Episode 70:
Rates:
What's next for 2024?

Catia Fernandes:
Right, so let’s get started. I am Catia and I work in the Procurement Department at Zencargo, managing the ocean products for Asia, Europe, Eastbound, Westbound, Indian subcontinent and Middle East to Europe, as well as Asia, Intra-Asia and Intra-Europe.

On these trades, I ensure we can offer the best suited products to fit the needs of our customers and I’m helped by a great team, and of course Anne-Sophie who will introduce herself as well.

Anne-Sophie Fribourg:
Thanks Catia. Yes, I’m an Anne-Sophie Fribourg. I’m the VP of Ocean Freight, frozen cargo, and as Catia said, we handle many trades and of course we have some other trades that Catia didn’t mention like transpacific. I’m in charge of having the relationship with the shipping lines, our preferred partners, at management level to ensure that in this very, very disrupted and unstable environment, we have the key contacts that enables us to offer you the best service we can offer, together with the competitivity of our rates.

So we’ll move on to the first slide and of course we will discuss of what has happened and what is going to happen in 2024. You’ve seen that the ocean freight market is a bit a rollercoaster since many years. We’ve seen that there has been some COVID related lockdowns. We had some congestions that brought some blockage of cargo. Then we saw a surge in demand. Now we are seeing a drop in demand and coming in together, high fuel costs and as well, some geopolitical issues that in a post COVID time has severely hit our market and had some impact. We’ve seen the Ukraine War, Panama Canal congestion, so there are some events that are more serious than others. Now we have what’s happening in the Middle East that has definitely impact, not only on the continuity of the service all over the trade, but also on the rates.

What we’ve seen since one year is a decline and a rates erosion on the majority of the trades. It might not have happened in the same time, but at the end, every trade has seen rate erosion in a very significant way. Why? Because of what I have explained, but also, we have seen that there has been some blank sailings.

Blank sailings meaning what? Meaning that shipping line are just withdrawing some ships on certain trades, mainly the transpacific and the Asia, Europe, the main haul trades, in order to better balance the supply and the demand, to try to sustain the prices on these trades. And that has also, you’ve seen that I’m sure, a lot of effect on the service capability.

In terms of rate, what we’ve seen also is that some industries have been hit harder than others. If we take the example of retail, retail was really in terms of rates, performing below market average pre COVID and with a very transactional approach. And we’ve seen that now, the lack of continuity I would say, has shown that prices are evaluating a bit different. So it varies really, whenever we talk about different industries.

Moving on, if we want to see in terms of numbers, what was the rate erosion, you see here that there has been a great drop, a very significant drop, on Far East, North Europe, which is a trade where we have the biggest ships and which is a trade also where it’s the most difficult to withdraw capacity. First of all, because there is a kind of a commitment from the shipping lines to assure a certain service. We should not forget that at a certain time, a few years ago, shipping lines had committed to have one departure per day from China, so of course if you want to sustain some service, you need to maintain your ship service.

But that has had an in fact a very strong impact on rates, while transpacific has been more sustainable, with only 30% drop on the West coast. It’s been a bit more of a struggle on the East Coast and that is mainly due also to the fact that the Panama Canal has been congested and that there has been more service available on the West Coast.

But we see that overall there is a trend of decrease of rates significantly. Rates are still a bit higher pre-pandemics, but what we can say is that in the same time as we see rates dropping, we know that shipping lines are having higher costs, which is very important for us to be able to understand what is going to happen in 2024. They have higher cost. Why? Because they have higher fuel costs mainly, and they have also higher charter rates, which of course give them a breakeven cost per unit that is higher and that is not inclining them to go too low on their pricing pricing policy. So we see today low freight rates in multiple trades and costs higher than pre-pandemics, if we want to make a summary.

Catia Fernandes:
All right, so what is happening in the market? Yeah, I will touch first on the demand, and the latest Sea intelligence report indicated that global container demand rebounded in 2023 August, compared to last year. But if we compare to 2019, the demand has actually fallen and if we look at the IMF projections, the global growth is expected to reduce from 3.5% in 2022, to 3% in 2023, and a further drop to 2.9 in 2024. So if we compare these rates to pre-pandemic, these growth rates are actually weaker.

Another interesting point is that the China exports fell 8.8% in August, compared with last year, and their imports dropped 7.3% according to their official figures. Like Anne-Sophie mentioned, this is led a lot by the Russia Ukraine war and the general reduction in consumer spending due to inflation, especially in Europe. So overall what we can say in terms of demand is that the global container shipping demand looks quite poor when compared to 2019.

Okay, so in terms of supply, if we move to that side. Next please. Thank you. So in terms of supply, there is currently over capacity in the market. We’d 30 new ships being delivered in 2023, that’s 24,000 TEU ships, so the big ones. And if you look at the period of 2023 and 2024, that’s 700 ships being delivered, which represents about 28% of the active fleet, so a lot of capacity coming into the market. In terms of percentage of growth for 2023, that’s a 9.2% year-on-year, year-on-year last year, and if we look at this growth compared to 2019, that’s about 12.8. If we look at previous periods, pre-pandemic periods, that’s a capacity growth of over 15%.

So also in the recent Alphaliner report, the global inactive container ship fleet has grown significantly, with the number of vessels idle and entering repair yards increasing. This is now 315 ships or the equivalent to about one point 18 million TEU. And this increase that we’ve seen lately has been boosted by the idling of several large vessels.

So how have carriers responded? That’s what we are going to address next. They’ve tried multiple things. The first one, they’ve announced a GRI back in August. This was led by Maersk who introduced an increase of about $200 to $300 per TEU. However, that did not hold for long. As mentioned before, there’s another announcement of a GRI which is now in place for November, but is already being mitigated from the original $1000 increase they expected.

They have also tried to do some scrapping with about 3% of the capacity being scrapped between this year, next year. They’ve looked at reducing their speed. They’ve reduced it by about 4% year-on-year and that meant a reduction in capacity of about 5 to 7%. They’ve been using a lot of these blank sailings strategy, like Anne-Sophie mentioned, cancelling voyages out of the Far East, that in the latest trends, that’s about 7% of the voyages being blanked. And they will continue to execute capacity withdrawal until, we predict, until about Chinese New Year, in an attempt to control the rate levels and to improve their vessel utilisation. So as an example, the alliance has withdrawal the EC4 US East Coast service in November and they’ve just announced, very recently, a couple of days ago, the suspension of the FE5 service on Asia Europe. So that’s an example and there’s other services being suspended by other alliances as well. Okay, I will hand over to Anne-Sophie.

Anne-Sophie Fribourg:
Yeah. So if we talk about what’s going to happen in 2024, what are the trends? What are the challenges? I think we should talk about three main pillars. We should talk about competitiveness into supply, quality of service and then sustainability. These are really the three pillars that we might study, analyse, for 2024.

Competitiveness, meaning rates, what we foresee is that the short-term rates will remain volatile for the next six months. We don’t have any crystal ball, so we can’t say what’s going to happen maybe after mid 2024 for the time being. The demand is still quite slow. We don’t foresee any great recovery. That means that volatility will remain. Why? Because what is different from pre-pandemics is that the BCO, the long-term contracts, are now being negotiating. This is a tender season for big BCOs, and what we see is that the large shippers, because rates are now low, short-term rates are low, will probably be able to negotiate low rates for their contract, at least lower than what they’ve been paying in the last four years.

Which means that shipping lines, after having signed their contracts, and since they need volume so they’ll be inclined to sign and probably at low rates, will probably system and particularly try to implement GRI on the short-term market. That doesn’t mean they will be successful. We’ve seen that it’s up and down. TP has been more successful than Asia Europe, but still it’s an increase of rates, and when you have a budget, when you want to forecast plan your spend, that might be complicated to see ups and downs every beginning of the month, every middle of the month. So we foresee quite a high volatility with rate being probably above pre-pandemic level.

Long-term rates level will be lower and we would advise, and Catia will talk about it after, that maybe you should commit for medium term contract. Supply will be high, this is what Catia has said, so we’ll see that there will be too many, many ships on the market coming in, continue to come in and blank sailings will continue. Which is also disrupting the service, because for us, when you propose a solution, when we build up a transport plan, we always need to have a backup service because you never know, even if we have visibility ahead of a month roughly, to get the view on the blank sailings, you still need to find some alternative solutions, so that is disrupting the service.

Also what we will see is that shipping lines are working on their schedule reliability. We’ve seen very big efforts that have been made in the previous months coming from 30, below 30%, schedule reliability overall to about 70%. So this is something where shipping lines are inclined to really work on offering a better quality of service, which might also be complicated with the ups and down in the blank sailings, but at least that’s what they plan.

And the third thing I’d like to mention is decarbonisation, is about sustainability. This is key. We all know that we are all working towards 2045 climate neutrality and we should all make efforts. If I take Hapag-Lloyd as an example, they are modernizing their fleet. They are bringing it, for example, efficient ship on biofuel over 13,000 TEUs, plus 12 new dual ships, that is of 23,000 TEUS, which means that when they bring these new ships, they will also work in parallel with the existing fleet by phasing out old and inefficient vessels and broadly upgrading the current fleet, which is about 150 ships.

So that means that all these movements will also have an impact on service, but this is something where we all need to, I would say, need to make the effort. And what does it mean? It means also some higher costs because that fuel, that green fuel, is more expensive.

And on top of that, there is also the regulation of the European tax charge that is coming in as from January 1st, and that will have an impact on the cost. We don’t have a clear visibility so far of what it’s going to be. We see various charges coming in from the carriers because they don’t buy it at the same speed, at the same level, and then this is why. They have a different costs and this is why we see different… But surely it’ll have an impact on the rates. So these are the main thing that we should foresee 2024.

As I say, volatility, shipping lines will want to be in a competitive cost position, depending on the carriers, depending on the strategy. They will probably deploy capacity in the key growth market but also, in the niche market, where they still want to be profitable and they’ll work on quality and this is also what Zencargo and Catia will explain that to you a bit later, will focus on really creating value and be dedicated and customer centric.

Other forecast, in terms of rates, the average rates should slide by 33% next year. This is what Drewry is saying. We know that carriers are expected also. This is a forecast from Drewry to lose 15 billion overall next year because of the level of rates. So we will now monitor very closely the carrier behaviour, because this is going to be key, whether this carrier will have a strategy of acquiring market share and this carrier being more conservative on rates. It is not very clear now, but this is really what we are going to do with the team and that we can maybe talk in our next webinar. Maybe we can move on the next slide, or I’ve probably covered already.

In terms of how you should prepare yourself, I think it’s important to really plan and understand what are your volumes, what kind of service level you are looking at and of course your industry. Then probably, we would recommend to secure some probably medium term rates, in order to have visibility, and this is a good momentum. Probably a bit later, there are still some discussions on the BCO contracts, but the time is good with the low rates that we see on the market to have commitments from the shipping line and be able to commit on medium term contract. It’s also good to have a diversified strategy where we can offer you to commit some of your volumes on spot rates and see what’s happening on this market, knowing that of course it can be up and down according to the GRI that will happen on the market.

It is very important and we do believe and work in that direction every day with the team of having good relationship with our partners, because good relationship showing our attractivity, our commitment, our capability to deliver, will give a better service from them, better flexibility and will improve the buying power, so very important to have a good vision of what we can commit and deliver, and also, to provide a good visibility whenever there are some peak seasons.

We do recommend also that you speak with us and we are happy to share and understand your needs and then be able to build up the right solution because we are dealing with the clients on a daily basis and we have, I think, quite a good view of what’s happening on the market. I think we can go on with the next slide and then it’s your turn Catia, I think.

Catia Fernandes:
Yes, so I think we should address now what should your freight partner do to support you? We see three main areas based on our experience. We believe they should be supporting you with bespoke solutions, with the analysis of risk adversity, the seasonality and your inventory policy. And then they should be using this analysis to develop a rate strategy, and align that strategy to your broader business goals so that everything is end-to-end connected.

We also believe the role of data is quite important and using data to provide visibility for carriers on forecasts and protect against unexpected peaks, and also using that data to do rate benchmarking and analytics. Finally, we believe another area that your freight partners should be supporting you with is by providing you industry expertise through market intelligence on rate trends and predictions, and to leverage their relationships with carriers to find you the best deals.

I think we can jump to how would Zencargo then add value to you if we were to do business together? We believe that through expertise is one of the factors, and that’s because we have a team of experts in the procurement team, in all of the major trades and they all have extensive networks. We also think we can help through the work we do with our partners such as Xeneta who provides impartial rate analysis. Also we believe that we, by providing you data, which is relevant and granular on our platform, we can help to make better decisions and provide you with accurate forecasts and also cost reductions.

We also think that by proposing supply chain solutions that follows your business in every step of the journey, we can offer solutions to optimize your supply chain, including your management, business forecast, rate strategy, consultations as you need. So we feel like these factors all merged together will definitely create value to the business as part of our mission being actually to create value through your supply chain.

I think we covered everything we needed so I would open it now to some questions that might appear. Let’s see. So there’s a couple that we already have from what I can see, so I’ll pick some of these. We have, should you do your tenders sooner rather than later? That’s always a question. Should you wait or not?

We feel that right now, as we stand, as of today, it’s probably wiser to wait because the big BCOs have not yet finalized their negotiations. However, we also need to take into consideration the market and if you obviously start seeing a lot of GRIs being implemented and succeeding, then you should step in into the tender, and not wait until the end.

We believe that probably end of November, start of December is a good time to submit tenders and take it from there. But obviously, like I said, it depends on the market evolving in the next few weeks and also what’s happening with the big tenders that define the strategy of the carriers.

Anne-Sophie Fribourg:
The big tenders Catia are being most of them on yearly, sometimes two years basis. We think that there might be an interest of shortening a bit, depending on the volumes, but shortening that validity of course, by being on a six months or even quarterly rates for next year, which could be.

Catia Fernandes:
I think that links to one of the questions that I’ve seen here, where people asked should we even look at tenders? And I think that’s what you’re saying. It doesn’t need to be a one-year tender, it can be a shorter validity tender, right Anne-Sophie?

Anne-Sophie Fribourg:
Yes. And should we look at tenders? Tender is always a good way to reassess your partnership, your relationship with your provider, if you’re happy with… It doesn’t mean only price, it means assessment of various things during a tender. What is a service that I get from my provider? Of course, the current provider is always in a better position than a newcomer because your provider understands your needs and probably can give you a bit better feedback on the service level.

But what is important is to reassess the whole thing, also because we can foresee that shipping lines are having various strategies. We don’t exactly know yet as I said what’s going to happen. But we see that there is a separation in the 2M, between MSC and Maersk. There has been some news about the regulation of the alliances in Europe and this is changing a bit. Probably that has an impact on the way carriers will work in the coming months after April 2024. That will probably reassess the whole thing.

So should it be through a tender or through a rate negotiation? It’s really depending on your volume and what you are able to commit, because a tender needs commitment, and when we are not sure volumes, you can do it in a more flexible way or maybe do an index-linked contract that we do already for quite a good number of our customers who really want to be linked to the market, and make sure that they don’t pay very high rates or very low rates and that is a way to avoid these peaks. Either they are up and down, so I would say there are various cases and as I say, carriers will have probably various strategies.

Catia Fernandes:
Yes. I’ll pick on some more open questions here. So people are asking if right now, carriers are looking at offering things like extended free time as they did in the past for this now season coming. What we’ve been seeing is that during the pandemic, free time was a very difficult thing to obtain because simply of the congestion in the ports, and the fact that carriers needed the containers moving. So the longer you left them in the port, the more problems and more was added to the congestion. Right now, you probably have seen that the vessel reliability has improved, so the levels of congestion have dropped massively, and there’s obviously, as we said, there’s overcapacity not only in terms of vessels but also in terms of containers. So right now, compared to the pandemic period, carriers are definitely more open to free time negotiations, and that is now part of the negotiation that you do with a carrier.

Of course that doesn’t mean they will grant it like nothing. They will evaluate it.

Anne-Sophie Fribourg:
Unlimited free time.

Catia Fernandes:
Yeah, it’s not unlimited unfortunately, but they are more open to it than they were during the pandemic times because of the fact that now there’s more containers available, and there’s less congestion, so if that answers it.

I have also, do we handle air freight? Yes, we do handle air freight, not between me and Anne-Sophie. It’s a different team of Zencargo, but yes we do handle air freight and road freight. So road freight is also part of our offering, so we cover everything road, air and ocean.

Anne-Sophie Fribourg:
And on the main trades where we operate, we have some, I would say competitive air freight, air freight rates and air freight partners. Many on Asia, Europe, but transpacific and road is more on intra Europe. But yes, this is something we do.

Catia Fernandes:
Yeah, that’s correct.

Anne-Sophie Fribourg:
Regularly.

Catia Fernandes:
So an interesting question here. Will the break of the 2M alliance cause carriers to treat the tendencies differently? I think we touched upon that a bit when Anne-Sophie said that each carrier will have their own strategy and they might therefore treat their positioning in the market differently. Some might go for market share, others might go for simply just improvement on rates. So at this point, I would say we wouldn’t exactly know, right Anne-Sophie?

Anne-Sophie Fribourg:
No. What can be said is that MSC is in is a bit ahead of the industry in the commending position, so MSC is number one carrier investing massively in a new fleet. Maersk, we’ve seen that they have always had various strategies and can be very unpredictable by giving low rates.

But the thing is, what we’ve seen, I would say on a practical basis, on a daily basis, they give low rates but there is no space or the space is extremely tight because their strategy is to fill a part of their ships with low rates. There will be some changes probably. If they’re not able to fill up their ships by themselves because they were 2M and they became sole carriers, sorry. They’ll have to fill up the ships. They might look for some vessel sharing agreement with other partners which might also change their pricing policy. And regarding the others, they are a bit…

I would say, in this market, there are the European carriers and the Asian carriers, they don’t exactly have the same strategy.

Catia Fernandes:
No.

Anne-Sophie Fribourg:
We see that CMA CGM is a bit more conservative, not really inclined to go too low on the rates. We see Maersk on certain segmentation in this portal going low, but offering no space or very limited space, and MSC is a bit between them. Can be leading the prices, or can be conservative. It’s not clear at all.

Asian carriers, most of the time, are going lower on rates but have less space, so we have to play with… I would say our role is to play with all these partners and find the best solution with the transport plan, because we’ve seen, recently, we were struggling with the team a few days ago, we’ve seen some triple rolling, meaning containers being rolled three times. That happens in Asia, not very often, but we see that they take the cargo and they don’t put it on board. So this is something we have SLA with carriers, and very strict SLAs, which of course is leading our relationship.

But you see you have to arbitrate between prices and between a space.

Catia Fernandes:
Purpose.

Anne-Sophie Fribourg:
So what I should say is, it’s not very clear what the strategies will be, depending on the carriers and depending on the fact that they have higher costs and carriers have different costs as well. So that is also leading very much their price strategy.

Catia Fernandes:
Yeah, I think we have time for one last question because we’re a bit of over our… I think it’s been just a lot of information here and interesting questions. So the last one is, how many providers should you include in your tender?

If we’re talking about how many freight forwarders you go after, if you’re talking through running tenders through freight forwarders, we believe that it’s important to have at least two or three as a benchmark, just to ensure that you can have a comparison across the different offering that each one of them is giving you. But don’t look solely at rates because that might not be the most wise decision.

You should be looking at multiple things that are not just rates. So what we mean is there’s a package that comes together with that offering. You should be looking at the full package, like what are they offering you in terms of the service level? Like what Anne-Sophie mentioned, in terms of availability of options, if the rate only covers one single option, that’s different from another rate that covers multiple options because they have impact on your sailing schedules and on the plan of transporting your cargo.

What we say is include two or three as a minimum, but make sure you compare them across multiple factors that are important for you. Transit times, space, availability of different options, rates, free times. So there’s a bunch of factors that are important for this selection and comparison and rates is one of them, but it shouldn’t be the sole one because it might drive you to not necessarily the best option for your needs. Would you add anything else?

Anne-Sophie Fribourg:
I would just add that we’ve seen recently some speculation from actors. I would say, and this is something that is I think quite dangerous in that market. What I would like to insist on is that there is a price, there is a fair price. It has to be a win-win relationship with a carrier, with your provider, and if going too low doesn’t ensure a good service. We’ve seen some crazy rates because people want to grab some volumes. This is not a way to build up a sustainable relationship with your provider.

For us, with the carriers, it’s not at all the way we work. Also in San Cargo, because we want to build up sustainable partnership. In the long run, enable you to get your commodities on time, avoiding all the disruption that can happen, and it will continue to happen. There are geopolitical risks all over. Tensions are high, that has impact. There are many things that is having impact, so I just want to insist on the fact that speculation is dangerous today and doesn’t give you a good service from anyone and especially not with the carriers. That’s not the way we consider our relationship with our main providers that are historical and that trust us and trust is key in today’s world, I would say. That’s me. That’s all.

Catia Fernandes:
Okay, so I think we’ve covered what we could with the time we have. I would say finally, if you would like to speak to a member of our team about a bespoke rate strategy, please contact us through our get started page and we will be happy to help you. You have the QR code there if you need it and we will see you soon hopefully, if we already not see you. All right then. Yes.

Anne-Sophie Fribourg:
And thanks for listening to us.

Catia Fernandes:
Yes, thank you so much and we wish you rest of good afternoon. Bye-Bye everyone.

Anne-Sophie Fribourg:
Good afternoon.

Catia Fernandes:
Bye.

Anne-Sophie Fribourg:
Bye.