Rates crisis favours larger shippers

The surge in freight rates since last November, which propelled carriers to an estimated record $16.2bn in collective earnings before interest and tax, is having a far greater impact on low-volume shippers than their larger rivals.

Analysis by Sea-Intelligence of freight rate data shows that the difference between the low range and high range of rates paid by shippers on the Asia-Europe trade had increased significantly on the spot market, from around $300 per feu to more than $1,200 per teu.

“The stable competitive environment which previously existed between shippers using spot on the Asia-Europe trade is clearly not stable anymore,” said Sea-Intelligence chief executive Alan Murphy.

A similar impact had been felt in the contract freight rates, which peaked earlier and which have seen the spread between the highest and lowest prices decline since March.

“However, despite this decrease, the actual difference remains extremely high,” said Mr Murphy.

Even disregarding the extremes, the difference between the lower and higher range of rates paid had increased from less than $200 per feu to more than $2,000 per feu.

“In other words, the price difference is still 10 times higher than what it used to be,” he said.

Moreover, the spread between contract and spot rates has been widening significantly since the beginning of this year.

“While of course a generalisation, it is not unreasonable to have an archetypical small shipper who ships on spot, versus an archetypical large shipper who uses a long-term contract,” Mr Murphy said. “In this model framework, the small shipper will — at least — be paying the mid-high spot price, due to his limited volume.

“The large shipper will — at most — be paying the mid-low contract price, again due to size.”

While the rate difference between the two had always fluctuated, between 2017 and the end of 2019 the average freight rate difference was $340 per feu.

But from late 2020, following an initial early spike and partial retraction, the differential has reached new records.

For the middle range of low contract rates and high spot rates, the differential is now over $9,000 per feu, while at the extremes of low and high it can be more than $10,000 per feu.

This extreme range in the cost of shipping goods is leading to a two-tier market in which scale is everything.

For a large cargo owner with $250,000 of goods in a 40 ft box shipping at the contract rate, freight costs have increased from 0.5% of the value of the cargo to 1%.

For the smaller shipper on spot rates, the change in costs is from 0.7% to 4.5%.

While this is still viable, albeit at some loss profit for shippers of high-value goods, for lower-value items the difference is more marked.

“The large shipper sees freight costs escalate from 5% to 10%, which would certainly be noticeable,” Mr Murphy said. “However, the small shipper sees freight costs virtually explode from 7% to 45%.”

With freight rates at that level, any profitability on low-value goods was put at risk, he said.

“Here is where we see why a number of shippers are currently under extreme stress. For lower value merchandise, the larger contract shippers see a substantial erosion of profits, but the small shippers see their profits reverted to losses, which in magnitude exceed previous profits.

“The current freight crisis shifts competitiveness between shippers. In turn, this also means the crisis is a clear opportunity for competitive positioning for some shippers.”