It is a scary trend - and one index after another is confirming it. Container freight rates nearly doubled last year, and then doubled again in the first four months of this year. In some sectors the freight rates have gone up by as much as TEN TIMES.
But, that is not all.
When you call your favourite freight forwarder today, more likely than not, s/he will talk to you as if s/he is doing you a favour by trying to find you shipping capacity in this crazy market.
Not their fault - that is the nature of the freight market we encounter today. Newspapers and magazines are full of stories about congestions in the ports, ships waiting at anchorages, cargo stacking up all along the maritime supply chains and shippers and consignees getting desperate for shipping space.
Even worse - the trend shows no sign of abating. People are starting to wonder if the shipping freight rates will continue their climb indefinitely. Or, in other words - when will we hit the peak shipping rates?
Most Firms Today Depend Heavily On International Shipping Rates For Meeting Their Quarterly Profit Targets
The way supply chains have evolved over the last three decades, firms have become addicted to international shipping. The prices of a container slot (or TEU) was more or less stable and low for so long that most companies have now built a stable pricing regime into their supply chain model.
Not only that, they have also configured their global manufacturing and supply chain footprint based on these assumptions about the container freight.
How do we know that?
Because, over the past two decades we worked on dozens of these global footprint restructuring projects for blue-chip multinational corporations operating on almost all continents of the globe.
Let Me Lay Your Apprehensions To Rest Here
Did we do them a disservice by building the global manufacturing footprint models based on this assumption of relatively stable freight rates?
Because we always had a number of backup plans available based on intimate and inside knowledge of the global shipping industry.
And, in this article I am going to layout three of the best and most viable alternate freight strategies that can be deployed by the companies that are hurting from these crazy freight rates they are seeing at present.
How Bad Is It Right Now, And How Bad Is It Going To Get Before It Gets Better?
That is perhaps the most asked question in the freight world today.
Companies were already suffering from the after effects of the COVID-19 when the Suez blockage came along and created a massive disturbance in an already dysfunctional global supply chain. Cargoes were delayed or lost, and freight rates skyrocketed.
Thin profit margins were buffeted even more severely and turned a perilous situation into a hopeless one for many companies. But the most important problem is that there is no end in sight. Many people are asking what next?
The honest answer anyone can give is - who know?
Who could have predicted COVID-19? Or, Suez Canal blockage? So anything else of this nature? All anyone can do is to be prepared, and respond intelligently to whatever the circumstances throw at you. That is what most of the material on this website is oriented towards.
Before You Go Out And Label All Shipping Companies And Freight Forwarders As Pirates - Consider This
From the shipping companies' perspective this is perhaps once a century opportunity to recoup some fixed cost contribution for decades of persistent low freight.
Here I am not going to go into the reasons for persistent low freight rates for decades because that is a topic for a different article. I will also not cover what places a cap on the freight rates but you will get a hint by the time I finish with the objectives of this article.
So what are the three most powerful recourses at the disposal of companies suffering from the booming freight rates?
They are not secret - at one point or other you would have perhaps considered any of these and given up because they might have appeared too difficult to put in practice.
In that sense my objective here is not to give you a new idea, as much as, show you how to put it in practice and be assured that it will work as envisaged.
1. Charter A Small(Er) Container Vessel
Whether you are a large shipper, or a smaller freight forwarder, one of the best remedies you have at your disposal is to look at the extensive container feeder vessel fleet available around the world for a suitable vessel to charter.
I am not going to go fully into the dynamics of container fleet economics - that is far too complicated.
What is relevant to know is that as larger and larger vessels are built and put into global shipping networks by the global carriers, their discards are
- pushed into feeder services
- or laid up,
- or scrapped.
All three of these can be source of a suitable vessel for your purpose. So, how do you go about chartering a small(er) vessel to suit your needs?
The best way to summarise the vast amount of information is to create the following simple four step action model:
Create A Working Model That Fits Your Supply Chain Economics
There is both - a good news, and a bad news here.
The good news is that nothing - no carrier, no freight forwarder, no 3PL - can match the customised supply chain model that you can build for yourself. The ship, the schedule/s, the load ports, the discharge ports, the loading and discharge sequences - all of these can be customised to closely match your overall supply chain model to an extent where you can treat the ships as your own floating warehouses. And, even better, with experience this fit will only get better.
The bad news is that the room for error is large, and the margin for error is low, lest your hope to turn a small loss into a tidy gain ends up actually becoming a much bigger loss.
So, how do you go about creating a working model that fits your supply chain economics?
There are dozens of examples all across this website - in several case studies from our real life projects, in articles and even in our books. If you are stuck, ask for help.
We are fully occupied with important work till the April of 2022 at this moment, but this is something we can help you remotely in a very short period of time, if you send us an email on firstname.lastname@example.org. However, hopefully the following generic guidelines would suffice.
To help guide you here are a few salient points distilled from these real life projects:
- Think in terms end-to-end supply chain when you create the models.
- Be aware of the execution intricacies as you create the model.
- Consider smaller and cheaper ports in the vicinity which may not have most advanced gantries and stackers but might offer highly attractive facilities and rates to attract tonnage. This is similar to budget airlines using ancillary airports such as Luton or Avalon to save on high slot and ancillary costs at Heathrow or Tullamarine.
- Create all five flows - read our FAQs on Five Flows of Supply Chain Management for more details of these.
- Model multiple scenarios - vessel sizes, load ports, disports, sequences, charter types, loading and discharge equipment, etc.
- Allow for weather and other delays (such as suez canal blockage etc).
- Allow for fuel cost (and other cost) variations - after all it is a large chunk of the costs.
- Be creative, yet realistic (e.g. you cannot load containers in the engine room - that was an actual suggestion we heard in one workshop).
- Do not forget Mr. Murphy - Whatever can go wrong will eventually go wrong - if you allow it to.
Find The Right Vessel
That is perhaps the first practical hurdle you will encounter. How do you work out what is the right vessel for your needs, and how do you go about securing it?
If you have done a good job in the previous step you already have a fairly good idea of what is the right vessel for your needs:
- What size - how many containers (200 or 2,000 or 20,000)
- What kind of cargo gear, if any
- What draft - fully loaded
- What length, width and type
- What age tonnage
- What flag
If you have any doubts, talk to your shipbroker. That brings us to an important topic - your shipbroker. Do not scrimp on this cost - in this market, s/he is your saviour.
If you do not know how to go about finding a suitable ship broker, send me an email - I have created and run for ten years LinkedIn groups with over 30,000 shipbrokers covering the entire globe.
I will not go into the more details of how to find a suitable ship because that is job best left to a good shipbroker in today's market.
Yet, it is ultimately your job to make sure that the ship you finally select suits your supply chain model and will execute on the plan. IF that is not the case, then either you need to change the supply chain model, or the shipbroker, or the ship.
Create The Right Contract
Finding the right ship is just the start of the process. Nothing can turn a winning preposition into a losing one faster than a bad contract.
I will not go into all the intricacies of contract law, or maritime law, or charter parties, or the law of carriage of goods at sea. Any one of these topics can fill an entire book, and yet cover only the basics. I will only give you some useful pointers below so you go with your eyes open:
- Your shipbroker will be familiar with most of the common charter parties (contracts) applicable for the circumstances.
- They will also know which charter parties favour the shipowner, and which ones favour the charterers (you). It may be advantageous to find the most favourable contract and use it a starting point for your negotiations.
- Read the base contract thoroughly and mark all the changes that you would like into it before you start negotiating the contract. This is not a legal job - it is a business job.
- Beware that a shipbroker only gets paid when the ship is hired. So their biggest incentive is to make sure that a deal gets done. That may mean that you could have gotten a better deal elsewhere if you were savvy about it.
- Familiarise yourself with basic market practices and terminology irrespective of how reliable your shipbroker is. Ultimately, you are responsible for the contract, not the shipbroker.
- Be aware that maritime law and the law of carriage of goods at sea are highly specialised branches of corporate law - not many corporate lawyers are well versed in these. If you need legal advise, make sure you eventually reach the right person - expect this to take some time.
- Be aware that while ship brokers are not legal advisors, they might know the basic meanings and applicability of most common clauses you might encounter.
- Nothing stops you from creating your own contracts if you deem fit - but today's market may not be the best time to ram a highly customised one-sided contract down the throat of a lone shipowner who has a lot of choice in the marketplace.
- You will get a better deal for a longer contract.
- Try and understand the shipowners perspective. They face a certain minimum daily cost of finance just for the structure of the vessel. In addition, they face daily operational costs that covers crewing, victualling spares, consumables and stores. More you understand the shipowners imperatives more creative deals can be created.
Execute and monitor using the right mechanisms
How you execute and monitor depends largely on the type of chartering arrangement you entered into.
If it is a time charter - the most common and useful form of charterparty - you will be responsible for the fuel, loading and discharging cargo and giving voyage instructions to the ship captain. In return you will pay a daily hire for the ship.
If it is a bare-boat charter you will be responsible for crewing the vessel, victualling (as well as the rope, soap and dope) in addition to all of the above.
If it is a voyage charter (or a contract of affreightment for multiple voyages, or a slot charter) you will pay a freight rate for a prescribed voyage.
Your rights and responsibilities will vary greatly depending on the type and details of contract you have secured.
But, just because something is in the contract, do not assume it will happen. In fact, inexperienced operators get a multitude of explanations for things not happening as per the contract, and not all of these explanations are easy to see through or verify.
That brings us to the key principle of execution in maritime operations - trust everyone so long you have verified everything before the event. Saving money on verification is false economy.
2. Turn to Break-bulk, multipurpose or tween-deckers markets instead of container ships
If your volume is large enough, or you can secure additional cargo from the market to help you fill a ship, you may be able to use the older style, or specialised vessels for a few voyages till the container freight rates are high.
I am deliberately not going into the intricacies of various types of vessels - general cargo, cellular, or mixed, break bulk, tween deckers etc. It is better if your shipbroker or advisor who understands your business helps you get past that hurdle.
You will save on the costs of containerisation and destuffing. But the supply chain model will look very different in this case. All the four steps outlined in option 1 above will still be applicable, but the details will differ greatly.
For this reason I am not going to repeat these four steps again in this article - if you have read this far you already have the imagination necessary to apply them to your circumstances with the help of your shipbroker and advisor.
3. If you suffer from low volumes - look to piggy back on a big player in your eco-system or business network
I could not fault you for summarily rejecting options 1 and 2 above for the simple reason that your business simply does not have the volumes to fill up an entire ship - no matter how small.
Does that mean you are totally powerless in this situation and have to accept whatever rates you are charged?
A big player in your business network - whether a customer, or a supplier, or a competitor - may have the necessary volumes, especially when combined with yours. In fact your volume might give them a leg up to climb down the scale curve by chartering the next bigger vessel size.
How do you go about finding such a player, encouraging them to consider this type of alternative/s, and negotiating with them?
For a start, share this article with them so they start considering the possibilities. A mind once stretched rarely snaps backs to its original position, no matter how inelastic it is.
Let me conclude this article by saying that I would not have spent nearly two hours writing this long article unless I way fully convinced that you always have options in your supply chain - no matter how dire the situation looks from the outside.
We have put most of these strategies into practice numerous times over the past three decades for our clients and may be in a position to guide you from afar, in case you need such guidance.
But be aware that the kind of ships I am talking about will soon get snapped up too. I am not the only one with these ideas.
4. Bonus content - have you ever wondered why two similar containers (same weight and same type) between the same port pairs cost different freight rates?
And, what has this information got to do with your freight rates?
Have you ever heard the frequently used shipping term "what the traffic will bear"?
My next article will address these very important questions because they are closely related to the content of this article.