News / Spot market rate volatility at its worst in 2015 – and carriers must take most of the blame

The spot market which had the highest degree of price volatility in 2015 was the Asia-US east coast container shipping trade , according to new research by Drewry Maritime Advisors.

The World Container Index (WCI), jointly run by Drewry and Cleartrade Exchange, saw spot rates on the eastbound headhaul leg between Shanghai and New York oscillate between a high of $2,500 per teu at the height of the west coast port congestion, and US shippers were in desperate need of alternative routings to a low of around $750 per teu at the year-end as a rate war began.

The total spread between highest and lowest spot rates on the trade was $1,688.

The second most volatile trade was Asia-Mediterranean, with a spread of $1,294 per teu, followed by Asia-North Europe, which had a spread of $ 1,015, as the extensive use of general rate increases paid increasingly low dividends for carriers.

Drewry said: “A GRI is often heralded as a success following a big spike in rates in the first week, but we would contend that to be truly successful (from a carrier point of view) it not only has to raise rates, but sustain that gain over a period of time. Against this measure they fell down routinely in 2015.”

It added that each of the main east-west trades – Asia-North Europe, Asia-Mediterranean, transpacific, Asia-US east coast and the transatlantic east and west bound – saw greater losses than increases last year, despite a raft of GRIs with sizeable increases.

“Some of last year’s rate erosion and volatility was linked to falling oil prices but it was also a consequence of the ever widening gap between supply and demand. Other factors, such as the greater use of missed sailings and peak demand, saw monthly load factors, and subsequently rates, move up and down more frequently.

“Carriers also have themselves to blame by readily accepting cargo at sub-economic levels, while the US west coast labour-related slowdown and the impending widening of the Panama Canal also played a part,” it explained.

Drewry said there are three main options for shippers and forwarders to tackle this volatility: leave the spot market altogether by signing long-term contracts; play the spot market and win or lose depending on its capricious whims; or develop index-linked contracts that track the spot market within certain limits.

While long-term contracts have become fairly standard for larger shippers that enjoy the comfort of securing the majority of their cargo on a certain freight rates with a given space allocation, the wild swings of spot market volatility often create “a strain on the contractual relationship” between customer and carrier.

At the other end of the scale is the tactic more favoured by small- and medium-sized freight forwarders, which is “to embrace freight rate volatility and to be fully engaged in the spot market to take short term commitments with varying carriers to make sure you have the best possible rate at all times”.

Drewry added: “This obviously requires a lot of time and energy and carries considerable risk when one misjudges the market.”

Finally, Drewry revealed it has been developing index-linked contracts with some shipper clients “where one links the price of sea freight to an external index which carries the confidence of all parties involved”.

“People usually use one of the freely available indices or come to a neutral third party to establish and maintain the index. Prices then fluctuate, based on pre-defined rules and with a pre-defined frequency,” it added.