Dynamic ocean pricing to change spot-contract mix

Dynamic ocean pricing to change spot-contract mix

An internal ocean freight procurement process can take anywhere from six weeks to 11 months, according to beneficial cargo owners. Photo credit: Shutterstock.com.

The parity of ocean freight spot rates offered by container lines online to those contracted with cargo owners and offered by non-vessel-operating common carriers (NVOs) hints toward the dawn of a new era of freight procurement in the liner shipping industry.

While the number of container lines and freight forwarders offering instant quoting capability continues to gradually rise, a potentially more impactful metric to track is the confluence of contract rates and rates offered via those dynamic quote engines. If dynamically provided instant rate levels are equal to or lower than contract rates, that would change the tenor of the way companies on both sides of the negotiating process look at their procurement process. Contracts in the trans-Pacific trade, for example, tend to be negotiated on an annual basis each spring, while quarterly contracts are more common on the Asia-Europe trade.

Sources in the beneficial cargo owner (BCO) and freight forwarding community have told JOC.com in recent weeks that some of the rates offered online by container lines match those cemented in annual or quarterly contracts with shippers and NVOs.

In both cases cited by sources, the competitive dynamic rates were provided online by Hapag-Lloyd, one of three container lines that currently provide buyers the ability to search for quotes and book space on a sailing through an online interface analogous to the way airline tickets can be bought directly with air carriers. Maersk Line and CMA CGM also currently offer this capability, and JOC.com has learned that other lines are set to join those three in the coming months.

Competitive online rates might compel shippers to migrate some of their contract volume to instant quoting. This would enable those BCOs to purchase freight more dynamically — i.e. be more responsive to changes in demand, dissatisfaction with certain carriers, or disruptions on certain lanes — as well as reduce the amount of resources tied to long-term procurement bids. The length of an internal ocean freight procurement process can vary from six weeks to as long as 11 months for large global shippers that are assembling complicated global tenders for hundreds of ports pairs, BCOs have told JOC.com.

Shifting paradigm

Under the current contract rate paradigm, shippers with significant container volume view that volume as leverage in negotiations with carriers and NVOs. Generally speaking, the more space a BCO agrees to purchase from a single service provider, the lower the per-slot cost. The challenge in migrating the shipments of those large-volume shippers toward a dynamic quoting environment has been in capturing the benefits of that leverage through rates and service levels that reflect the importance of that business to carriers and NVOs.

As such, the dynamic quoting tools — whether offered by container lines or forwarders — have tended to target the small and medium-sized shippers in the market, potential customers that have normally been overlooked by sales teams at the largest carriers and third-party logistics providers (3PLs) due to resource constraints and a low return on investment (ROI) for the use of those resources. In theory, online quoting tools solve that resource issue by offering a much lower cost-of-sales option to the capacity seller.

But in an environment where online spot rate quotes are competitive with contract rates, the outlook changes. A veteran mid-sized NVO, for instance, told JOC.com that online rates from Hapag-Lloyd are “now at the same or better level than those within service contracts.” Separately, a large United States exporter that regularly uses Hapag-Lloyd told JOC.com that it gets the same rates through the German container line’s Quick Quotes tool as it does through its contract, and that the line has encouraged it to book online. It’s important to remember that rates offered by a single carrier online won’t be the same as an open marketplace of rates from carriers and forwarders and would represent rates correlated to the relationship the carrier has with a particular shipper. 

It’s too early to say that large BCOs will reshape their outlook on procurement based on the availability of competitive dynamic rates. Outside of preferential rates or the ability to negotiate out surcharges, the stability (in terms of minimizing rate variability and assuring capacity) that annual contracts bring is a soft benefit that most won’t be eager to ditch.

Still, the perception has long been that airline-style online rates would necessarily be less attractive than contract rates negotiated directly with carriers or NVOs. If that’s not the case, the perceived stability from contracts could also be viewed differently.

Patrick Berglund, CEO of the crowd-sourced freight rate benchmarking software provider Xeneta, alluded to this evolution at the JOC Container Trade Europe conference in mid-September in Hamburg. He explained that the dynamic nature of the ocean freight market should have those in charge of procurement examining the value of committing resources to annual contracts that are not reflective of these accelerating changes in the market.

Xeneta customers are not exactly the target market for transactional freight quoting platforms either, because Xeneta aggregates contract rate data, not spot rates. Still, in Berglund’s eyes, that data is best used to help shippers procure in a more dynamic fashion if they choose, not just to inform annual ocean freight contract bids.

If shippers do choose to use digital transactional platforms more frequently, they also need to think about what that behavior looks like, just as they would in contract negotiations. For instance, the spot freight procurement platform Cargobase said in late August report shippers and forwarders using digital quoting platforms need to be “selective in requested and offered services” based on research the company conducted of $120 million of recently awarded shipments on its own platform. That means in dynamically bidding out spot freight, there’s a sweet spot shippers want to aim for in attracting service providers — too few and a shipper is less likely to get a competitive rate, but too many and the service providers will be unlikely to bid again knowing it’s a long shot to gain the business.

Cargobase provides a sort of inverse offering to the digital quoting engines provided by container lines and forwarders. Instead of providers offering space to BCOs, shippers put spot freight out for bidding and solicit quotes from forwarders.

“Although tricky to accurately pinpoint — due to the ‘ad-hoc’ nature of spot-buy shipments — it seems that shippers who keep their invitations in that seven-to-nine [bid] sweet spot not only receive the highest number of quotations, their average cost avoidance is higher too, often leading to lower average ‘per kg pricing,’” the report said.

Response from service providers was highest when shippers invited three or fewer service providers to quote on ocean, road, or air service, but the actual number of quotes was correspondingly lower. While that makes sense, there are diminishing returns in any mode when too many quotes are invited, the company said.

“While it is great to consider all options, and give multiple partners a chance to bid and win new business, we have learned that if you are always quoting in a pool of 20 providers, the actual win-chance is only 5 percent (assuming all variables remain equal),” the report said. “With such a low likeliness, we see provider commitment erode over time.”

From the freight forwarder and NVO side, this all portends an era where the role of the global forwarder moves away from relying solely on rate arbitrage on space aboard a vessel and toward services that don’t hinge on procurement.

“We do something our customers don’t want to do, can’t do, or can’t do as well as us,” Marc Meier, managing partner and CEO of the Hamburg-based forwarder Fr. Meyer's Sohn, said in a keynote address at the CTE conference in September. “We get paid for our market knowledge, and our buying power with carriers. But this will change; this will not matter going forward. The big challenge is to monetize the value-add.”

Changing that mindset won’t be easy, as shippers traditionally have not been willing to pay for technology and process improvement services that have generally been bundled into broader freight forwarding relationships, Meier said, adding that the differentiators going forward will be adaptability and agility, and not just an openness to technology.

Focusing on fixed costs

Fauad Shariff, CEO of the freight-forwarding marketplace CoLoadX, said at the 2018 JOC LogTech conference in Las Vegas that innovation for forwarders has to address the way they look at fixed costs and operating profits. He argued forwarders are primarily focused on the procurement of capacity that is largely out of their hands and isn’t as variable as they think it is.

“As a forwarder, say your top-line number is $100; that’s sales,” Shariff said. “Your cost of goods sold is $80; that gives you a $20 gross profit. The next $15 to $17 go in fixed costs. Your EBIT [earnings before interest and taxes] is $3 to $5. Every [forwarder] beats their brains out for the $80 and $20, and that’s never going to change because you don’t control the ships. You can hire procurement teams and do RFPs [request for proposals] and RFQs [request for quotes], but if you focus on that $15 to $17, that’s where innovation begins.”

JOC.com first examined the state of instant ocean freight quoting in mid-2018, when only Hapag-Lloyd and Maersk offered such functionality to shippers. Since then, CMA CGM has joined that group and a dozen or so top-25 forwarders have added similar capability across their book of contract rates with container lines. The advent of 3PL-focused software-as-a-service (SaaS) tools to give forwarders of all sizes the ability to transact with shippers electronically has also made the concept more pervasive.

Maersk has attached distinct service add-ons to its digital quoting tool, such as the ability to book on a particular sailing, and a loading guarantee product that penalizes the line if cargo is held back at the origin port but penalizes the shipper if it no-shows on the booking. Maersk’s theory is that these additional services will only be adopted if they are part of a digital transaction experience, as Johan Sigsgaard, Maersk’s head of trade for Europe, explained to JOC.com in a June interview.

The desire to move volume to a digital procurement environment is attractive to carriers in one respect. Such systems reduce a carrier’s cost of sales, as the quoting and booking tools are automated and require no direct human sales efforts. On the other hand, container lines are not yet in a position to deal with the practical implications of having dynamic demand influence the deployment of their physical assets.

“With QuickQuotes, our salespeople don’t have to put out 200 quotations per day for small customers and only get five bookings,” Ralf Belusa, managing director of digital channel and incubation unit for Hapag-Lloyd, told JOC.com in 2018. “Now they can work on more productive things.”

It’s also easier to capture behavioral data about customers if they book via an online booking engine. But the benefit of that data on smaller, transactional customers has to be weighed against the stability for container lines of knowing a customer is committing to move a certain amount of volume over the course of a quarter or year. That’s especially true if the customer can predict with precision their weekly allocation needs.

Still, it may simply come down to the rates. If shippers large and small get the same rates booking digitally as they do via contracts, and if shippers can use benchmark data to dynamically determine what a good rate is between an origin-destination pair, and if the carrier commits to guaranteed service parameters, what’s the larger motivation to move containers via contract?

“People won’t book with you unless you’ve got competitive rates,” Toby Edwards, CEO of Shipa Freight, the freight forwarder Agility’s instant quoting platform, told JOC.com in 2018. “Of course, ‘competitive’ can vary from market to market.”

Edwards called the rates available on Shipa Freight “like a street rate, a walk-in rate, the guy shipping a couple times a month. But my vision for this and my hope is we may offer lower rates. For us, we don’t need a salesperson; the customer is doing some of the work for us. So, maybe we give you a 5 percent discount as we build in operational efficiencies.”

The industry may still be a fair distance from that rate environment, but it’s closer now than ever before.

Contact Eric Johnson at eric.johnson@ihsmarkit.com and follow him on Twitter: @LogTechEric.

Comments

Historically, spot rates fluctuate, many times going under contracts rates and why BCO's cover only a percentage of their anticipated volumes with contracts. But that got all turned on its head in 2018 and early 2019 when spot market rates spiked to double the contract rates due primarily to carriers managing capacity to the market and the market having an extended peak period due to the anticipated Tariff hikes on 1/1/2019. For the rest of 2019 and into 2020, the anticipation of the fuel increases may cause some freight to be moved up in timing to avoid the fuel surcharge increases, only a possibility. The global economy and carrier capacity management will decide the eventual outcome of rate and surcharge levels. Technology won't have a great deal to do with it. It may influence who moves what and why, may.

11 month procurement process?