At Universal Cargo Management, we love Drewry Shipping Consultants.

Drewry researches and consults on the international shipping industry, and they always have great insights to share. If you want to know more about Drewry, I’ve included the “About Drewry” information from their website at the bottom of this post.

On Friday (June 26th, 2015), Port Technology shared a Q&A with Drewry concerning rate volatility in international shipping.

Freight rates are volatile; we all know this. But are there solutions to dealing with the roller coaster of up and down freight rates? If anyone knows the answer, surely it is the international shipping experts at Drewry.

Here are highlights from the Q & A’s with Drewry that Port Technology shared along with some additions related to the questions from yours truly:

What do you think will be the impact of ever bigger ships on spot rates?

The introduction of ever larger ships into a market that is already over supplied has had the effect of increasing rate volatility. The reason is that not only does the upscaling of vessels increase the capacity deployed but also there is the individual carrier behaviour, especially with this first wave of record ships, where shipping lines don’t want to have the ship sail half empty on its maiden voyage. So on top of the structural effect of increasing supply, we’ve noticed the very short term effect of carriers grabbing extra cargo to assure the ship is nicely full and the only way to do so is by dropping the rates.

With the prospect of new ULCV’s entering the trade with a rate of 1 per week between now and the end of the year, we expect freight rate volatility to increase further.

Additional Impact of Bigger Ships:

Drewry, as well as the question itself, was focused on spot rates (freight rates in the spot rate market as opposed to the contract rates carriers have with the big shippers like Walmart), so the answer is limited to the impact of bigger ships on freight rates.

However, bigger ships are having a bigger impact on international shipping than just rates.

Bigger ships have also encouraged the trend toward carrier alliances (no, for once I won’t bust out my Carrier Craziness Bracket at the first opportunity). Not to contradict Drewry, but lowering spot or freight rates is not the only way to fill bigger ships. Another way to fill the ships is having multiple carriers work together, filling the ships with their individual cargo containers of freight.

That’s what the carrier alliances do while, in theory, not working together on sales or freight pricing.

Another effect of bigger ships on international shipping is port impact. Ports are scrambling to make infrastructure changes to handle much larger ships than in the past. Many ports are having to take on hugely costly dredging projects just to make it possible for megaships to call on them.

Meanwhile, the ports that can receive bigger ships already have been experiencing congestion in the adjustment process to receiving much bigger numbers of cargo containers at a time from bigger ships.

We’ve struggled to effectively deal with freight rate volatility and it remains a real issue for our organisation. How can we deal with this?

That’s a question we receive regularly and is in fact a very pertinent question, especially because freight rate volatility, in the face of increasing overcapacity in the coming years, is likely to get worse.

… [I’m skipping past part of the answer for large shippers who deal directly with carriers to the small to medium shippers who would deal through a freight forwarder like Universal Cargo Management.]

The second option, which we see more amongst the small to medium sized freight forwarders rather than BCO’s, is to fully embrace freight rate volatility, and to be fully engaged in the spot market to take short and longer commitments with varying carriers to make sure you have the best possible rate at all times. This obviously requires a lot of time and energy and carries considerable risk when one misjudges the market.
…

Additional Information:

Most shippers don’t have time to do all the work of making sure they’re getting the best service they need at the best freight rates for the service.

This is where a freight forwarder like Universal Cargo Management comes into play. We do all the working of the market on your behalf while making sure the routing, paperwork, and additional logistics of your imports and exports are handled.

But because freight rates are so volatile, getting a quote on shipping prices should be done within 30 days of shipping.

Are alliances a solution for reducing over capacity?

Alliances are a solution for sharing the commercial risk of operating a string of Ultra Large Container Vessels. Ultra Large Container Vessels (ULCVs) were a solution for improving the operating cost in a commoditised market: when customers select providers solely based on price, it’s the shipping line with the best cost profile that can offer the best prices to its customers and gain market share or generate superior profits.

So alliances were put in place to operate the ULCVs but do not contribute to reducing capacity. If anything, they’ve contributed to increasing capacity by improving the operability of ULCV’s.

Possible Outcome of Alliances:

Drewry, of course, answered that question well; however, I would like to add a possible affect carrier alliances could have on capacity.

Carrier alliances have shifted the capacity market share controlled by carriers in the international shipping industry. Fewer carriers control larger percentages of the market. For example, 2M, Ocean 3, G6, and CKYHE are projected to control 95 percent of the cargo volumes moving in the major east-west trades.

Many carriers have felt the pressure to join an alliance just to compete and survive in the international shipping market.

With the dominance the bigger carriers wield, teamed up together, there is a good chance a number of shipping companies (carriers) will go out of business or get completed absorbed in a merger. If the number of carriers shrink, capacity could shrink or possibly be better controlled.

Do you expect any space issues in the near future?

Currently, the idle vessel fleet is very low and so are scrapping volumes so shipping lines have recently only used blank sailings to reduce capacity. This signals that in general, it’s been cheaper to operate the ship, even at a loss, than to lay it up completely. Pulling a service also has negative commercial repercussions and no shipping line will want to be seen by the market as a first mover in this regard.

All of that will change if the poor rate situation continues to deteriorate and laying up vessels becomes the cheapest option for shipping lines as we have seen it happen in 2009. Consequently, Drewry believes that BCOs should be aware of the potential of space issues should carriers be forced to withdraw services to support rates –O3 Alliance announced the temporary withdrawal of a complete Asia-Europe string yesterday, for example.

Simple Answer for Small to Medium Shippers:

Overcapacity or too much space is the current problem for carriers. You can expect there to be room for your cargo on ships.

If carriers do start trending toward laying up ships, like in 2007, and shrink capacity, room will probably still be found for your cargo but freight rates would probably increase dramatically.

Is it possible to control/regulate this industry vs individual carrier interest in economies of scale?

We currently see no practical way to control or regulate this industry to avoid carriers pursuing economies of scale.

Why So Wordy?

A simple “no” would have sufficed, Drewry. 😉

… Is it the right time now for shippers to take advantage on the low spot rates?

… with current low spot rates, there is indeed an incentive to leave the “fixed” long term contracts and start saving some money in the short term. However one should bear in mind that what goes down, is likely to go up again at some point.

Sound Advice for Shippers:

It’s always a good idea to take advantage of lower freight rates when they’re available and you are able to ship. The nature of freight rates’ volatility means you never know if the pricing on your international shipping will jump to much higher levels in the near future.

Why are the orders of new mega vessels rising? Will the ULCV ordering not cause a cascade effect and result in even bigger rate reductions, when the industry is already in an unsustainable position?

Ordering bigger ships is perfectly rational from an individual carrier’s perspective: in a commoditised market the objective is to achieve the lowest possible operating cost. This can be achieved by using the scale economies offered by these bigger ships.

In a process that is called vessel upscaling, shipping lines maintain existing service patterns but they are being performed with bigger ships. The ships that have become redundant in the process need a new home which is usually found by cascading them to secondary trades. These secondary trades then also experience vessel upscaling and further cascading follows.

Currently, all the mega-alliances [are] engage in upscaling. Capacity is being injected into a market that is already oversupplied and at the same time everyone is putting a brake on scrapping and layups. The result is [a] dramatic over supply situation on all the trade routes and hence the crash in rates. For the next 2-3 years we do not see the situation improve.

Results for Shippers:

If just looking at the last two sentences of Drewry’s answer, this would appear to be the classic carriers’ loss is shippers’ gain. However, the results are more complicated than that.

While shippers are in a position to enjoy lower freight rates from overcapacity, the larger ships have helped create congestion and cost shippers money in the failure of cargo to pass through ports efficiently.

Carriers keep ordering bigger ships because it benefits them in terms of operating costs, regardless of the problems ports face. While it will be hard for carriers to recover higher freight rates over the next 2-3 years, it will be a challenge for the rest of the industry to shift to the higher single ship volumes.

Some of the damages shippers have suffered are much greater than the benefit of lower freight rates. That’s a reason why the cheapest possible shipping price should not be the top concern of importers and exporters.

Click Here for Free Freight Rate Pricing

Here’s that information about Drewry from their website that I promised you at the top of this post:

Drewry’s origins date back to the 1960s when the late founder, George Drewry, recognised that the international shipping industry did not have an independent source of data, information and advice.

H.P Drewry Ltd, as it was then called, was established in London in 1970 as an independent and authoritative provider of information and analysis to the global maritime industry.

Throughout the 1970s and 1980s the publishing base was expanded as new products, such as single client advisory work, were added to the portfolio. The company also expanded into other markets adding new sectors such as containers, ports and shipbuilding.

During these formative years much work was undertaken to build the company’s information and knowledge bases and during this time the Drewry brand became well established.

In April 2000, a management buy-out took place. This allowed Drewry to diversify and to launch new businesses supporting client needs across a broader base of maritime activities including ports, terminals and logistics. We have also opened offices in India, Singapore and China and with these, coupled with our network of associates across the World, Drewry now operates on a global platform.