The obscure world of ocean freight pricing

The obscure world of ocean freight pricing

Katherine Barrios from Xeneta takes a look at the role of technology in freight pricing.

Most people don’t really care how much it costs to send a container on a ship from A to B. Why should you, really, right? Things just arrive and you get what you need, when you need it right when you enter your favorite store or when you order your must-have shoes from an online store. At least, that is what I thought coming from the software tech industry and jumping into the wonderful world of shipping and logistics/supply chain.

As a side note, I grew up walking around Maher Terminals in the Port of NY/NJ. My father was a member of the New York Shipping Association and the International Longshoreman’s Association for 35 years. I clearly remember seeing container ships docking amazed at their size, enormous and scary cranes and all the shiny new cars from Asia being unloaded on the lots ready to be loaded on their next mode of transport. So, it’s pretty neat that I ended up in shipping as well. That said, here are a few my findings from my time in this industry thus far. It’s an obscure world when it comes to container prices.

What I discovered about shipping is that it is rife with sweat and frustration and a whole lot of negotiation behind the scenes that has happened to get those precious shoes, electronics etc. into your hands. The supply chain, logistics and ocean freight industry is complex, to say the least. One that until recently has been a stranger to anything mildly innovative and well, simple.

Last year that beautiful steel box turned 60 years old and it has indeed grown up since its introduction to global trade in 1956. In 2016, world container trade was projected to surpass 180 million twenty-foot equivalent units (TEUs) or containers. You would think that with 60 years under its belt the art of container shipping and logistics would constitute a systematic and standard-based way of setting, monitoring and getting visibility into these freight prices. Nope. It’s a “he said and she said” game and relationship-based pricing, but not everyone really always knows what the “real” market prices are – what are others paying. Not sure if I would call that fairness in global trade.

You may have caught on to the dramatics currently happening in the shipping industry where ocean freight prices were at a defying low in H1 2016. Not until November 2016, did we see somewhat higher prices albeit sustainable prices for carriers. With low demand in the current economy and an overcapacity of cargo space supported by the introduction of mega vessels which can handle more than 18,000 TEUs, shippers have had a field day while shipping lines have scoured to get cargo in and thus stay afloat. Well, not all of them stayed afloat. Those of us in the shipping industry know the sad demise and chaos that Hanjin caused in the summer of 2016.

Shipping alliances are being born and reorganized frequently to deal with the overcapacity and other challenges. So, they are trying. The end of March 2016 saw a ridiculous market low price of $128 on the spot market for the popular Shanghai-Rotterdam route. Now, that was low. So, with little cargo and too much space, shipping lines just wanted the box and weren’t always pricing based on what is being shipped. They just wanted the box. It’s called survival.

Now, a low price is a good thing for sure for shippers; cost savings and all that, down to the consumer. But, too low of a price also has its downfall – the demise of some shipping lines means that there would be fewer ships, a lot less capacity and then, “bam”, prices can skyrocket. So, on the flipside, there would be too little space and a price hike, which then means that cargo can be left at the docks. What does that mean to you, the consumer? Well, your favorite shoemaker may not be getting the inventory on time, and that means you will be hearing, “Sorry, ma’am/sir, we’re out of stock. Our next shipment won’t be coming in for another week.” Booger.

Consumers would be sad to not get their product when wished, but shippers will be even sadder. Losing out on inventory and losing out on a sale to you, is a deeper cut in their pockets. And as many of us know, the Hanjin debacle did indeed leave Christmas only as a thought for many. With cargo still at sea, many stores with cargo on Hanjin ships saw the Grinch instead of Santa this past holiday season.

Savvy shippers actually want to make sure that they know how the market is moving and anticipate changes in the market to make sure their cargo is always delivered and on time. They would like to dive deep into ocean freight price intelligence, monitor a shipping pricing index, to understand the market dynamics better and thus negotiate with the shipping lines based on facts. The ultimate goal is to make sure they get their cargo from A to B on time with little to no disruption and that the price is rightfully competitive.

I did say it was a good deal about relationships when it comes to ocean freight pricing. Well, that isn’t going to change, and well it is a tiny bit charming that human contact is not all yet lost. But, to be real, the “he said, she said” pricing-setting mechanism needs to be complemented by data to help make informed decisions in a more systematic, fair, fact-based and best of all, a simple and efficient way.

Indeed the shipping and logistics industry have been rather slow with embracing technology, but that is all changing. Everything from freight booking platforms and logistics management systems like Freightos, Haven, Flexport, Freight Hub are making shipping freight and sifting through Excel sheets, back-and-forth phone calls, emails and faxes (yes, faxes) to book cargo less chaotic and seamless.

Key freight forwarder K+N and the mighty Maersk have introduced digitization as a main driver in their overall strategy. There are also other players joining the techie scene. Actually, the might Dane just announced that the launch of an online container shipment booking system on the world’s largest e-commerce platform – Alibaba. So, it’s not only the hot “startup” companies taking a bet on technology in this industry. The good old boys are not messing around. Maersk means business and will not accept to be left behind as the rest of us toot the innovation and technology horn. Exciting and impressive.

This is more of a change of mindset. Yes, the container is 60 years old, but it doesn’t mean the way of working and the business processes have to stay dated. The point is that ocean freight pricing is volatile, tainted by legacy; however, shipping, logistics and procurement professionals deserve better information in real time to make this market more transparent. It is now a “must-have” and no longer and “nice-to-have” like it was just a couple of years ago. I am pleased that the legacy players in the industry are jumping on the bandwagon. We need them to continue the digitization revolution in shipping.

All it is, really, is easy access to factual on demand information that will help the industry get visibility into all areas of the daily ocean freight process. This way shippers, carriers, freight forwarders can continuously improve the way global trade is done. In the end, this means that you will get those shoes when you want them and at a nice price. I truly do believe technology can make anything better and more efficient. Fear not. Humans will always be involved no matter what. This isn’t Terminator … yet.

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3 Comments

  1. Andy Lane
    January 25, 2017 at 2:21 pm

    Very well articulated Katherine, and I very much think that you are right – many shippers (not necessarily the larger ones) simply do not understand the concept of “total cost of ownership”. But they sure are experts in complaining. It should not be this way, and the carriers are also at fault for never truly engaging their Customers and pro-actively exploring new ways to cooperate and collaborate for mutual gain.

    Taking just one commodity as an example, Polo Shirts, you can stuff about 7,500 of these into a TEU. A USD500/TEU freight rate change impacts the cost of each by USD7c! If the retail price is USD30 – that represents 0.23% of the retail price. This “saving” cannot possibly be worth the deterioration in reliability and Customer service.

    Despite the sharp downturn as a result of the GFC, Maersk still tried to produce value differentiation in “Daily Maersk”. Zero premium for proven 97.5% reliability was forthcoming, so the message received is “you only need to compete on cost”.

    The down-sizing of the back office, amongst a myriad of cost saving initiatives, resulted in it becoming very much more difficult for smaller shippers to get the personal touch from Maersk. But Maersk has always wished to do business with the smaller shippers, and now the Alibaba partnership forms one pillar of what is needed to obtain that business. This is also premium business at above average revenues.

    It will mean that a deposit payment is required, against securing (guaranteed) space, and therefore more of a mutual commitment at the booking stage, and can go some way to reducing downfalls. The erratic, but on average 25% no-show bookings causes chaos and huge cost leakages down the chain for carriers. It is also the root-cause behind poor on-time delivery performance, it is a lose-lose. Once you cure that (or part of it), and once you have a lean digitised back-office, you will be able to offer sustainable economic shipping – without having to operate in the red year on year.

    Maersk has long been the industry’s “innovator”, and then everyone follows, yet at the same time taking cheap pops at them at every opportunity – jealousy one can only imagine! Maersk and their peers (MSC, CMA, Hapag, OOCL, etc) need to innovate to stay in business. Where as many others just claim state bail-outs instead. Subsidies are addictive and breed incompetence, not sustainability and superior service.

    1. Katherine Barrios
      January 30, 2017 at 3:50 pm

      Hi Andy, Thanks for your comment. As an outsider, the relationship between shipper and supplier is rather boggling. It’s amazing to me that it has worked like so for so long. In the end, it’s the consumer who gets shorthanded, IMO. I do, however, believe that things are changing and liners and shippers are getting a wake-up call. Trust and mutual respect has a long way to go, but certainly they are on a better path. Best, KB

  2. John Fahy
    January 29, 2017 at 4:26 am

    As a consultant, we can only admire Katherine for pointing out some of the obvious?
    We have seen this continuous drive to reduce crew cost resulting in few personnel on board and with considerably less competence.
    However, the underwriters are still prepared to issue insurance policies to these companies.
    Lower levels of shore based personnel have been reduced hence personal contact with shippers has also been lost while upper level management has exploded personnel and excessive salaries.:-)
    Government hand out have increased and shipping companies take full advantage of free milk.
    Hence, no one is interested in the real cost of shipping an article from A –> B.
    After all if we all give a great shout and declare we all need welfare some government will come up with the cash?