Ocean Freight Procurement Strategies for 2021
While the Ocean Freight rates are at record high towards the end of 2020 the questions that I hear the most from clients are, Will I be better off signing a contract as early as possible for 2021? Followed by, Will I be better off with an ocean freight contract or braving the spot market?
The answer is (as it always is) it depends. To make an informed decision, this article will cover the underlying reasons of why costs are high and service levels so low and how this is somehow a vicious cycle that will affect the cost of shipping for 2021.
Ocean Freight rates are at record high
The health crisis due to COVID19 affected ocean transportation as early as the 2020 Chinese New Year. The historic blank sailings from China were expanded due to the lockdowns to prevent the spread of the virus. These blank sailings were the best proof of results in terms to contain rate deterioration by active capacity management.
By the time the virus spread to the western world, blank sailings and active capacity management became the norm. Experts expected the ocean carrier’s industry to lose about $23 billion. After the spring scare from the virus, as product of the lockdowns, most consumers (the ones that kept their jobs with higher income and working from home) found excess of cash that was soon put to use buying hard goods. Updated kitchen gadgets replaced dining out, the need for home offices and home school increased demand for furniture and those overseas vacations were replaced by home improvement or expansion projects.
The contained wave of hard goods demand exceeded the deployed capacity in the international transport system, which, coupled with the newfound capacity management aligned among ocean carriers took the ocean freight rates to new records.
Ocean carriers revised their best forecast for a higher profitability because of the good-old demand vs supply price principle followed by cost efficiency. Some carriers claim that their digital and/or logistics service integrations strategy is to credit the profits when it is in fact a consequence of disciplined capacity management.
Service Levels are at record low
COVID19 and Ocean Carriers dynamic capacity management A.K.A. blank sailing have consequences far from just high freight rates.
The equipment can not be repositioned as expected. Most of trades are not balanced, therefore containers are not in the place where you need them most of the time. Equipment availability is a result of careful equipment flow planning. The blank sailings have an impact in global positioning patterns.
Port Congestion generated by blank sailings, irregular equipment flow and unplanned vessel port stays have an impact in schedule reliability. All services plan for sailing days and port stays with little buffer in normal conditions. When you add extended waiting times for services that need to deliver fresh equipment or pick up 2 weeks’ worth of rolled cargo, chances are that the vessels involved will not be able to keep the service integrity causing delays over delays and a very poor service reliability. In November we heard that it is down to low 50%.
Shippers pay the highest rates for poor service
Sad but true! I remember the days when ocean carriers were aiming for over 96% schedule reliability as a differentiator to ‘win the market’ and charge premium rates. In short, it did not work. There was plenty of capacity and Freight Forwarders will go from one shipping line to the other with no regret to keep a few bucks per container. Now it is different, Freight Forwarders go from one carrier to other to find equipment and space no matter the rate and offer a solution to their customers, one has gone as far as to charter vessels.
Who bears the cost increase?
Short answer… YOU! At the end of the day, that house expansion you have been wanting to do it is more expensive now than a year ago.
Why is it a vicious cycle and how long is it going to last?
Carriers are happy with their newfound profit; therefore, dynamic capacity management is here to stay. Equipment flow is a consequence and so it is port congestion. Dynamic Capacity Management will allow carriers to blank congested ports and somehow increase service reliability at the same time they save some operational costs.
The problem is that service reliability will not happen overnight. COVID19 has also an effect reducing current capacity as some vessels quarantine and/or have problems with crew members. There might be new lockdowns and therefore less people working making the actual equipment flow (on site) more difficult to maintain. Even airfreight will be affected as most of the capacity in place will be focused in distributing vaccines around the world, therefore increasing the demand for reliable ocean services.
High demand for vessels in the charter market increases the ocean freight costs, and if or when demand slow down, ocean carriers will just adjust their capacity accordingly.
How will the 2021 contract season work?
If service levels and reliability are low. If demurrage and detention for equipment seem unavoidable. Shippers will be betting on ocean freight contracting. The issue is that contracting at peak rates is probably what procurement 101 advises against.
Then spot market is better? Not really, rates are about the stay high and how to secure equipment and avoid service failures?
What is better? Maybe Quarterly Contracts and shorter-than-a-year-term contracts will be the way to get the best of both worlds…
KUNAN Consulting can assist you in developing an ocean procurement strategy for 2021. Please contact us at www.kunanconsulting.com