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April 08 2016


What's a "Good" Ocean Freight Rate?

Shipping rates
An interest rate that’s initially ‘good’ for a shipper may not be so good in the long term if the carriers disappear, or attempt to stay solvent by interim measures including slow steaming or cancelling voyages, the question remains - just what ‘good’ rate?

freight rate benchmarking

If you’re a shipper, the immediate response is that a ‘good’ freight rates are a low one, although your carrier will surely disagree. But today’s world of ocean freights and trade lanes is far more complex than it had been where both shippers and carriers must fully understand that changes are essential in order to move container cargo worldwide mutually profitably.

Ocean freights can be a commodity. Similar to grain, oil, and the metals traded about the London Metal Exchange, ocean freights rise and fall based on supply and demand issues. With ocean freights, the provision & demand issue is primarily cargo volume measured against container and ship availability, plus bunker price changes, currency fluctuations, and insurance surcharges due to piracy in the major trade lanes.

While most of these are economic conditions can be either forecasted or hedged, government support of failing carriers skews supply & demand by giving bargain-basement freight rates designed more to increase cash than manage a going concern. To be the recipient of such a rate might be ‘good’ in the short term, however the ‘good’ disappears in the event the shipping line goes under as well as the remaining carriers raise the rates.

Therefore if a rate that’s initially ‘good’ to get a shipper may not be so excellent in the long term if the carriers disappear, or make an effort to stay solvent by interim measures including slow steaming or cancelling voyages, the question remains - what is a ‘good’ rate?

A Zero-Sum Game?

Clearly the actual shipper - carrier relationship is unhealthy and requires to be examined by either side. Prolonged low rates that cause carriers to lose money and threaten their financial stability are as unhelpful in the lon run as are high rates that price the shipper’s products from their intended markets.

Although many companies ship bulk of TEU's globally, the result of this volume is frequently diluted by the need to ship a wide array of products over a similarly large number of shipping lanes and ocean carriers. This weakens management's ability to negotiate competitive ocean freight rates as well as making it difficult to see whether the rates paid are in line with their competition.

There were some worrisome indicators how the container business is now considered a zero-sum game where ocean freight rates and sailing times are thought battlegrounds in the fight for freight rate supremacy.

But because shippers and carriers worked together so that you can develop the concept of Just-in-Time deliveries, perhaps the next concept adopted with the logistics world ought to be that of benchmarking, where ocean freight minute rates are compared and rated over trade lanes and cycles.

Benchmarking: It’s All Relative

Benchmarking enables a shipper to accurately answer the main questions asked in the shipping business: “Am I making payment on the right freight rate? Is my rate competitive?”

Ocean freight benchmarking is best for both shippers and carriers; carriers often need independent verification that the rates requested by the shippers do in fact happen in order for the negotiations being finalized, while shippers need independent verification how the rates they accept on his or her many smaller lanes parallel those as reported by larger shippers on the same lanes. Benchmarking provides the information important to answer the question of what is a ‘good’ ocean freight rate: a ‘good’ rate is one which is lower, or otherwise the same, as your competitors.

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