For transpacific importers and exporters, it's a little nerve-racking going into contract season this year given the high starting point of sea freight rates. What should shippers expect as you prepare to negotiate rates for the 2021-2022 Ocean Freight Contract Season? Our supply chain experts weigh in on 5 trends to watch and factors that will be at play this year.
Where do we anticipate the market heading in 2021-22?
We expect that by March 1, we'll really begin to see where the market will land in terms of rates and how the carriers will want to negotiate.
We do know this year will be particularly challenging for shippers who:
- Do not have the ability to forecast well
- Have a myriad of origin and destination port pairs rather than consistent volumes
Why will it be difficult for shippers who struggle with forecasting?
It is hard for ocean carriers to allocate space efficiently when your future volumes and capacity needs are unclear. The more predictable your volumes are, the easier it is to consistently get space on vessels. This means being able to accurately forecast your freight volumes is essential. Proactively share your forecasts and minimum quantity commitments with us so that we can work with carriers to plan for your shipments accordingly. Our supply chain data management tool, WorldScope, can help you do this. Learn more here.
Why will it be difficult for shippers who have a many origin and destination port pairs?
Again, consistency is key. The more often you are predictably using vessel space, the easier it is for carriers to plan their loads and equipment to support your bookings. When you have cargo coming from and going to a lot of different places, it is much harder for carriers to guarantee space compared to a consistent allocation.
The challenge this year will be finding a balance between consistency and flexible alternatives as we battle congestion issues at some of the largest U.S. ports and gateways.
What are 5 key trends to expect during the 2021-22 Ocean Freight Bid Season?
1. Higher rates (FAK Rate + Full Premium) through May/June
The sudden volume drop due to the initial impact of COVID and subsequent "capacity crunch" afterward sent transpacific container rates skyrocketing.
"This time last year, the rate was $1,200 to the West Coast and now it's basically $3,000, so it's a pretty significant difference," said Martin Karczewski, UWL VP, 3PL Services.
Typically, the freight market follows a cycle with a peak occurring in the months just before the winter holiday season. With the pandemic hitting in 2020, instead, we saw volumes rising steadily throughout the end of the year, and delays from the resulting port congestion are expected to continue possibly into Easter 2021.
"Traditional peak season, where you have a normal rate and then at some point in August, September, October, you get hit with that Peak Season Surcharge (PSS) — That model may be challenged in 21-22," he said.
Carriers introduced a variety of premium services in 2020 which are supposed to guarantee vessel loading and terminal discharge. Now, shippers often have to pay these premiums just to get their cargo on a ship.
"Rather than a traditional peak, I think this premium surcharge that the carriers have introduced and like so much probably is going to replace that peak season charge, because they can introduce it quickly, they can activate it per market, it doesn't have to fall into a peak season category —they can trigger it in the middle of January if they want," Karczewski explained.
According to UK-based maritime research firm Drewry, particularly this year, shippers should also "track the development of spot freight rates because they indicate the tightness of the market on some routes, they may be a leading indicator of contract rates, and they could point to future problems of capacity availability if ocean carriers prioritize (higher) spot cargoes vs (lower-rated) less profitable contract cargoes."
2. More pressure on free time
In our latest Market Update, we shared that we expect carriers to lessen the amount of free time they give in 2021 to keep equipment flowing.
"Given how long this equipment shortage has gone on, we fully expect carriers to push back and clamp down on free time into the U.S.," said Karczewski, "So if you previously had 10, 14 days of free time in the past, it's going to be a real struggle and we're not sure where it's going to land at this point, but I highly doubt things will exist as they have existed in the past. We'll continue to fight to get as much free time for our shippers as we can."
Our president Duncan Wright recently discussed the issue of free time with JOC's Peter Tirshwell. “This will force warehouses to be more rigid with appointment scheduling, missed appointment penalties, possibly even forcing drop/hook facilities to look at more live unloads so they don’t get stuck with per diem,” Wright shared.
In the article, Tirshwell explains how the carrier's focus on free time "is part of a larger effort by carriers to reset expectations of shippers, who for much of the past decade enjoyed the benefits of systemic vessel overcapacity and carriers’ willingness to be competitive on contract terms to obtain shippers’ business."
Carriers are now much more disciplined in how they manage their capacity, causing shippers to address operational issues like turning containers. Clamping down on free time, according to Wright, will impact drayage operations, limiting drayage drivers’ ability to handle more efficient double moves.
“The drayage market is just as strained right now as the ocean carrier market is and the free time impact will likely have as large if not a larger impact on them as it does on the receiver’s facility,” Wright said. “If free time is impacted, this will put a significant strain on drayage operations, as truckers will likely be forced to spend more time bobtailing [i.e., driving with no container] to pick up containers for large drop-and-hook operations to avoid per diem.”
Gone are the days of letting ocean containers sit at facilities for days like mobile storage units. Less free time will make 2021 the year to focus on operational efficiency to mitigate potential demurrage/detention issues.
3. Increased capacity discipline from ocean carriers
Carriers were extremely disciplined in how they managed their capacity to prevent rates from bottoming out last year.
Even during the worst times of the pandemic with cargo volumes dropping, carriers were able to hold freight rates steady by managing capacity through blank sailings, cost cutting, lower fuel rates, and a renewed focus on profitability over market share.
We fully expect carriers to continue this strategy in 2021.
4. More government intervention
2020 saw both China's Ministry of Transport (MOT) and the U.S. Federal Maritime Commission (FMC) get more involved in the ocean freight business.
"The stratospheric increases in transpacific spot rates and the current shortage of capacity in Asia have led regulators in China and in the US to signal that they are watching the competition situation closely," Patrick Burnson of Logistics Management explained.
"China’s Ministry of Transport met most major carriers on 11 September 2020 and asked carriers why there were such large increases in transpacific rates and expressed “hope” that they would bring back ship capacity to the market," he reported.
In January 2021, China's Ministry of Commerce also got involved. “Our ministry is in talks with the ministry of transport and other related departments to adopt measures to increase shipping capacity and stabilize freight rates,” said Li Xingqian, head of foreign trade, according to Lloyd’s List (reported in The Loadstar).
In the U.S., the FMC announced in September 2020 that it is "actively monitoring for any potential effect on freight rates and transportation service levels, using a variety of sources and markers, including the exhaustive information that parties to a carrier agreement must file with the agency."
Then in November 2020, the commission announced Fact Finding 28, an investigation into carrier practices that the FMC believes are contributing to port congestion at major U.S. gateways. They cited three main issues that they are looking into: demurrage and detention practices, empty container returns, and how some carriers turned away US exports to expedite repositioning empty containers to Asia to prioritize more lucrative import cargoes.
Expect more scrutiny of container lines by regulatory agencies this year.
5. Larger focus on technology
With whole offices forced to work from home and more commerce moving online, the COVID-19 pandemic did have at least one positive impact on the ocean transportation industry which is often slow to change: it pushed the industry as a whole to embrace technology and supply chain digitalization.
Think for a moment what unpredictability and volatility can do to your supply chain: They can cause lost sales, penalties, chargebacks, damaged relationships, lack of trust, and costly inventory imbalances.
Now more than ever, real-time visibility, the ability to forecast, anticipate, and manage risk, and provide accurate, timely, and coherent information to your organization and your customers remain the lifeblood of any successful business.
We've invested heavily in technology to help you accomplish just that. Our WorldScope supply chain data management platform provides real-time shipment tracking and tracing, hot shipment tagging, forecasting and order management tools that help put you in control of your shipping data. We're continuing to invest in and develop this tool, rolling out new features and updates to help our importers and exporters achieve their objectives. Contact your UWL rep to schedule a demo or learn more.
2021 will not be the year to cut costs. Expect the premium rates to stick around this year and more pressure on free time (less free days). Carriers, through their capacity discipline, will have a lot more power in negotiations this year. However, their actions will be closely monitored under the scrutiny of regulatory agencies. Importers and exporters should focus their energies on better forecasting and improving their operational efficiencies in 2021. New advancements in technology in the ocean transport industry will help you accomplish this.
- Trans-Pacific carriers aim to curb free time in annual contracts (JOC)
- Viewpoint: Container congestion may now impact Easter (American Shipper)
- U.S.-based shippers should expect higher ocean contract rates in 2021, says Drewry (Logistics Management)
- Global supply chains choke under tsunami of freight (American Shipper)
- Learn more about UWL's WorldScope Supply Chain Data Management tool