Want to know what’s happened in the last month in the ocean freight industry?
In this week’s episode of Freight to the Point, Richard Fattal, Zencargo’s co-founder and Chief Commercial Officer, gives us his updates on the ocean market and how it will affect rates and shippers.
We’ll be exploring:
How blank sailings have not been enough to stem the decline in rates
Demand post Golden Week
How supply chains will act pre-Chinese New Year
Richard Fattal
Richard Fattal is Co-Founder and Chief Commercial Officer of Zencargo, the digital freight forwarder enabling organisations to make smarter decisions through real-time data of their supply chain. Based in London, Zencargo helps customers manage their supply chain such as Swoon Furniture and Ribble Cycles.
Hello and welcome to another episode of Freight to the Point, a podcast from Zencargo. I’m Helena Wood, and today we have invited Richard Fattal back on again to talk about what’s happening in the ocean market, how it’s affecting rates and some of his predictions for the coming months. It’s always great to have Richard on the podcast, because when he joins us once a month, we’re able to get a real expert view into what’s actually going on in the market. So for anyone that doesn’t know, Richard is one of our co-founders, and as our Chief Commercial Officer, works very closely with our procurement and pricing teams, who are in touch with our carrier relationships all the time, understanding what’s influencing the rates market and what’s going to be coming up next. So, Richard, it’s always great having you here to share that expertise.
Thank you so much for that, and thank you very much for having me on the show today.
For anyone who’s listening to the audio transcript rather than watching the video, you might see that Richard’s blushing, but it’s undeserved. He should be feeling very rightly smug about his knowledge here. So Richard, let’s kick off, or get freight to the point, as it were. Tell me, what’s been going on in the last month? What’s affecting the market?
So the last month’s been characterized by continued reductions in the ocean freight container prices. And you’ll probably remember last time you had me on, we were discussing the time of year, and that we were really entering what was typically peak season, and that we had yet to really see increases in peak demand because of the broad scale de-stocking trend that we’d seen, particularly from consumer-oriented businesses in Europe and the US.
And one of the things I pointed to last time was Golden Week in October, and how that normally is a bit of a turning point in the market, where you can have pent-up demand as the factories are closed during Golden Week. What we’ve seen is very little in the way of uptick in demand in this period, and really a peak season without the peak.
And so whilst I would say the rate of decline of ocean freight rates has slowed, that’s more mathematical and mechanical than anything else. They started off very high at $9,000 and $10,000 on Asia Europe, $6,000 or $7,000 on the US trades. The rate of decline has definitely started to reduce, but yet we do see broad-based kinds of rates across the board, mainly because that demand has not picked up going into the end of the year.
And so for the moment, whilst there have been capacity reductions in the market, which obviously have service ramifications and mean that as a shipper you can have disturbances to the lead times that you’re able to achieve moving on the Asia, Europe and trans-Pacific lanes, they have not been enough to stem the decline in ocean freight rates. So most notably, coming out of Golden Week, we saw anywhere between a 26% and 31% capacity reduction on the trans-Pacific trade. It looked like 19% to 27% between weeks 41 and 43.
This reduction in capacity has not stemmed the decline in rates, and that’s really because that available capacity, in spite of the capacity reductions by taking out particular sailings, there’s that available capacity in the market, and carriers are operating at utilization rates that are in the 70%s and 80%s, and it means that those carriers are actually looking to fill a space on the ship and have reduced rates commensurately.
The other thing to note is that because a lot of shippers have now come off of annual contracts because of the move in the market, that creates more competitive tension in the market, and more competitive tension and demand in the spot market, which then means that the market becomes more volatile as a result of, let’s say, more customers being actively engaged in price negotiation.
And is that a sensible decision? So I can understand, as the market has fallen, many people on long-term contracts must have suddenly thought, “Actually we must move to the spot market. We’re not getting good value for money.” But long-term contract engagements come with much more than rates. There’s the commitments around capacity; there’s commitments around fees; there’s commitments around service levels. So for shippers who maybe have moved or are thinking about moving, it’s interesting that you talk about the fact that that in turn creates further volatility in the spot market, but how would you recommend someone approaches their contracting at the moment? What’s the best thing to do?
So I think one of the things that I’ve said a number of times before is that when looking at what’s effectively risk / cost-benefit analysis on your supply chain going into 2023 or going into any budget-setting period, you have to understand what the risks and the opportunities are for your own business.
And it’s really important not to be short-sighted or to forget the recent history and the learnings from recent history, and the reality is that many of the same factors that underpin the disturbances of the last couple of years are to some extent still around. So you do still have a zero-COVID policy in China. You have a shortage of effective capacity in ports in Europe and in the United States. You have very active unions in both Europe and the United States in reaction to the cost of living crisis that is being experienced there.
All of these things mean that unknowns can creep out of the woodwork, and you can turn a corner and suddenly the market isn’t exactly as you anticipated. And so I think that’s something that shippers have to be very aware of: the potential and the real likelihood of continued volatility in the market.
That said, the current supply-demand imbalance is very much a reflection of the reality of economic slowdown in Europe and upcoming economic slowdown in the United States. And with fresh ocean capacity coming into the market, the supply-demand picture for ocean freight is different to how it’s looked over the last 12 months.
So I would say that, as a shipper, I would certainly be thinking about how I can capitalize on the fact that the rate environment and the negotiating environment is a little bit easier than it’s been before, but at the same time, use this as an opportunity to develop and strengthen relationships that will, with your freight partner and ultimately with the carrier, see you through what could potentially be continued volatile times ahead. And so I would look beyond necessarily the next few months, and think about the long-term relationships that you are setting up with your partners.
And that’s really interesting, Richard, because obviously, you’re talking about some of the different drivers of market volatility and market change. So the macro trend, which has been the elephant… It’s not really an elephant in the room, because we’re all talking about it, but it’s the global economic climate, which we are feeling very acutely in the UK at the moment. You were hinting that the US is due to feel more discomfort from that in the coming months.
And then you were also talking about some more localized and specific risks that could drive volatility. You spoke about COVID. You spoke about the shortage of capacity in ports, particularly in Europe. And then you’ve spoken about the power of the unions. I mean, we’ve already seen a number of strikes or near-strikes that have had an impact on the whole network.Given where we’re at now in terms of the market and the rates environment, particularly with those micro impacts, do you think they’re likely to cause significant pain, or actually, should we all be really looking at the global economic situation? What should shippers be more nervous about, or is it just about thinking about everything holistically?
So I would say both. I would say the macro economy really drives the rate movement. So you have to think about Asia, Europe, for example as an 11 million TEU trade, and so any one country, or any one port where a strike might be going on, is not going to be a huge driver of their overall market, although it can create disturbances for the shipping line that’s managing that trade. But if you are a shipper going into a particular port and it’s faced by a strike, that’s really going to have an impact on your supply chain.
So I would say that from a rate perspective, what is going to drive up or down the price of Asia, Europe or the trans-Pacific, it’s really global supply-demand imbalances, and it’s really going to be driven by the extent to which we turn the corner on the recession in Europe and the extent to which the US goes into a significant recession over the coming months.
What we do know is that de-stocking in global supply chain has already started and has been running for some months, and it’s our belief that we should turn the corner in terms of a re-stocking trend as early as the end of the second quarter of next year. We’ve looked at previous recessions and we’ve run the numbers, and these de-stocking trends never really last more than four quarters.
But I would say the micro is important as it relates to your supply chain. So if you are a shipper going into Liverpool, and Liverpool port is frequently going on strike, and you think that that’s going to continue until there’s a broader-based reconciliation between the unions and the port authorities there, then that’s something to be aware of and to need to look for mitigations for, and to work with your supply-chain partner to make sure you are well set up to be able to mitigate and that you have the right visibility to look around the corner.
So whilst the macro will drive the rate dynamics overall, the micro can very much drive the service levels that you are able to achieve, and it can be a driver of the need to have greater flexibility or agility in the supply chain. I think that unless there is a dramatic impact from COVID or another, let’s say, significant event, I don’t necessarily see us going back to the kind of rate environment that we’ve seen over the last couple of years. But at the same time, certainly from a service-level perspective, and also in the context of a renewed ability and capability of the carriers to manage their capacity thoughtfully and to reduce the number of sailings when appropriate, it’s very important to understand the dynamics, basically, at a micro level, in order to understand the service risks you have in your business.
That’s really helpful, thank you. And you spoke a bit about, as you reflect on the macro, the continued de-stocking trend. You don’t think restocking is going to come until certainly into next year, probably later in Q2. If we were to think a little bit shorter-term, let’s think the next month, maybe December. So between now and the end of this calendar year, what do you think is going to happen to the rates market?
So my view on markets in general is that they always overshoot in one direction or the other. My background is I used to be in financial markets and trade bonds, and you look at any graph, it always goes up a little bit more than it should and then it re-balances. It normally happens that people get a little bit exuberant; things get a little bit over the top.
Right now, there are carriers that are looking for capacity and they will want to fill the ships, and at a certain point, they’ll realize that there’s an excess demand. At that point, the rates can go back up.Also, it takes a little bit of time for some of the actions to play through into the market. So if you take a service offline or you change the amount of capacity in the market, that takes some time to feed through, and it’s not an immediate or real-time market in that sense. There are certain time-lags in terms of the transmission mechanism through to pricing.
And so I would expect that prices likely overshoot, let’s say, the normalized levels that they will get to, and then come back up, and that would be my immediate prediction between now and the end of the year. And then I would say it really depends on how supply chains act going into Chinese New Year, and the extent to which they’re working through their stocks and how Christmas goes.
If Christmas is strong, then to all intents and purposes, they start to sell through stock during November, then the rush on goods to get ready as quickly as possible before Chinese New Year, which is happening in late Jan, will be stronger than maybe is expected right now. If Christmas is a little bit weaker, then a lot of buyers will wait until after Chinese New Year to replenish stocks, and they’ll really think about bringing in new ranges in the spring and into the summer. So it’s going to be a bit of a function of what Christmas looks like. But I would say in the short term, before that, I would anticipate rates slightly overshooting on the downside and then coming back. They always tend to do that, and when you put the brakes on, it takes a little while before the market adjusts.
And would you still advocate for thinking about that diversified rate strategy that we’ve been speaking about over the last few months?
Look, I think it depends on the shipper, I would say, because whereas during 2021, 2022, I would say rates were very, very elevated and so the risk-reward ratio was more skewed to the upside from having less of your volume necessarily locked in if you were contracting at the peak. I think now with rates falling, I would say if you have a very steady profile of business, it probably makes sense to contract more of the volume than maybe has historically been the case over the last few months. That said, if you do have peaks and troughs in your volume, then having a mixed approach can be more interesting.
And the other thing I would say is it really also depends on your risk profile and the type of goods that you’re moving. Whilst rates have come down considerably, if your sales are very much dependent on the price of freight, then having some exposure to the spot market on a percentage of your business might also very much make sense. So it very much depends on the profile of your business, but I would say that the levels that businesses would be contracting at this year are very much more favorable than they’ve been over the last couple of years.
Which is obviously good news for shippers. And is there anything else that shippers should be thinking about as they head into the next few months? Is the worst over?
Look, I hope so. I mean, COVID-19 was a particularly difficult and challenging environment, not only from a public-health perspective but also from an economic perspective. And whilst there were certainly winners from COVID-19, there were also losers, and I do hope that we move into a more normalized environment. But, that said, I think if it’s taught us anything, it’s taught us to be vigilant and to look for agility as much as possible in the supply chain.
So what I would recommend is very much having open and detailed conversations with your own teams, with your management, but also with your supply-chain partners to really understand what the right solutions are for you for next year.
So, Helena, you called it a diversified rates space strategy. I think it’s really about just finding the broader supply-chain strategy that makes sense for your business. And I think that just has to be the number one focus going into the end of the year to understand what the profile of next year looks like, because it might look very different for a lot of businesses to 2022. You might be in the middle of a de-stocking period, but you might know that the back end of 2023 is going to be busier. Again, your seasonality pattern might look very different in 2023 to what it’s looked like in the last couple of years, and so making an informed decision based on what the business looks like it’s going to reflect in 2023 is the important next step for businesses now.
Excellent. Thank you for sharing that. It’s always so useful to get your insight to what’s coming up in the market and how our shippers should be preparing and thinking about that. Before we wrap up, Richard, the In Summary section of this podcast is always a good chance for you to tell us what’s coming up, what we should watch out for, what’s going to be in the news. Do you have any final stories that we should be thinking about over the next couple of weeks?
So I think the big watch-out for next year is really on the shipping-line reaction to the new cost environment they’re going to be operating in. And so I think one of the things to watch out for in the news is any stories or announcement that relate to both the IMO, but also the fuel strategies of the carriers.
One of the things that you might have heard me talk about before is that the cost base for the carriers in 2023 is very different to the cost base for the carriers in 2019. Not only is fuel much more expensive, but particularly, the low-sulfur fuel that the carriers are now utilizing as a result of the environmental regulations has started to trade at a very significant premium to fuel oil, to the much cruder alternative oils that used to be more commonplace on the ship. And so this means cost-push inflation is really, really a challenge for the carriers.
At the same time, the new regulations for next year mean that they’re going to need to make some changes, and there’s a few things that you can weigh. One variable is how compliant are the different shipping lines going to be? The penalty mechanisms are not so strongly enforced. Different carriers might have different attitudes towards when they want to be compliant by and how compliant they want to be. But also, basically meeting the regulations is a trade-off between cost and also service, because they have to slow down in some cases or pull ships out of service in order to meet those regulations.
So actually, that’s something that’s going to be very interesting next year, which is understanding what levers the carriers use to manage profitability but also meet the obligations under the environmental regulations that are coming in. And I would definitely say that you should watch out for announcements from the carriers on services, on ways of operating, and also on longer-term investments. There are some key decisions that are being made now around what types of fuel and technologies carriers are going to back from the perspective of reorientating their fleet to a low-carbon economy.
Super interesting, and with the new regulations in the new year, it will be interesting to see what comes. I suppose also the watch-out for us as any continued… You’ve hinted at the power of the unions. Any continued industrial action we should all keep an eye on. Obviously, Liverpool is continuing to strike. The US West Coast ports are continuing their heated negotiations, which have gone up and down over the last few weeks and months, actually. So there is obviously space there for more disruption, so I would encourage our listeners to keep an eye on that.
Well, Richard, thank you so much for joining this week and for sharing so much insight. I know the market is volatile, but it’s certainly reassuring to know that we can have some guidance and insight from you in terms of how to approach the coming months.
Thank you again also to our listeners for tuning into today’s episode of Freight to the Point. Don’t forget to and subscribe to our show, and if you have any feedback on our episode or would like to get in touch with Richard or myself, please don’t hesitate to do so on LinkedIn. But until our next episode, goodbye.
Hello and welcome to another episode of Freight to the Point, a podcast from Zencargo. I’m Helena Wood, and today we have invited Richard Fattal back on again to talk about what’s happening in the ocean market, how it’s affecting rates and some of his predictions for the coming months. It’s always great to have Richard on the podcast, because when he joins us once a month, we’re able to get a real expert view into what’s actually going on in the market. So for anyone that doesn’t know, Richard is one of our co-founders, and as our Chief Commercial Officer, works very closely with our procurement and pricing teams, who are in touch with our carrier relationships all the time, understanding what’s influencing the rates market and what’s going to be coming up next. So, Richard, it’s always great having you here to share that expertise.
