very high (and are expected to remain high for months, creating upwards pressure on contract rates)

Based on the Drewry Container Freight Rate Insight, a service that tracks and provides average spot container freight rates on 700+ lanes globally and analyses market trends, we can clearly see that 2020 spot rates have exceeded 2019 spot rates by a large margin since March. The Global Freight Rate Index, a weighted average of all-in spot rates on East-West, North-South and intra-regional trades, reached $2,276/40ft container in August, a 32% increase from August 2019 (Figure 1).

Figure 1: Drewry global spot freight rate index ($/40ft)

Figure 1: Drewry global spot freight rate index ($/40ft)

Some routes and regions stand out as benefiting from lower rates in 2020, but the vast majority are seeing rates rise – particularly transpacific eastbound and Europe-to-Asia eastbound, where the increases are worryingly high.

 

We note that average spot rates on the North-South routes show more moderate increases than on East-West routes (Figure 2).

 

Figure 2: Drewry North-South spot freight rate index ($/40ft)

Figure 2: Drewry North-South spot freight rate index ($/40ft)

 

Particularly this year, shippers and forwarders should track the development of spot freight rates because they indicate the tightness of the market on some routes, they may be a leading indicator of contract rates, and they could point to future problems of capacity availability if ocean carriers prioritise (higher) spot cargoes vs (lower-rated) less profitable contract cargoes.

 

“The risk that some contract shippers will see increases in their 2021 contract rates is rising.”

 

For further information or request a demonstration of this online service click the link below. Customers using this service also gain access to the Drewry’s next market outlook webinar on 16 September.

 

Request a demonstration

 

 

2. Ocean carriers are reporting consistent, year-on-year increases in their average rates

Ocean carriers provide some limited information on their average freight rates when they report their financial results. There is normally a 2-month delay, so the latest available numbers are those for 2Q 2020. The rates reported do not break down the trend for spot rates and for contract rates separately - they are averages of both.

 

Four carriers (Maersk, Hapag-Lloyd, OOCL and Zim) have reported detailed 2Q 2020 results and they all reported increases of between 4.5% and 7.9% in their average spot & contract rates between 2Q 2019 and 2Q 2020.

 

 

3. To date, contract rates have not increased

Drewry’s Benchmarking Club, a closed user group of over 100 multinational shippers, enables shippers to compare their current contract rates against the market and to get insight into recent contract rates secured in the market. The data is updated monthly.

 

While this sensitive contract information is confidential to Drewry Benchmarking Club participants, we are permitted to publicise the Benchmarking Club East-West Contract Index below, which shows that until now contract rates have mainly declined, not increased.

 

 

"How confident are you that you are obtaining competitive freight rates?"

Figure 3: Drewry Benchmarking Club East-West Contract Index (% change month-on-month)

Figure 3: Drewry Benchmarking Club East-West Contract Index (% change month-on-month)

This data on contract rate trends until July does not imply that the decreasing trend will continue. This is the difficult question which shippers, forwarders and ocean carriers now face.

 

Drewry urges shippers to warn their financial departments that there is a risk of higher 2021 contract rates and to consider using independent resources like Drewry to provide unbiased market insight, forecasts or target rates to address this risk. On some routes and for some commodities, the prospect of higher contract rates is highly likely.

 

By using best practices for global ocean bids, including the use of benchmark data to set target rates and negotiate final rates, shippers can ensure that they are not spending more than necessary and can demonstrate that they are obtaining competitive rates and following industry best practices.

 

If you are a shipper, how confident are you that you are obtaining competitive freight rates? Are ocean carriers, post-industry consolidation, now changing their market behaviour and managing capacity more tightly than previously?

 

These are important questions which will shape the outcome of the 2021 contract tenders and for which Drewry will continue to support shippers. Get in touch with us today to learn how our market insights, tools and best practices can optimise your ocean freight procurement this year.

Contact

Philip Damas

Philip Damas

Director, Head of Drewry Supply Chain Advisors

Industry at a glance

World Container Index

East-West composite ($/40ft)

Bunker Prices

Rotterdam ($/tonne)

Global Port Throughput

Jan 2012 = 100

Idle Capacity

('000 teu)