Turning fluctuating sea freight rates to your advantage

Due to the volatility of sea freight rates, negotiating contracts for sea transportation has become a tricky business. Some factors influencing the rates are predictable, but others are not. Shippers often opt for security by closing fixed-rate contracts for a year, but that security literally comes at a price. Yet it is possible to ‘play the market’ and get the best available rate at any given time.

Rates are sensitive to outside influences

Due to the overcapacity in the seafreight market, transportation rates have generally been low over the past years. Low, but not stable: spot prices have risen by more than 30% and then dropped by almost 45%, all in less than two years. This erratic behaviour is largely due to macroeconomic global developments, with the slowdown of the Chinese economy as a major factor. In a market this volatile, unforeseen events may trigger new price fluctuations at any moment.

Shippers must find a way to make the best of these circumstances. Many of them work based on a 12-month procurement cycle, and consequently have no other option than negotiate the best possible rates at the time the transportation contracts need to be renewed. But those who found themselves locked in to the rates of February 2015 must have scratched their heads when they later saw the prices plummeting month after month.

Renegotiating: the relationship matters

Of course, there is always the option of renegotiating. Extreme changes in spot rates can be a valid reason to open a conversation with carriers, but only if one has a stable and tested relationship with them. Many carriers prefer to remain loyal to their customers when the market shifts, provided that the shipper is willing to accept a rate that more closely reflects the reality of the market. The only thing is that this works in two directions and it may also lead to higher bills when rates fly up.

Depending on the situation, this approach may or may not yield better results than the alternatives of a 12-month contract or the spot market. The ‘sweet spot’ is the contract that allows the carrier to remain profitable and that doesn’t make the shipper doubt whether he is paying a fair price.

In a market with fluctuating prices, a carrier has choices, too. When prices go up, some carriers will prefer to offer their services to transactional customers at higher rates. Others will place more value on a guaranteed volume for the long term, but at a lower rate.

Your logistics service provider may do a better job

Besides renegotiating existing contracts, shippers may decide to take the approach of a non-vessel owning common carrier (NVOCC) and ‘play the market’. While this may on average and in the long run yield better rates than those in 12-month contracts, shippers should be aware that this game is played in an arena that is dominated by parties for whom it is part of their core business. It is all a matter of specialised skills and market intelligence: he who knows the most, ultimately gets the best rate.

Because of the specialisation required, shippers’ results will in general be average at best. If they want to benefit from the market dynamics, outsourcing is the way to go. A global logistics service provider like Damco has the leverage of large freight volumes, traders dyed in the wool, and up-to-the-minute knowledge of everything that is going on: all the ingredients it takes to win.

More information?

If you want to investigate how your company may benefit instead of suffer from varying sea freight rates, you may get in touch with your local Damco office here.

Are you interested in more ways to reduce your supply chain costs? Then you can download our recent white paper Six ways to lower your logistics costs (without compromising on speed or quality) here.