FAQ: Why are the shipping rates so volatile?

Posted on Tue, Jun 07, 2011 @ 11:10 AM

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Q: Why are the shipping rates so volatile?

A: While there are several factors involved,

The primary is market demand. Traditionally from Dec through April for imports, especially from Asia to the U.S., it is called the "slow season." Because the retail market slows down after Christmas. However from mid January through early February there is an upsurge of cargo moving to beat the Chinese New Year deadline whereby factories all over China shut down for weeks. This usually keeps rates high as there is always space problems for cargo getting on vessels. From May through November this would be the "peak season" where there is a big demand for cargo moving into the U.S., so the Carriers raise the rates during this period, with the GRI (general rate increase), and PSS (peak season surcharge).

Another factor is fuel, or what is called the Bunker Fuel factor. This is a floating surcharge that the Carrier's can change when oil prices rise or fall. It is called the BAF.

Shipping Rates

(Photo from www.wallcoo.com)

Another factor is when the Carrier has increases in costs such as when Terminal costs rise, especially with Unions, congestion problems, etc. Or when the U.S Rail costs increase for similar reasons. This is where the Carriers can add in new surcharges which have happened in the past and eventually get absorbed into the "all in " rate quoted.

Most recently the primary reason for rate increases, was a knee jerk response to the tremendous downturn in traffic and volume as a result of the current U.S. recession since '08. This downturn caused many carriers to lose about 50% of their previous volume and while their costs remained the same or higher, and their revenue all but disappeared, they found themselves the beginning of this year looking at an average of $500, 000,000 in losses per Carrier. So from late '09 until May of '10, most Carriers put a large portion of their fleet out of commission off the coast of Singapore. Thereby creating a vessel shortage, or a false space problem. This gave them all excuse to raise their rates again, in order to salvage their businesses. This type of thing is not normal.

See our Blog post about the dramatic rate increases during early 2010.

Tags: shipping, economy, FAQ, shipping rates

Comments

All good points, will try to add to it.

All ocean pricing is market driven with supply/demand ratios being the ingrediant. When supply exceeds demand, rates drop. As noted, in 2009 carriers suffered huge losses (about $17. Billion as an industry) due primarily to the significant drop in global trade. Global trade had doubled between 2000 and 2006 and anticipation was that it would double again between 2008 and 2015. Instead between Dec. 2007 and Dec. 2009 global trade declined over 22%, while carriers were increasing their capacity to handle what they thought would be continuing growth. But in 2009 volumes were down, rates were down, and carriers were severly hurt financially.

In 2010, the market came back somewhat and the carriers did something out of character - they laid up ships, over 500 to be exact, taking ths supply out of the trade and they raised rates because they had to and they could. That took them from the huge losses in 2009 and making a reasonable profit in 2010. SO to start 2011, they reverted to character, they DID NOT lay up ships, new vessels came into service and rates dropped again.Volumes ar up in 2011, about 8% globally and yet rates are depressed. So it has always been, and apparently so it will always be. 2010 was an aberation, the carriers acted to protect themselves - for one year. Now back to the "real world" for them

Posted @ Tuesday, June 07, 2011 12:09 PM by Gary Ferrulli

Great summary analysis Gary. I ALMOST feel sorry for the Carriers, almost.

However along with the fact most or all carriers had an "aberation" in locking everybody out last year and forcing premiums to get back in the black, they had no choice, it was litterally "sink or swim" for most.

However it is also not what I would call a real market driven economy with most Carriers, because so many are subsidized. It seemed for sure in '09 a few would go under, but they seem to have bottomless pockets of their own government bailouts. (I guess they all learned from the Fed).

I also want to point out that Carriers by and large stab themselves in their own foot by giving ridiculously low rates to some Shippers and not to others. There is no rhyme or reason, it is just "who you know" or what they call in China "Guangxi".

Until the Carriers start getting their heads screwed on straight and learn to keep their rates above their bottom line no matter what, and offer service contracts based upon performance and that alone, I for one don't mind when they park some vessels in Singapore to stabilize the market. That was the most brilliant move I have witnessed in 26 years in this industry.

Posted @ Tuesday, June 07, 2011 12:38 PM by devin

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