Episode 59:
The future of rates:
Should you lock in long term?

Anne-Sophie Fribourg:
Good afternoon, everyone. When it comes to shipping, all eyes have been on rates, especially in that industry, but while prices are going up and down, we know that a lot of changes are happening, and that changes have a lot of impact on the rates, on the pricing strategy, on the tactics of the carriers, and the services, and all this will probably change the shape of the environment in the future. At Zencargo, a lot of questions come from our customers, from our prospects, about the rates, about the future of rates. For example, is it now a good time to lock in a rate? Should we stay on the spot market? What should be done in order to keep our supply chain competitive in a very volatile environment?

So, who better to join me than Niels Madsen, who is the Niels Madsen VP of Product & Operations at Sea-Intelligence? Niels will jump on and discuss with us about the market trends, and how it will affect the rates. So, welcome, Niels. Would you like please to introduce yourself?

Niels Madsen:
Thank you very much, Anne-Sophie, and thank you very much for having me here. As you said, my name is Niels Madsen. I’m now three years with Sea-Intelligence. Before that, I had about 28 years with various carriers, primarily on operation or network design, so route network design or roles. That’s sort of my background in terms of this. I’ve been spending time on intermodal, on terminals, on vessels, et cetera, et cetera, so it’s primarily on the operational part. And since three years now, with Sea-Intelligence on looking at statistics and looking at what the future might bring.

Anne-Sophie Fribourg:
Background is very impressive, huh, Niels?

Niels Madsen:
Thank you.

Anne-Sophie Fribourg:
Our shippers are expecting some kind of normality after what we’ve experienced during COVID, during the past years with crazy rates, with shipping lines not knowing where their equipment is, with bottlenecks in the ports, so are we back to a normal situation? What can you tell us about what we call the new normal?

Niels Madsen:
The new normal, yes. What is really normal these days? If you think of normal as returning to pre-pandemic days, then no, we are not. We have to settle in for the new normal that we discussed. What we are looking at from the Sea-Intelligence perspective, when we look at schedule liability, when we look at the capacity deployed, when we look at freight rate for that matter, schedule liability for the vessels, it’s coming back, but it’s still lagging behind pre-pandemic levels, and we saw in pandemic, that as soon as there is a little bit of a bottleneck, carriers tend to deprioritise schedule liability, so that’s probably also what we will see in the future. As soon as there is anything… schedule liability is nice to have, but if there is something that struggles it, probably they will not focus so much on it.

When it comes to rates, I don’t think anybody has experienced anything like what we had for the last two, three years. We said a year ago, that it would take a long time before we came to pre-pandemic levels. We were wrong. It took a very short time. Actually, in some instances, we are now getting reports that we are below pre-pandemic levels on freight rates, which is totally scary. But I believe that that probably freight rate is something that’s going to normalise around pre-pandemic levels very soon. We are seeing bouncing up and down, both on spot rates and on contractual rates, but it will level out probably somewhat slightly above pre-pandemic levels.

Anne-Sophie Fribourg:
And there are other challenges that we see at the moment. We see that there is a lot of capacity coming in?

Niels Madsen:
Yes.

Anne-Sophie Fribourg:
The order book is huge. We see that shipping lines have to become compliant with the new regulation. There is a path to zero carbon, and they are all attempting to change their ships, renew their ships in order to be compliant. We see a change in the alliance’s landscape, as well. And we also see labour issues in ports, problems with the circulation of the cargo in many ports, which is improving, but there are still some issues and bottlenecks. What would you categorise as short-term issues? And what would be the long-term issues where you think it would have a huge impact in the years to come?

Niels Madsen:
The big one, as you mentioned, is probably the capacity injection that we are seeing right now. Because of the relatively low demand, although it is gaining back now, but the low demand have now made sure that there is a lot of capacity available in the market, and more is coming. We have, right now, somewhere between 10 and 12% over capacity and 2023, ’24, both years, we’ll see another 9% additional coming online. Not to mention what order books will be placed, so the rest of this year is going to come in ’25, ’26. So there is a over capacity in the market, and there is two options you can say for that: either the carriers will keep the capacity in the market, in which case, the demand will not be enough, and then they will sail around with under utilisation, which in a normal market would predict a lowering of freight rates. So the question is, can they get any lower?

The other option is the carriers will start to either delay new buildings, or to take out capacity, either through cancelled sailings, blankings, or even lay-ups. Initially this year, we saw no indications of capacity withdrawal. Lately, we’re starting to see now reduced capacity, cancellations, even suspension of services. So carriers are now taking actions towards trying to mitigate some of that over capacity in the market.

The other one you have is the IMO regulations. I don’t think you’re going to have too much of an impact on the service level from the carriers, but you might have an impact on rates… not on the rates, but let’s call them surcharges, because I think that whatever IMO regulations that the carriers will be imposed, will have some money attached to it, some cost attached to it, and that will likely be sent on to the shippers. I don’t think they’re going to be doing it as part of the freight rate. I think they will be doing it as part of a surcharge, which will then be incorporated in all the new contracts that are going to come. We all know that shippers mainly all have contracts saying “No surcharges allowed”, but as a shipper, can you then really afford to sit back and say, “Yeah, we are the shipper who did not want to pay for a green world,” so they’re going to have a strong argument for a green surcharge.

Anne-Sophie Fribourg:
And what about the landscape of alliances? Would you say we saw the divorce of 2M of 2025?

Niels Madsen:
Yeah, we saw the announcement of it and we are slowly starting to see… I mean, officially they say that they will continue operation until 2025, as is, without… which they don’t. We are already seeing that MSC and Maersk are going alone on certain new projects that they’re doing. So they’re, of course, preparing themselves for a breakup in 2025. That being said, MSC has been now saying that they intend to go alone and they probably also have the size to do so. Maersk on the other hand, has never really been someone who’s been out there alone. They’ve always been in either an alliance, or a global partnership of sorts.

Anne-Sophie Fribourg:
So they might join another alliance or have some-

Niels Madsen:
My suspicion is that all three alliances will break up and new partnerships will form along the way. I don’t think we are going to see alliances the way that we have them today. It has caused too many problems for them… regulatory, in terms of competition laws, et cetera, et cetera. There’s been too many questions to ask and we even now seeing all the lawsuits that have been going on in the US. So I think they will abandon alliances structure as we see them today, but they will go into long-term partnerships and that can then be individually on a trade by trade basis, with whom you are entering a partnership.

Anne-Sophie Fribourg:
And we’ll probably see, and I’m sure you agree on that, differences in the carrier strategy in the future.

Niels Madsen:
That’s the next one, right, because we have very clearly different strategies between the top five carriers for sure. Maersk being the full end-to-end logistics provider, MSC not being so much interested in logistics, CMA now investing in airplanes, et cetera, et cetera. So they have a very different strategy in terms of what is it that they want to offer to their customers, and that’s perfectly fine, but that’s also going to play in when you start considering who are you going to partner up with in the future?

Anne-Sophie Fribourg:
Who will be your partner? Yes, I agree with you. And you talked about the charges that could… new surcharge that could come into effect. What do you think is going to be the relationships between shippers, forwarders, and carriers, knowing that shippers have suffered a lot during COVID? What is your analysis of the recent relationship?

Niels Madsen:
Well, this is where you have to be a little careful about what to say, right, because have the shippers really been suffering for the last two years, or have the carriers been suffering for the previous 20 years? Who was first and who’s taken revenge on whom and so on. This industry has always had a strained relationship between carriers and shippers and forwarders. Yes, for the past two years, carriers have definitely taken advantage of the situation, but who wouldn’t? I would argue shippers, forwarders took advantage of the situation the previous 20 years, and they’re probably taking advantage of the situation now. I don’t see any shippers going out and offering to pay $200 over the going spot rate. So it’s a matter of who’s first, chicken or the egg, right? This is-

Anne-Sophie Fribourg:
Seller’s market or buyer’s market.

Niels Madsen:
Yes, exactly. It’s a seller’s market or buyer’s market. That’s the whole thing. And we will never come to terms on who’s right and who’s wrong, but we have to trust each other at the end of the day and at what-

Anne-Sophie Fribourg:
Yeah, ’cause we need each other.

Niels Madsen:
What we have to do is, we have to trust the agreement that we enter into. So if you are out there and making a one-year agreement, then you have to stick to the deal. You have to stick to the gun even if the rates go up or if the rates go down. That’s the whole thing. But we all tend to… and both carriers and forwarders and shippers, they all tend to reopen the contract as soon as the rate dispersed by $50 in either direction, right?

Anne-Sophie Fribourg:
I’d like, Niels, to come back to the question of rates and rates level, and if we can quickly have a focus on the main trades we are interested in, which are Transpacific and Asia and Europe, what would you say… we’ve seen that there has been GRI on Transpacific. Shipping lines have tried to implement them in order to favour their long-term negotiations with mainly the BCOs. What do you foresee particularly on these two trades in the coming weeks?

Niels Madsen:
Well, first of all, the GRIs that the carriers are trying to impose, at least, let’s put it like that, that is apart from pandemic, than it’s business as usual. They have always tried to impose a GRI right before rate negotiations that either it came in April on the Transpacific, or it came in November, December on the Asia Europe trade. It has always been like that. It would probably always continue to be like that. Whether they’re successful or not, it’s a completely different ballgame.

The other reason why they’re trying to do the GRIs now is that, we saw since end of Q3, but especially since Q4 2022, we’ve seen the rates in basically free fall. That continued into Q1 as well. And our understanding is that the carriers have tried to put a break on the fall, so it’s still falling, but let’s say it’s not falling as free fall as it used to be.

So the GRI announcement have put a break on the falling rate that was going with, and that at least seems to have been successful. At least they’re not in the free fall that we used to see. I believe we will continue to see GRIs coming out, and then of course, it’s up to the individual BCO carrier relationship on whether it’s going to be successful or not. I hope they will. I hope they’ll be successful, and don’t get me wrong, I’m not on the carrier side in any way, but this industry, it has to be a win-win situation for both parties. Otherwise, we end up in this situation where everybody wants revenge over what somebody did two months ago and then we continue this downward spiral of mistrust. If we are in a win-win situation where the BCO is making a decent profit, the carrier’s making a decent profit, and everybody’s happy, then that’s where we should be.

Anne-Sophie Fribourg:
Yeah, exactly.

Niels Madsen:
So that’s sort of just my view on it, right? But, yeah.

Anne-Sophie Fribourg:
And very quickly on the backhaul trades, which are the export rates, meaning out of Europe?

Niels Madsen:
Yeah, well, if you start on the Pacific side, actually the backhaul from US to Asia, right now, those rates are still over 100% on pre-pandemic levels, so we are still seeing a heavy increase on the backhaul on Pacific. It’s a matter of time when that will also take a hit, I’m sure. Right now it all turns to… it has to do with capacity, it has to do with equipment shortages, it has to do with positioning of equipment, et cetera. There’s still that lag point… sorry, lack of containers in Asia that is situated in the US that they want to get back. Asia Europe is a little different. It’s already sort of levelled out to a slightly over a pre-pandemic level. So back haul trades, it will follow, once the equipment situation is sorted out, then the back haul trades will fall into place and we will be back at pre-pandemic level or slightly higher probably than pre-pandemic level.

We also have to remember with that… we have to rate… that the carriers’ cost level have increased since pre-pandemic, right?

Anne-Sophie Fribourg:
Yes. Yes.

Niels Madsen:
So what was previously $1,000 unit cost, is now $1,200 unit cost, and so they can’t afford to go back to $1,000, which they used to, right, purely example on the prices. So, you will see a slightly above pre-pandemic level is where the carriers will be targeting.

Anne-Sophie Fribourg:
Okay. And when you say that the shippers should commit and deliver, this is what you would advise today in order for shippers to make sure they remain competitive, that their supply chain is really a competitive advantage and really would like you to tell us, yeah, what kind of value can be added by switching on the spot market, or maybe part of your business on the spot market part contracting on long term, how do you foresee the balance that would be needed to be in the race?

Niels Madsen:
That is very much up to the individual BCO, the individual shipper what levels, what balance you’re looking for. Is it a 50/50 or 70/30 or 80/20? That’s actually up to the individual shipper. I would not place all my eggs in one basket. I would not 200% on contract, and I would not do 100% on spot market. That is too much of a risk in either way. The way things are going right now, I’m also not sure that I would enter into more than a maximum six-month contracts. There’s too much volatility going on in the rates still, both up and down. So you need relatively short-term contracts, or you need to have longer term contracts with renegotiations every three, six months, something like this. It would be good for shippers, I think, to have a long-term relationship contract, if you understand what I mean, with the carriers to say, “Okay, we are in this for the next three years or five years, but let’s look at the rates every three months or six months or something like that.” To me, that could be an option.

Anne-Sophie Fribourg:
That is a good option with having historical relationship with a partner is really key in terms of commitment and rates that you can achieve being reliable and being able to give forecast. I think what is important also is probably to get a very good understanding of the market and what you are telling us is very valuable and I think working with a freight partner is key to understand the dynamics and be able to position yourself in such a volatile market when there is a big lack of visibility.

Niels Madsen:
But I think that it’s also important that if you are, as a shipper, able to do a proper forecast, it’s important that you commit and you also deliver on the forecast, but it’s vice versa. It has to be delivered by the carrier, as well. So it’s not just a one-way street and it all comes back to this whole level of trust that we are talking about.

Anne-Sophie Fribourg:
And commitment.

Niels Madsen:
And commitment between-

Anne-Sophie Fribourg:
And delivery.

Niels Madsen:
Yes. So-

Anne-Sophie Fribourg:
These are the keywords.

Niels Madsen:
It’s a two-way street, right? It’s a two-way street, and I think that’s where we have been. Pre-pandemic, it was a one-way street. Shippers were forecasting but not really delivering. During the pandemic, it was the other way street. Carriers were saying one thing, but then at the end they were not delivering what they promised in terms of space allocation, and we have to get it. This one has to be into a two-way street where we can rely on each other and know that if I commit 50, but then I’m getting 50.

Anne-Sophie Fribourg:
True. Thanks, Niels, I think we have to switch to our Q&A. I don’t see any questions so far. Okay, I have one question. “Any tips for balancing service level and good rates? Does long-term rates help?” I think we’ve more or less answered that question.

Niels Madsen:
I will-

Anne-Sophie Fribourg:
But not the balance.

Niels Madsen:
No. I’m not going to go into specific what is a good rate, what is a bad rate? That depends, of course, on where you are in the world, and the individual shipper/carrier relationship. Balancing service level, my personal take on that one has always been to have a slight overweight of contracted cargo, either if it’s 60/40 or 70/30 in terms of your total volume, right? 50/50 is a little risky.

Anne-Sophie Fribourg:
“Shipping companies have the option to pass Suez Canal, or below Africa in the Cape of Good Hope. Do you have any idea which passage is cheaper? I know lead times would increase if we consider passage below Africa, but is this passage cheaper than passing through Sue Canal?”

Niels Madsen:
No, it’s not. Passing south of Cape Town will initially, as you say, as the question says itself, the passage would take longer. Generally speaking, you would need to include two more vessels on every service in order to have a weekly service out from Asia to Europe. You have to add that kind of a cost. You have to add the additional fuel cost, et cetera, et cetera. Generally speaking, no, it’s not cheaper, which is the eternal argument that the Suez Canal is always using to increase the rates every year, right? What’s your option? You don’t have any other option, blah, blah, blah.

But we saw with the accident of the incident of Ever Given when it got stuck in the Suez, that carriers are able to do it and do it relatively fast. It, of course, helped back then that a lot of vessels were open. They were simply available to make a quick decision. But the general question is no, it’s not cheaper to go south. It is still cheaper to go through Suez Canal. Plus, for the carriers, it opens up the market of Middle East and Mediterranean, because if you go south, you are basically skipping out on the entire Central and Eastern Mediterranean, plus the entire Middle East in cargo.

Anne-Sophie Fribourg:
Last question. “Shipping lines have now started using renewable energy, lower fuel consumption with UL SS operations, and other operational efficient operations to reduce their costs. Will it be cheaper in the future if we look into booking such vessels for transportation? Will these new implementations help reduce the shipping costs?”

Niels Madsen:
Long term, yes.

Anne-Sophie Fribourg:
Yeah.

Niels Madsen:
Long term, yes. Right here, right now, yes, I saw the wind energy on deep sea and this kind of thing. Those are still experimental stages. I don’t have any major shipping who has implemented it on any of their services as a regular thing yet, but they’re looking into it, and hats off for that. I like that. It’s perfect. What we are seeing now is these alternative energy sources, fuel sources, that the new buildings are coming out with. And right now that fuel is more expensive than normal fuel, but what we do need is a need more fuel companies to start producing that kind of fuel.

And I’m saying that kind of fuel, because the carriers are right now… I think there’s right now up to three different kind of alternative fuel methods, but it goes for all of them. If there’s only one company in the world that produces methane gas capable of using it for vessels, then the price is high. But if you have 10 companies who can do it, the price will automatically start reducing. So long term, yes, it will contribute it to cheaper transportation costs, I’m sure. But right here, right now and long term, it’s maybe 10 years, 15 years. Right here, right now, two, three years it will not… probably be more expensive in the short term, and then it’s going to even itself out and then it’ll be less expensive in the longer term.

Anne-Sophie Fribourg:
Thanks very much, Niels. Thanks for all your valuable insights.

Niels Madsen:
You’re welcome.

Anne-Sophie Fribourg:
I think we had a good vision of what is going to happen and I’m going to thank you all and hand over to Lucy.