However, a shift began to occur. We first noticed the gap between short and long-term rates closing already in April 2017 and the summer months seeing that gap decrease even more.
The decrease carried into peak season:
On August 1, 2017:
market average short-term rate = USD 1816
market average long-term rate = USD 1397
A difference of USD 419 between the two markets.
On October 11, 2017:
market average short-term rate = USD 1568
market average long-term rate = USD 1395
A difference of USD 173 between the two markets.
While the short-term market is still lying above, it's worth mentioning that in two months, the difference between short-term and long-term market average rates for the trans-Pacific has decreased by 60%.
Carriers tried to mitigate rates from behaving erratic and as such implemented GRIs effective November 1. The increases ranged from $600-$1,000 and were deemed successful only in keeping rates from sliding further.
With reports of overcapacity continuing to come in for Q4 and this sudden stumble (albeit still small) of the short-term rates below the long-term market, we can't help but wonder if rates could be falling back down to Q2 2016 levels. However, we cannot stress enough that the market is in many cases stillhealthy for liners. But, as we all know, things in this industry can change almost overnight.
Supplier Negotiation Preparation
With so much fluctuation and uncertainty in the market, in one of our blog posts, we highlightedfour questions to considerfor BCOs working on RFQ's, and so we’ve attempted to answer them as best we could:
Q1. Should and/or could we postpone on contacting and see how the market will play out through the rest of the year and consider action in Q2 2018?
Based on what we are seeing, with more capacity entering the market in 2018, short-term and as well as long-term rates will react by turning downwards. Keep in mind more capacity will enter the market in 2019 as well. As such, rates will continue to be pressured into 2019. We’re not sure at this time if or when carriers will implement any other additional charges in an attempt to offset some of these potential rate declines.
Q2. Do we consider allocating more volume on the most volatile corridors to the short-term market to better position ourselves?
That will, of course, depend on what your specific volatile corridors are as well as your overall transportation strategy. With continued excess capacity and more anticipated in the ocean freight market, compare your rate options, long-term versus short-term and see if they match up with your strategy.
Q3. Could we benefit from ”hedging” all or some of our volumes to quarterly or 6 month contracts – rather than the usual 12 month / annual?
Even though the ocean freight market has stabilized as compared from years past, it remains sensitive to market conditions, and it really doesn’t take much to turn it on its head. We encourage our customers to continuously monitor market and economic conditions. We help out with a great free newsletter and a post on short-term shipping contracts.
Q4. Should we consider including rate adjustments throughout the contract period – with floor/ceiling levels (for predictability) – all based on market movement events/criteria?
This is definitely a time in which shippers and forwarders should be working closely with their ocean freight partners. Flexibility, market knowledge and rate history and benchmarking are always important in collaborations.
As we close out this year and cargo buyers prepare for the RFQ period, remember that the market is moving right this minute, so you always need to keep your eye on the changing data trends.