Shippers should expect big hikes in contract rates

7/26/2012

A leading freight analyst says shippers who negotiated contracts with carriers at the end of 2011 - when the freight market was at its weakest - should prepare for a hefty increase in costs when contracts come up for renewal.

The warning comes despite another weekly fall in a key measure of containerized freight spot rates on the Shanghai-Rotterdam route: the World Container Index (WCI), assessed by shipping consultants at Drewry’s.

Another benchmark, the Shanghai Containerized Freight Index (SCFI), also fell last week pointing to an almost complete erosion of the 1 July round of General Rate Increases (GRIs). More GRIs are planned for August.

But in its latest Logistics Executive Briefing to importers and exporters, to be published later this week, Drewry puts recent declines in spot rates into perspective, highlighting that the WCI’s latest benchmark rate from Shanghai to Rotterdam, dated 19 July, was almost three-and-a-half times the level it stood at in December 2011.

Rates have also rallied on Transpacific routes, though in a less pronounced fashion, the Briefing adds, with Drewry’s Hong Kong to Los Angeles benchmark rate, published in the Container Freight Rate Insight, surging over 66% by the third week of July since the start of the year.

"Further rate increases are planned for August on both Asia- Europe and Transpacific trades which will raise rates again, if only temporarily," says Martin Dixon, Research Manager, Freight Rate Benchmarking, at shipping consultants Drewry’s.

"Carriers are certainly facing headwinds in their attempts to maintain freight rate levels as demand growth weakens. They have already started to remove some capacity through the recently announced skipped sailings but they will be reluctant to pull whole service strings while the hope of a peak season still beckons. For these reasons, Drewry expects rates to drift lower through the remainder of the year."

But he says the bigger question is what these developments mean for contract rates, on which over half of all container shipments move.

"Importers and exporters must expect to pay higher freight rates when their contracts come up for renewal, whether later this year or next. Hardest hit will be those whose contracts were agreed at the end of last year when the market was at its weakest."

Drewry’s Container Forecaster anticipates average all-in East-West freight rates (across both contract and spot markets) increasing higher still next year by another 10%.

"This will take average East-West freight rates to within a whisker of 2008’s pre-recessionary levels when industry pricing last peaked. Shippers should prepare themselves accordingly to avoid any nasty shocks," warns Dixon.