…and when should shippers consider contract rates?
Spot Rates have fallen off the cliff! This time last year, the average cost per forty-foot container (FEU) moving Eastbound from China to Long Beach California cost more than $15,000 and there were additional fees to secure space on the vessel from competition. The capacity climate this time last year was extremely tight and combining that with the never-ending demand and port congestion contributed to the perfect storm and making it the perfect Carrier’s market. One year later, demand has sharply dropped, congestion on the West Coast has cleared up and vessels are arriving partially full.
As a Shipper/Importer, 3 questions urgently need to be answered:
- How far will the Spot Rates Fall?
- When is it a good time to secure contract rates?
- Should something be done now?
Spot Rates
Ocean carriers made windfall profits in 2021 as they took full advantage of the perfect storm conditions stated above. Prognosticators and analysts alike did not fathom the rapid decline of spot rates in 2022. In fact, the best-case scenario estimated ocean rates to fall to $7,000 per FEU by Q4-2022, not the current $3,000 per FEU. The break-even rate for an FEU travelling between China and Long Beach is $2,000. However, Ocean Carriers have been known to endure losses on lanes to keep operations flowing. So, once supply and demand equalize, we predict the ocean rate to stabilize at $2,000 per FEU by Q1-2023.
A word of caution of solely riding the Spot Rate Roller Coaster is that from a Forwarder/Carrier perspective, the Spot Rate Shipper is purely transactional and lacks preferred Shipper status.
Contract Rates
With falling Spot Rates, on the surface, it seems logical to continue in the short-term Spot Rate market. Any long-term relationship with a carrier or Forwarder seems preposterous. However, what if the Shipper could obtain secure capacity and have two pricing programs: stabilized longer-term rates and a free-floating spot rate in a contract? Lastly, what if the relationship with a Carrier/Forwarder builds preferred status enabling additional pricing promotions that are below the spot market? Doesn’t this strategy seem like a better solution?
What Should a Shipper do Now?
With CPC Consultant’s assistance, a preferred Shipper program can be established now and will set the path for the Shipper to be successful in the upcoming 2023 contract period. Riding the Spot Rate market in the short-term produces lower rates than a flat long-term contract, however, it fails to build a preferred status with the Carrier/Forwarder which is the cornerstone of a secure supply chain. In recent memory, last year, the Carriers and Forwarders turned their back on new customer relationships; they chose to stick with their preferred customers and gave them capacity and better rates than FAK spot rate customers. Therefore, we recommend acting now to set up contract rates with the carriers/forwarder to pave the way for Preferred Shipper status.
CPC Consultants guides our shipping clients through all challenging scenarios and finds the optimal balance of service and cost to navigate through uncertainty. Call now for a free assessment and discover what CPC Consultants can do for you.