A year of peak rates: the honest outlook for shippers

Industry reports are coming in that container rates to Europe from Asia have passed $20,000 for the first time on record. Price increases are now significant enough that the mainstream press is reporting on them as volatility in the ocean market becomes a global business issue.

For many shippers, this has meant a doubling or even tripling of their shipping costs. Even those with contract rates are having to deal with extra surcharges and an early peak season. Meanwhile, schedule reliability is near an all time low with experts predicting continued disruption until H2 2022.

This is no longer a conversation shippers can ignore. We’ll be digging into this topic at our upcoming online event, Surviving Peak Freight on July 8th, in collaboration with Lars Jensen, global shipping advisor and CEO of Vespucci Maritime. 

In the meantime, it’s worth considering what options remain for shippers.

Scenario planning for disruption

The events of the last 12 months have put ocean freight supply and demand completely out of sync while also causing structural issues that severely limit the ability of the market to adapt to changes.

The short term: 3 months

For Q3 2021, the situation in the market is likely to remain extremely challenging.

• Currently, ports are highly congested, especially on the West Coast of the US, but also in China following issues in Yantian and neighbouring regions.
• Further lockdowns or transport issues are likely to push rates even higher. Every new issue extends timelines for restabilising equipment levels and schedule timelines.
• As long as equipment remains unevenly distributed, competition for space will remain extremely tight, keeping steady or even upward pressure on rates. This is also likely to put pressure on the contract market, with additional premiums and reduced allocations.
• This may also lead to certain UK BCOs bringing cargo ready dates forward which will impact on an earlier Peak Season.

Medium term: 6 months

With the ongoing structural issues in the market, the medium term is more likely to be a question of stabilisation rather than significant improvement.

• Much depends on the ability of carriers and ports to deal with their equipment and congestion issues. These are to a large extent co-dependent, therefore hard to deal with in isolation.
• Relief may come in the form of the return of some level of passenger air travel, increasing available capacity in the air freight market. This would lessen pressure on ocean freight, providing the opportunity to start to realign schedules and demand.
• Moderating demand may also lead some carriers to being more open to negotiated rates and contracts.
• If a large number of BCOs bring their peak season orders earlier in the year, this will lead to an extended, but less critical, peak period through Q3-4.
• We could also see rail rates coming in line with Ocean rates with 4 weeks booking required as more shippers explore alternative routes.

Long term: 12 months

While it is impossible to predict over the long term, it’s likely that rates will still be elevated but stabilise progressively.

• In the long term, carriers will have more flexibility to balance spot market and contract rates which will provide opportunities to build in more rate certainty, especially as equipment levels become more amenable.
• While we would expect a space crunch pre-Christmas, the following months should bring more stability.

Shipping in the world of peak rates

It’s important to recognise that there are no easy solutions to this situation. In the absence of lower rates on the horizon, shippers will need to work with the world as it is. In the current market, and for the likely future, the only choice for shippers is to maximise the value and utility of existing services.

Achieving this will require the input of multiple levels of the business, not just logistics and supply chain. Teams will need to align forecasts, orders, shipping windows, manufacturing to book space, optimise efficiency and minimise extra costs.

1. Closer collaboration & alignment with external suppliers

We are already seeing trends of whole months being booked solid. In the current market, planning ahead is one of the only tools available to shippers. Shippers can expect to pay full market rates for un-contracted volume and even those with capacity agreements may find their allocations restricted.

• Planners must extend booking windows, with four weeks being a current minimum, and six being preferable. For many businesses, this will require extending demand forecasts to create visibility over upcoming needs for space and ensure bookings can be placed in good time.
• Now is the time to drill down into manufacturing timelines for absolute clarity. Shippers will need to work closely with manufacturers to set predictable, reliable cargo ready dates to enable advanced bookings and minimise delays.
• This also applies to your upstream supply chain – any delay that impacts your booking windows or cargo ready dates has the potential to instantly double your landed costs for that product.

2. Agile demand planning and freight planning

There is a strong chance that all non-premium cargo will be rolled at least once. The choice of whether to delay or expedite cargo will need to be taken on a SKU by SKU basis. This is not just a choice for logistics teams – this will require coordination between sales, merchandising, supply chain and finance teams to balance margins and inventories across catalogues.

• For some businesses, this may require trimming your available products in the short term to focus on profitable SKUs.
• Prioritising POs according to SKU value and demand can help move urgent products while saving on less important cargo, utilising other modes where possible.
• Urgent cargo will still be able to find space on LCL or air, but it will involve paying a premium to guarantee.

We have already seen how quickly shocks can spread through the system, as Yantian did last month. Internal stakeholders need to be reviewing supply chain decisions regularly, based on shared, accurate, live data.

3. Laser focus on all cost areas

With container availability at a premium, it’s essential to maximise utilisation and minimise extra costs.

• Work with your forwarder to track and benchmark container fill, using CFS services if possible to combine suitable SKUs and minimise the number of containers required.
• Combined with SKU cost metrics, consolidation can also help you combine SKUs of different values based on an average container value that creates acceptable margins for your products.
• Free time at high congested ports is now non-existent, so detention and demurrage  charges are also a significant risk. With live supply chain data you can better coordinate with your suppliers to minimise node waiting times and keep costs to a minimum.

What you can do today

Shippers, carriers and forwarders will need to work together to navigate the next 12 months. It’s in everyone’s interest to keep trade moving and boxes and ships filled.

1. Embrace data: The foundation for effective decision making remains reliable, up to date supply chain data. The only way to manage current market disruption is to look ahead and act quickly when change inevitably comes. We’re already using our supply chain platform to give customers more visibility, coordination and connectivity to keep stock moving.
2. Stay informed: Our July webinar Surviving Peak Freight on July 8th is a must attend for anyone shipping anything right now. Lars Jensen is one of the world’s go to experts on shipping and not to be missed.
3. Ask for help: Whether you’re a customer of Zencargo or not, we can help you with free advice on rates data, contingency planning and agile execution. Please reach out to me and I can help connect you with a member of our team.