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Is it Time to Negotiate Long Term Freight Rates?

Obtaining the lowest ocean freight rate possible, used to involve intense negotiations and signing long-term contracts. These days it is much different. In our previous blog post, we described what is typically known as the high shipping season, that is, a period in which there is higher than average demand for ocean freight, the market experiences higher rates and limited available capacity.

Investments and Economy Take a Toll

Over-enthusiastic investments in megaships and the slowing global economy have resulted in a collapse in rates. Keep in mind though, when much of the investment was made in megaships, global trade was strong and rates were high. The expectation of many of these vessel carriers was that trade and rates would remain at similar levels after these megaships were built. Little did they know this would not be the case and as a result, we have seen failed GRI (General Rate Increase) attempts by vessel carriers, Hanjin collapse and increasing m&a activity among carriers.

Against this backdrop, shippers have benefited from ocean carriers’ dilemma by taking advantage of historic low rates usually in the form of short term contracts. However, as we move closer to 2017, will shippers continue to benefit from low rates?

Long Term versus Short Term Contracts

Traditionally, long-term contracts were attractive to shippers who wanted a steady, fixed shipping cost. In addition, shippers that signed long-term contracts often gained an advantage when capacity was tight. But, because of several years of volatility in the ocean freight market, shippers have opted for short-term instead of the typical 12-month contracts.

However, according to Xeneta, an online aggregator of crowd-sourced ocean freight rates, now may be the time to consider change in strategy and try to negotiate long term contracts. During third quarter, short-term contract average price for the East Asia-North Europe lane declined 24%; but, the market low price increased 11%. The gain in the market low price indicates that carriers have been successful in pulling up short-term rates during the quarter.

If one looks at second and third quarter combined, the market has trended up and then flattened pushing prices up for the Chinese New Year. As a result, this will allow carriers a better starting point to negotiate with shippers.

The ability to pull up the short-term rates will be key for carriers. As long as they can do this, 2017 could usher in higher ocean freight rates and thus shippers may want to consider long-term contracts.

Factors Affecting Rates

When negotiating, shippers should take into consideration factors affecting ocean freight rates. A good list of factors is available from Marine Insight’s website:

Service charges: Extra charges such as those from port authorities and terminals will affect the ocean freight rate.

Season: High season such as what we described in our previous blog post will affect rates.

Currency: Ocean freight rate depends on the fluctuating rate of exchanges and therefore is likely to be levied on the latest prevailing exchange rate.

Fines and Fees: If there is any delay in ship reaching the port because of over-crowding, then there might be a fine imposed which affects the ocean shipping rates.

Bunker Capacity: Bunkers are containers to store fuel. Rising fuel prices and the latest prevailing fuel rates will affect the freight charges.

Container Capacity: The containers used to store the goods function on the simple economic principle of ‘economies of scale.’ If the shipper does not have enough goods to fill the containers to their optimum capacity, it will affect the freight charges by way of the shipper having to pay more in spite of lesser quantity.

Utilizing Freight Forwarders

There’s alot of moving parts that go into negotiations. As such, shippers typically utilize freight forwarders to manage and track shipments. Even still, freight forwarders will need to negotiate with ocean vessel operators to obtain needed space, acceptable rates, surcharges and service levels to meet the needs of both their existing and potential customers.

Freight Hub is the first digitized freight forwarder that can serve your needs in the most efficient and time-saving manner. Find out more by visiting our website as well as sign up to receive our newsletter to stay informed on the latest industry trends.