The fast fall in freight rates for goods exported from China continued in November. Rates in other trades were less affected but the general trend was nevertheless downward. Several factors need to be monitored.
After having risen to record levels, freight rates on the major international shipping routes have fallen to the level they were at in late 2020. At first sight, the fall does not look dramatic. After all, at the time, shipping companies' finances were not considered to be in a catastrophic state.
New parameters need to be taken into account, however.
This combination of soaring fixed costs and a reduction of about 30% in cargo volumes had a major impact on shipping companies' operating results November. The three big shipping alliances responded immediately with sharp reductions in capacity. This has not been enough, however, at least not so far, to hold up the fall in freight rates. Only long-term contracts, even if contract rates have often been renegotiated, are enabling them to avoid a complete collapse of the market.
For several months, Chinese exports filled ships' holds and generated super-profits for the shipping companies. Now, these exports have fallen sufficiently to reverse the market trend. The pandemic crisis has demonstrated clearly, therefore, that the global container shipping freight rate market is made or broken by China's economic performances.
After having long been dazzled by the discipline and competitiveness of the world's "factory", Western economies are now obliged to recognise the geopolitical realities which, deliberately or otherwise, had been ignored for several decades.
If this turning point in the globalisation trend we have known for the last 25 years is confirmed, the shipping companies will need to adapt and reconfigure their software, so as to be less dependent on China for growth. This will undoubtedly be one of the key issues as they reposition themselves for 2023.
The annual contract negotiating season has got off to a slow start. Naturally enough, shippers are opting to wait in the hope that they can take advantage of the sharp reduction in freight rates. The main question, however, concerns the quality of service offered. There is no point in negotiating a rock-bottom rate if it subsequently proves to be impossible to load one's goods on to a ship.
The notion of negotiation is based on a rate seen as reasonable by both parties but one which provides for a real return in terms of quality of service. The problem with the negotiations currently in progress is that they concentrate too much on rates and not enough on quality of service.
As their revenues fall, the shipping companies are unable to stop following an operating logic based on the application, ship by ship, of the most profitable freight rates. Yield management tools will automatically prioritise the highest, most quickly bankable sources of revenue.
At this stage, shippers should be wary of relying on the weekly schedules published by the shipping companies. They should rather think in terms of sailings per fortnight. They would be wise, too, to expect (...)