Container Freight Rate Volatility and the NYSHEX Solution
By Johanna Zuber
In a recent JOC.com article, Peter Tirschwell, iHS Maritime & Trade's Senior Content Officer, explored the impact rate volatility is having on carrier shipper relationships. The article, while not about NYSHEX, strikes at the heart of the problem that we have been fighting since our company's inception: container freight rate volatility. In the article, Peter describes concerns from carriers and shippers alike that arise due to not only volatility but also increased unreliability in the industry. With NYSHEX, BCOs now have a choice to secure guaranteed volumes with NYSHEX. In this blog post, we offer BCOs some best practices for including NYSHEX in their ocean freight strategy.
The issue of volatility in container freight rates is not a new topic. At NYSHEX, we have been able to track increasing volatility back to 2008. In that year, we experienced the global financial crisis and the carrier alliances that ruled ocean shipping were determined to be in violation of antitrust laws. More recently, our data show that in 2015 and 2016, container freight rates saw a 36% standard deviation (see image below). Compared to other markets, the S&P 500 for example, this is extremely high. In fact, the S&P 500 standard deviation over the same period (2015 and 2016) is only 4%. This week alone, the spot rate for a 40-foot container from Shanghai to the East Coast increased 18.2% while the rate to the West Coast is up 10.7%.
Our NYSHEX commercial team spends a lot of time talking to BCOs trying to understand the challenges this volatility poses in practice. The most common word they hear is "Unreliability". Rolled cargos and blanked sailings can cause huge economic losses within a BCO's supply chain. We've worked with Professor Michael Ehrlich at the New Jersey Institute of Technology to quantify the damage. Overall, we found $14.7 billion in wasted inventory costs alone (see below image). When you take losses on the carrier side into account - caused by booking downfall and blanked sailings - the number goes up to $23 billion.
Every spring, Logistics Managers at large BCOs begin negotiations with carriers for annual contract rates. Throughout the year, they'll measure their performance against the market. Hopefully, the data will show that the Logistics Manager made a good deal by contracting an annual rate which minimizes transportation costs through the entire year compared to the rate they would have paid on the spot market. This is easier said than done; when volatility increases, rates may go so low as to negate the benefits of an annual contract. Conversely, rates could also go so high that shippers cannot trust that their contracted rates are enough to guarantee a slot on the booked vessel.
Desperate for better predictability and reliability, increasingly BCOs turn to NVOCCs who promise to offer competitive rates paired with superior customer service and streamlined systems. As NVOCCs secure more business from shippers, their buying power with the carriers increases and allows them to drive down carrier rates more, further eroding carrier profitability and paralyzing them in this cycle of inferior performance and financial instability.
As these challenges facing our industry continue to get worse for shippers and carriers alike, NYSHEX offers an alternative that allow BCOs and carriers to work in harmony. Our product solves these deep-rooted industry challenges by offering a guaranteed ocean service. Our exchange has rate offerings from four of the world's biggest carriers and allows shippers to buy guaranteed contracts often three months or more in advance of sailing. Our members are buying guaranteed service NOW to secure their volumes for Chinese New Year. They are also taking advantage of the low rates during slack season to secure rates below those agreed to in their annual contracts with no fear of rolling.
While NYSHEX may not be the solution for all volume, combining the flexibility and reliability of the NYSHEX Forward with the stability of an annual contracts can offer a solution to the headaches Logistics Managers experience today. By reserving a portion of their freight to contract through the exchange, shippers can preserve their options while guaranteeing service in all market conditions. Critical cargo will sail during the peaks, and service levels will remain dependable during slack.
If the NYSHEX solution sounds like the answer to some of your business's biggest problems, schedule a demo with a member of our sales team! They'll walk you through the system and set you up in our live exchange where you’ll be able to begin contracting right away.