Transportation & Logistics Analysis

Ocean freight rates: should commodity box rates be revived?

February 02 2021

The sharp rise in container shipping freight rates is particularly penalising for low-value cargo. The introduction of freight rates which vary according to the nature of the cargo transported, along the lines of the old "commodity box rates", could offer a solution, at least temporarily.

The level reached by ocean freight rates on some routes, particularly from Asia to Europe, is today endangering the global supply chains. In this situation, a return to commodity box rates (CBR), which is to say rates which take account of the value of the cargo transported, could be an ethical and inclusive way of re-establishing peace on container shipping markets.

Differentiated pricing

CBRs, which were in use during the era of the shipping conferences which were abolished in Europe in 2008, were rates based on the customs coding and value of the goods being transported. The lower the value of the goods, the lower the freight rate and vice versa.

After 2008, these common tariffs were replaced by directly negotiated rates and Freight All Kind (FAK) rates. These latter rates involve a unit price published by the shipping companies on a monthly basis and applicable to spot traffic. They do not differentiate according to the nature of the goods transported, so long as they are "dry" and non-dangerous, or according to their market value.

Clearly, the greater the commercial value of the goods transported per tonne or per cubic metre, the less it is affected by the price of transport. A sudden three or fourfold increase in freight rates has a much greater impact on low-value goods like chemicals or basic agri-food products than it does on the high-tech components transported by container for the automobile and aeronautical industries, for example.

European economies penalised

Faced with current soaring freight rates, European economies find themselves automatically more affected than Asian economies, particularly the Chinese one. On average, the value of goods transported in a 40' container from Asia to Europe is about five times higher than that for one shipped from Europe to Asia.

Current freight rates are having a greater negative impact proportionately on European exporters than on Chinese ones, which runs contrary to the European Union's wish to rebalance its trade with China, which was reaffirmed in the recent China-EU investment agreement.

Via the European Shippers' Council and CLECAT, European shippers and freight forwarders have warned the EU authorities in Brussels of the threat to European companies posed by the market distortion caused by the shipping companies' strategy for keeping freight rates high. For the time being, however, the European Commission is not inclined to give way to calls for more regulation.

A compromise in the interest of all

How can we get out of the existing impasse, which has also brought about a major decline in trust between shippers and shipping companies?

This is not a call for a return to the conference system even if the current configuration of international shipping, with three shipping alliances representing more than 80% of capacity and applying the same global policies, raises questions.

Introducing minimum and maximum rates based on the main categories of containerised goods for a six-month period could give market operators the visibility and calm they need to prepare their budgets, as well as strengthening the economic resilience Europe so badly needs in the coronavirus storm we are currently going through.

The shipping companies would not be the losers because, in the longer term, these new rules could serve as a shock absorber when the market inevitably turns.

A question of sovereignty

On Asia-Europe routes, it would be an illusion to believe that Chinese exporters, whose exports are currently being held up by the absence of adequate shipping capacity to transport them, will not be listened to by their central government.

Let us try a little bit of political fiction. If China orders its shipping fleet, led by Cosco, to come to the aid of its exporters by suddenly reducing rates for 40' containers from $8,000 to $4,000 in a coordinated manner, we can expect to see many commercial contracts switch from incoterm FOB to CIF European destination port or even to Delivered At Place (DAP) until the goods arrive at European terminals under Chinese control.

Cosco has until now followed the inflationist rating policy of the other shipping companies but its current silence is an indication that China is planning to retake control of the market. If this happens, Western interests will be the losers, whether they be shipping companies or major distributors. The shipping companies will lose market share if they are unable to react sufficiently quickly, and the distributors will lose control over their orders.

There can be no doubt that the Chinese New Year, which starts on 12 February, will mark the start of a new round of manoeuvres in the Asia to Europe trades.

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Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).