When the container shipping market is being analyzed, it is often from the perspective of carriers and shippers. Carriers are the suppliers and shippers are the buyers. This view is beneficial for a range of different analytical perspectives such as the balance between supply and demand, the way to design shipping networks, the value of transit time, the availability of empty containers, etc.

But this approach is missing an important dynamical element – an element which is presently not being discussed much in the wider industry but is creating a substantial impact on the shippers. The element here is the spread in pricing in the market – and at the heart of the matter lies the fact that shippers tend to be competitors with each other. Of course, not in the general sense across all shippers – but shippers who belong to the same industry, such as supermarkets, furniture retailers, or sports equipment sellers. For the shippers, it is therefore not only the level of the freight rates which is important – but also the spread in rate levels between the shippers.

Data from the Freightos Baltic Index (FBX) shows that the price spread on key head haul trades has increased substantially in the past couple of months. 

Data from the Freightos Baltic Index (FBX) shows that the price spread on key head haul trades has increased substantially in the past couple of months. Just to mention a few examples: On the Asia to US West Coast trade, the freight pricing range tended to be roughly around 500 USD between the high and the low in any given week. As we entered the new year of 2021 this increased sharply to 2000 USD. On the Asia to US East Coast, the spread was in general higher last year at around the 1500 USD level but also increased in 2021 to more than 200 USD.

The other pivotal major deep-sea trade to Europe is no different. The pricing range between low and high any given week to North Europe increased from 4-500 USD last year to 2-3000 USD so far this year.

From a shipper perspective, this adds a whole new level of freight risk into the equation.

As an extremely simple example, assume we look at retailers of shoes. One retailer is selling shoes at 100 USD per pair, the other is selling at 10 USD per pair. The shoes are shipped from China to US West Coast and let us furthermore assume that the seller of expensive shoes is a major shipper enjoying the freight rate at the lower end of the freight pricing range of the FBX and the seller of the cheap shoes is a small shipper paying the freight at the higher end of the freight pricing range.

In the beginning of March 2020, the high-end retailer had a freight rate of 1258 USD and the low-end retailer paid 1440 USD. Both parties can fit 10.000 pairs of shoes into the container. The 100 USD pair of shoes thus had a freight cost of 13 cents where the 10 USD pair of shoes had a freight cost of 14 cents. This is of course only for the ocean freight component, with various land-side charges as well as equipment charges coming on top.

Fast-forward to the FBX pricing range of today. The high-end retailer now pays 4128 USD and the low-end retailer now pays 6135 USD. The 100 USD pair of shoes thus need to cover 41 cents for freight whereas the 10 USD pair of shoes need to cover 61 cents.

This means that a year ago the high-end retailer’s freight costs were 0.1% of the retail price and for his low-end competitor it was 1.4%.

Today the high-end retailer’s freight costs have increased to 0.4% of the retail price but for his low-end competitor, it has ballooned to 6.1%. This will detract marginally from the profitability of the high-end retailer but could render the low-end retailer unprofitable.

The increase in not only the price but also – importantly – the increase in the price spread is directly impacting the competitiveness between shippers operating in the same sectors. This freight risk is seen to convey a – relative – competitive advantage to larger shippers versus smaller shippers as well as to shippers of high-value goods versus shippers of low-value goods.

 

About Lars Jensen, CEO, SeaIntelligence Consulting

Lars is a leading expert and thought leader in analyzing global container shipping markets. Lars has 19 years’ experience hereof the last nine within multiple companies he has founded, with the main focus as CEO of SeaIntelligence Consulting.


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