Have you ever pondered why ocean freight rate changes on a month to month basis?
Ever been curious why different ocean carriers have different ocean freight rate?
How much does a shipping liner earn from you?
We don’t have ALL the answers, no one can reasonably claim to have them. But we know what are the contributing factors that make your ocean freight increase from month to month.
Possibly even, armed with some of this knowledges you can put on your thinking cap, stroke your imaginary beard and forecast the future ocean freight rate.
What Is An Ocean Freight Rate
“Freight” is solely used to describe the transportation of goods that is non-human. Freight car, freight train, freight bus, etc… all describe their form of transportation of goods. Moreover, 90% of cargo transported via the open sea.
Nearly all item that we, the consumers, consume on a daily basis, a percentage of our purchase is to pay for the ocean freight rate.
Ocean freight rate essentially is the price we pay to the ocean carrier, or as the logistics industry call the Vehicle Operated Common Carriers (VOCC), to haul the container laden with your new edition of sneakers from Chongqing, China to Newark, USA.
Ocean freight rates are primarily paid in US Dollar, which is why currency fluctuation is a major factor in determining the price of your Nike sneakers. This will be discussed further in this article below.
Vehicle Operated Common Carriers (VOCC) therefore plays a bigger role that we might have imagined in our daily lives as a consumer. Unless there is a cheaper alternative to ocean transportation, such as shooting laden cargo into space (Space Freight!), we rely upon them heavily until then.
How Ocean Freight Rates Are Determined
If one day someone approaches you and asks to carry something valuable for him in return for a money, and you were not told of what kind valuable goods are you carrying, how much money will you be willing to take to accept that weird request?
Of course, you would respond with asking, is it heavy? Is the distance far? Is it valuable? Is it dangerous?
Similar sense applies to how the cargo type affects the price of an ocean freight. Here are a few examples
Dangerous Goods – requires expert cargo handlers to handle the cargo, special equipment to contain the cargo, and special response team if something went wrong. Dangerous Goods cargo are charged with a higher ocean freight rate compared to normal cargo goods
Out of Gauge Goods – requires special lifting crane to hoist the cargo onto the vessel, and special containers such as an open top container or a flat rack container to load the cargo
Vessel operators also need to take special care when stowing the cargo, preferring to store it on deck instead of an off deck. These also increase your ocean freight rate.
Perishable Goods – Tomatoes, Vegetables, Frozen Food all require reefer containers to transport. Those reefer containers are then required to be plugged into a power source to maintain the temperature at a constant rate throughout the shipment.
Heavy Goods – Scrap metal, notorious for being difficult to stuff into a container, and once it is stuffed, also damages the container considerably due to it’s jagged, pointy edges bundled loosely in a container.
The high-density cargo also proves a test to the structural integrity of the container. Vessel Operators exercises special care when dealing with these products, and special care always equals more compensation required.
Our team had the privilege to visit the port of Chittagong, Bangladesh. We noticed first hand a mix of congested jetty vessels, public jetties and container vessels, happening as we drove by at a snail pace in a narrow two-lane road, peppered by bicycles, Tuk-tuks taxis, and pedestrians.
Bangladesh is a tidal port, vessels only have a small window in a day to berth, and a long period of time to pilot the main vessel to port.
Sensibly, where time is money, the vessel carrier loses money by the second from fuel idling fee. These costs are of course transferred to the consumers.
Juxtaposing Chittagong port with the port of Singapore, with over 30 million TEUs annually passing by the Straits of Malacca to Singapore, is one of the busiest port in the world and a global transshipment hub.
A ship arrives or leaves Singapore every 3 minutes, they cannot afford any congestion. This type of efficiency is required and in turn, reduces the cost of freight per container because vessel operators simply prefer to dock at Singapore.
Due to the fact that ocean freight rates are dealt in US Dollar currency, the strength of the Dollar is also a contributing factor to the ocean freight rate.
However, if you see the graph below plotted by using Freightos Freight Rate Baltic Index vs Oil Prices, we can see no correlation month to month between them.
There is a drastic drop in the change in Oil Price between October to December 2018, and it took 2 months for the ocean freight rate to reflect the drop, whereas the spike in currency rate was reflected the following month itself.
This means that ocean carriers are usually hedging future oil prices, in order to stabilize its cost of operation.
It is, in fact, not the actual US Dollar currency fluctuations that determine the rates of ocean freight, but currency value in relation to the Port of Discharge’s country currency’s value.
The weaker the US Dollar Currency in relation to your country of import, depending on the INCOTERM of your shipment, the cheaper the ocean freight rate is.
Vessel Size and Cruising Speed
Since the cost of ocean freight rate consists of 60% bunker fuel costs, vessel size and cruising speed are two of the main factors that can determine the cost of ocean freight rates.
Container vessels consume hundreds of tonnes of fuel per day. Sea captains have the difficult task to balance between arriving at the port of destination in time or slow down the cruising speed enough to save fuel consumption.
Also, the larger the vessel size, the bigger the container capacity and the more the cost of the total bunker fuel charges can be spread among the containers.
During the Financial Crisis in 2008, vessels started to slow down their voyage time, or slow steaming voyage. It has become a commonality on the Europe-Far East Trade and also other shorter trade routes.
The net effect of the increased transit time also meant that vessel space surplus are absorbed and therefore vessel operators are able to control their cost more effectively.
Nevertheless, Bunker Adjustment Factors (BAFs) are still implemented by liners in order to generate some revenue stream a midst that global financial crisis.
Which goes to show that even at the point of the global economic environment, the consumers all have a significant impact one way or another, that is seemingly intangible.
In the not too distant future from the writing of this article (2020), the International Maritime Organization (IMO) will implement strict sulfur emission cap regulation.
Why is sulfur bad for the environment? Sulfur dioxide, when combined with water and air, forms sulphuric acid, also known as the acid rain.
Its corrosive nature is the major contributing factor of landslides, deforestation, and aquatic life deaths. Something Leonardo DiCaprio is not too happy about (we shouldn’t be either).
Low sulfur content fuels (LSMGO) are relatively more expensive than regular fuel, costing at around 565 USD per metric tonne.
Yes, you’ve guessed it, your ocean freight rate will increase by approximately 10% or above once this IMO regulation comes to full force, particularly in your trade location. But, for a good cause.
Distance between port to port
Sea voyage duration has a direct correlation to how much ocean carrier’s charges the ocean freight rate. The longer the nautical distance between ports, the more expensive your ocean freight rate will be.
Throughout the years, technological advancements have improved the geographical limitations that constrict the transit route of ships. We are talking about the engineering feat that enables vessels to “drive through” land areas; The invention of sea canals.
- Panama Canal – built in 1914, an 84 km waterway that connects the Atlantic Ocean and the Pacific Ocean, this bypasses the need to voyage along South America.
- Suez Canal – built in 1859, a 193.30 km waterway that connects the Mediterranean Sea and the Red Sea, this mitigates the need to travel along the African Continent.
Regional intergovernmental Organization
Regional Intergovernmental Organizations are organizations formed by countries within a strategic geographical location.
They have a common goal of fortifying its global presence and promote intergovernmental relationship in multiple fronts, whether it be Economical, Social, Cultural or Technical. Strength in Unity.
The prominent Regional Intergovernmental Organizations are:-
- African Union
- Caribbean Union (CARICOM)
- Association of South East Nations (ASEAN)
- Asia Pacific Economic Cooperation (APEC)
- European Union (EU)
The trickle-down effect of these Unions is trade agreements or the Free Trade Agreement. For example, ASEAN, representing 11 countries have bigger trade leverage against other nations, hence are able to negotiate a better Free Trade Agreement between neighbors.
A Free Trade Agreement essentially has the function of reducing or eliminating import/export duty, and reduce non-tariff barriers. These measures are in place to promote international trade between those favoring nations.
Vessel Operators in anticipation of the new trade agreement will look to deploy more of its assets to accommodate the trade volumes. Therefore, the price of ocean freight rate will also be reflective of how these relationships between countries set in.
Simple Economics (Demand and Supply)
The principals of economics are way beyond the comprehension of logistic service providers.
The simplest way we know how to explain is that before demand and supply reach equilibrium, there is either a shortage/overflow of demand or a shortage/overflow of supply.
And while the market is adjusting to reach an equilibrium, where demand equals supply, the price will increase or decrease and adjust as time goes by.
Container Relocation Problem
The current Port to Port Ocean Freight Price from Hamburg, Germany to Ningbo, China is roughly USD 600 per 20’ container. In contrast, port to port ocean freight price from Ningbo to Hamburg cost between USD 900 to USD 1200.
Assuming the transit time is equal, the total nautical distance and the ocean carrier is the same, there is still an almost 50% price difference between two routes.
In a perfect world, there would be equal trade volumes in and out of every country. But insofar, the economic power in the USA, China, and Germany, will always have more purchasing power, more population consumption than smaller or developing nations.
Container flow to countries with a higher trade surplus, a state where total export exceeds total import, will be generally cheaper to export to.
Simply because ocean carriers are willing to sacrifice some revenue in order to recover the cost of repositioning the container to a country with container demands.
Other contributing factors of ocean freight rate
Shipping peak season is generally between July to October, in anticipation for Christmas. With such high demand during a short period of time, prices of ocean freight are bound to increase.
Another form of the festive period that has a significant impact on the trade volume flow is during Chinese New Year, in February.
This impact comes in a different form whereby it is by the spike in demand that increases the ocean freight price, but by the decrease in supply itself.
This is a holiday season that observers take leave from their daily work. Factory rush production time as their workers are on leave during Chinese New Year, a practice also used by receiving importer.
Moreover, vessel operators also run with a leaner team as staffs take the weeks off in lieu of the celebration.
Hence, higher scarcity brings price of ocean freight rate will only go up.
Glossary of surcharges in shipping ocean freight
The list below is not exhaustive, ocean freight rates might be a base and rates below are charged by ocean carriers as a separate item:-
Low Sulfur Surcharge – Levy for low Sufur Oil usage by carrier
EIS – Equipment Imbalance Surcharges
ERR – Emergency Restoration Charges
ERS – Equipment Repositioning Surcharges
GAS – Gulf of Aden Surcharge
GRI – Abbreviation for “General Rate Increase.” Used to describe an across–the–board tariff rate increase implemented by conference members and applied to base rates.
DG Surcharge – Levy for Dangerous Goods Surcharge
OWS – Over Weight Surcharge
Piracy Surcharge – Levy for ocean route along high piracy risk area
PSS – Peak Season Surcharge
SCS – Suez Canal Surcharge
SES – Special Equipment Surcharge
Reefer Surcharge – surcharge for keeping reefer containers plugged into an electrical source
Monitoring Surcharge – Levy for monitoring reefer temperature charge
Aden War Risk Surcharge – A surcharge on goods transiting the Gulf of Aden
BUC – Bunker Charges
BAF – Bunker Adjustment Factor
CAF – Currency Adjustment Factor
We are at the mercy of economic forces and political forces. Best we can do is to anticipate to the best of our ability how these factors listed above may affect our bottom line transportation cost.
And more importantly, how we can, to a certain extent, mitigate the risk of a sudden increase in ocean freight rate and other related shipping rates by being diligent and a smart trader.
To read more about ways to mitigate risks in ocean freight transport, do take a look at our other piece relating to Marine Cargo Insurance.