Ocean Freight Market Update
2020 Trends & Best Practices
At the onset of 2020, we expected to see flat or slightly increasing ocean freight rates. The potential for a slight increase was driven by the implementation of IMO 2020 which prohibited a more than 0.5% sulphur content in marine fuels across the globe. This regulation meant a huge shift to low sulphur fuel oil for which there was great uncertainty in the supply market. The price of LSFO surged to over $700 per ton in late 2019 in Singapore, Asia’s main bunker hub. At Europe’s primary hub in Rotterdam, the price hit $580 per ton. While the LSFO price per ton slowly decreased moving into 2020, the rates remained significantly elevated above historical high-sulphur fuel rates. The graph below depicts the changing LSFO market which ultimately hit a low of $259 in 2020 Q2 making the price of LSFO lower than previous HS fuel rates.
The global impact of COVID-19 drastically changed the ocean freight industry. As businesses in the US and worldwide started to shut down, order cancellations piled up causing a huge drop in demand for ocean freight. In response to the shifting market, carriers were able to quickly act by manipulating capacity and blanking sailing routes across the globe. As the pandemic progressed and demand started to rise, blank sailings lightened but remained in effect through most of the summer.
Drewery low-suplur bunker price tracker, Source: Drewry
Source: eeSea / Freightwaves
While demand normalized, the result of the continued blankings was a steady and significant increase in rates. Since sailing schedules had already been set, carriers could not quickly respond to increased demand so demand quickly surpassed supply creating a market crisis. Due to economic instability, carriers have continued to be hesitant to increase capacity. Even in cases where capacity has been restored to normal rates, the backlog of delayed or cancelled shipments is increasing the demand even more, driving rates up further. In some instances, carriers have been hesitant to open sailings back up because they believe demand is being artificially inflated by government support and pre-Chinese Golden Week bookings. A fear exists that this increased demand is neither stable or permanent and that underlying economic conditions will ultimately lead to decreased future demand.
Global rates increased from $1,358 in early March to $2,250 in September representing a 66% increase over seven months. China/East Asia to North America West Coast rates steadily increased from March 2020 to June 2020 when there was a rapid rise from $1,638 to $2,811 in mid-July. Since then, rates continued to increase reaching $3,887 in early October representing a 137% increase since March.
Continued unprecedented rates and market activities along with unpredictable demand has created a historic moment in the ocean freight industry. The ambiguity of future market movement driven by lack of demand visibility and the potential for another COVID-19 wave have put companies hoping to source ocean freight in a difficult situation. In some cases, carriers are not even guaranteeing supply to companies under contract. Loadstar reported that the container shipping industry saw record profits in Q2 of 2020 due to their cost cutting and blank selling efforts to manage capacity. The long-term effects of this industry shake-up could mean more use of blank sailing in the future, increased volume volatility, and consolidation of intra-regional carriers.
Ocean Freight Best Practices
The international ocean freight market is approximately a $500bn market comprised of over 170 carriers globally. However only approximately 20 of these carriers make up 90% of that annual revenue. This is even further consolidated by the fact that three major alliances between these carriers make up nearly 90% of the remaining revenue which allows shippers some great level of flexibility but strengthens the carrier negotiating position.
Given this concentrated market share, running a successful Ocean Freight RFP can be a daunting task due to the variety of incoterms, global scope of the business, and lack of clean data. Best in class shippers are however surpassing these hurdles and negotiating volume, at least annually, to secure service levels and preventing unexpected price increases. Insight Sourcing Group coaches our clients through these events and executes on their behalf to bring best in class results by leading fair and comprehensive sourcing events that evaluate multiple levers to validate client’s business constraints and cost models.
The above chart details the value tree of Ocean Freight Costs which includes many opportunities to optimize cost beyond asking for lower prices on existing lanes and shipping terms. Some of these key levers include evaluating alternate port pairs, transit times, sailing frequencies, container sizes, NVOCCs (Non-Vessel Operating Common Carriers) vs direct carriers, and BAF (Bunker Adjustment Factor) programs. BCOs (Beneficial Cargo Owners) are recommended to understand the below levers as they are key to driving best in class ocean contracts and category management.
- Alternate Port Pairs. Insight Sourcing Group recommends asking providers to quote on your existing chosen port pairs in addition to allowing them the freedom to provide alternate origin and/or destination ports. This can uncover hidden savings in price or transit time that otherwise may be unknown to you.
- Transit Times. Be sure to collect on every bid the associated transit time to evaluate a more complete picture of what suppliers are proposing. BCOs should evaluate the potential cost savings associated with sometimes longer transit times and leverage it to drive negotiations externally to drive pricing alignment or internally to drive operational changes that can support longer transits.
- Sailing Frequencies. All carriers and alliances are not created equal when it comes to sailing frequencies. Missing the boat on a monthly shipment can mean extended unplanned delays vs carriers who are sailing on a more frequent basis. Be sure to evaluate how much flexibility comes with the price you’re contracting to avoid unwanted detention and demurrage charges for example.
- Container Size. Asking for quotes on multiple different container sizes can allow shippers to evaluate order consolidation opportunities that save freight costs. While the pure Ocean Freight and BAF portion of a shipment will increase with container size it is not always linear and drayage costs frequently remain the same. This can mean a 40 ft box ends up only costing 40% more on a full door to door move despite including twice as much volume as a 20 ft container. Many BCOs are also using 40 ft high cube containers which often cost the same as 40 ft containers and allow more volume.
- NVOCC vs Steamship Lines. This is a key consideration that often becomes largely size dependent. Using steamship lines may require a separate freight forwarder to process shipments and documentation that adds cost to the shipment price. Steamship Line direct contracts also frequently require minimum quantity commitments that lock shippers into a committed volume that BCOs may be wary of. However, Steamship Lines can have the most competitive price in direct quote scenarios and should be used to help evaluate options and compare to NVOCC prices.
- BAF Programs. Coming into 2020, BAFs were at the top of everyone’s list of concerns with impending IMO 2020 LSFO changes. However, this quickly petered out as demand shrank and markets aligned to the new fuel. This quick shift showed the importance of managing BAF. Best in class BCOs are aligning BAF programs to market indexes and requiring carriers to follow a uniform pricing model to allow for increased visibility and to better align fuel program changes across their supplier base.
Utilizing these levers allows BCOs to get a much more comprehensive picture of supplier proposals inclusive of price, service, and flexibility. It’s best to then leverage this information to drive stronger, more informed negotiations, based on facts, not estimates or benchmarks. Through this process, BCOs can find opportunities to drive savings for their networks that aren’t at the expense of their suppliers and find new ways of operating that are profitable for their suppliers, helping to strengthen relationships and secure service, but still meet their personal financial goals.
2021 Ocean Sourcing campaign
Insight Sourcing Group is currently selecting BCOs (Beneficial Cargo Owners) to participate in customized and individual sourcing events as part of our annual ocean sourcing cadence aligned with market timelines and contracting season. With the unprecedented market escalations that occurred over 2020, sourcing ocean freight to align with current market conditions and secure pricing and service is critical to business planning and operations. Our firm has worked with dozens of clients over the last 10+ years to source their ocean freight and find savings through evaluation of multiple sourcing levers. We continue to source for many of these clients on an annual basis and bring savings relative to the market. In 2020, we brought savings ranging 5-20% for clients across a range of industries including Chemical, Industrial, Retail, Automotive, and Telecom. Our sourcing events consistently drive 5-10x ROI and beat market prices by over 12%.
Insight Sourcing Group has had tremendous recent success partnering with organizations to execute on the cost optimization approaches described above, in many cases driving savings in excess of the ranges outlined above and delivering a strong ROI. If you are interested in learning more or looking for a partner with the capability and expertise to execute on the approach to ocean freight described above, please contact us here.
About the Authors
Dylan leads ISG’s Logistics Center of Excellence. He is a supply chain and strategic sourcing leader with 12 years experience in procurement, logistics, and network optimization. His industry expertise includes companies such as Colgate-Palmolive, Clorox, and Logitech. His category experience includes Truckload, LTL, Small Parcel, Ocean, Air, and Warehousing. Dylan also has driven over 50 network models and optimizations driving over $37M in savings. Prior to ISG he led the creation of L’Oréal’s supply chain sourcing team managing over $275M in spend and bringing $25M+ in savings across Transportation and Warehousing.
Tommy’s sourcing and procurement experience extends across industries including telecommunications, retail, and manufacturing. He has developed expertise in achieving savings in the transportation category, specifically LTL, small parcel, and truckload. Recently, Tommy delivered $27M in savings on a small parcel category project for a Fortune 10 company. His recent client work includes AT&T, Bed Bath & Beyond, and lululemon. Prior to ISG, Tommy worked for Manhattan Associates in data analytics and business intelligence for several Fortune 500 clients.
Blake is a member of the Logistics Center of Excellence with extensive experience in multiple transportation categories, including freight forwarding, truckload, LTL, and other specialized modes of transportation. Recently, Blake helped a client evaluate strategic transportation partnerships across a nationwide footprint while also driving $2M+ in cost savings. Additionally, Blake has achieved savings for clients in categories such staff augmentation, janitorial services, MRO, travel management, and waste disposal. Some of Blake’s recent clients include Toray, Boral, Freddie Mac, and Genuine Parts Company.