Slide in container freight rates may be beginning to level out
Freight rates on the major east-west container trades continued to slide this week – although ...
Shippers and forwarders can now access a real-time spot market air freight rates, as well as the possibility of hedging on prices, as the TAC Index launched this week.
Based on sea freight’s Shanghai Containerised Freight Index (SCFI), the TAC has been several years in the making and has attracted at least six major forwarders to provide data.
Currently transitioning to beta stage, the TAC has launched with airport-to-airport indices on Hong Kong to LAX, Chicago, JFK and Frankfurt tradelanes.
There are plans to introduce more lanes and increase the number of forwarders contributing to the data, so that weekly tonnage can be published along with the $/kg aggregated air freight rate.
“For shippers, there are no airfreight benchmark rates out in the market, and the only way to find price levels is to issue requests for tenders, which are very expensive and cumbersome,” said Robert Frei, TAC Index director, and former head of air freight for Panalpina.
“The tenders provide only a look at the rate at any specific time, and then you try to lock it in with the other party for three, six or 12 months, but it is still artificial. Our index provides weekly information.
“For the forwarders, it is interesting for them to know the volatility of the rates and how their internal procurement benchmarks against the entire market. So this data is, for them, very valuable.”
There are other air freight rate indices in the market, such as Drewry’s air freight rate index, but, in common with WorldACD, it is published monthly, several weeks after the end of each month. Drewry’s is based on data from the WACO System network of forwarders.
Peyton Burnett, managing director, said two subscriber bases would be targeted: “We are looking primarily at shippers, but we will also target the financial services for structured products and exchanges.
“Air cargo is taking a step closer towards integrating with the global commodity markets.”
The aim in the future is to be able to use the index for Forward Freight Agreements, or swaps – cash-settled financial contracts.
Brokers in the FFA markets can identify a forward spot rate, which the shipper or forwarder can buy, protecting it against a change in the spot market rate. It can then book with any carrier at the carrier’s spot rate. If the FFA contract rate is lower than that month’s index average, the buyer will be repaid the difference by the FF market.
For that to happen the TAC needs to be well-established and have total market confidence, as the SCFI does.
However, the FFA market has yet to fully take off in containerised shipping, and there is some reluctance in air freight to further expose carriers to an already low spot market. Much of the reluctance stems from concerns over the quality of any data – but the TAC team have spent years ensuring the best quality possible. Others argue that the air cargo market is not suited to FFAs, citing surcharges and different products that could distort the data.
Speaking 18 months ago, when the TAC Index launched a push to appeal to forwarders, Ram Menen, former head of Emirates SkyCargo, said: “You can use indices to tie into contractual agreements on market prices. Right now, forwarders lock into fixed rates with shippers for a six-month period. An index would allow them to avoid getting stuck.
“Forwarders on contracts have no instruments available to them to adjust. Equally, shippers won’t need to use forwarders as a bank.”
The sea freight industry has also been reluctant to use FFAs, although it is common in bulk shipping. Ricky Forman, container FFA broker at Freight Investor Services, believes fear of change is the greatest challenge, but that 3PLs are likely to drive the idea forward.
Whether the market eventually moves towards the financial markets is as yet unknown – but current rate transparency is now here to stay.