Dynamic pricing allows for forward shipping contracts: Drewry

Dynamic pricing allows for forward shipping contracts: Drewry

Shipping consultant Drewry believes an online marketplace where ocean freight buyers and sellers agree on binding forward commitments would eliminate inefficiencies in the existing spot market. Photo credit: Shutterstock.com.

Dynamic pricing technology holds the most promise in its potential to allow container lines and shippers to tie up forward contracts, shipping consultant Drewry said Wednesday.

That belief comes as evidence builds that publicly available dynamic rates provided online by ocean carriers might be converging with contracts rates the lines offer directly to beneficial cargo owners (BCOs) or non-vessel-operating common carriers (NVOs). Only three carriers — Maersk, Hapag-Lloyd, and CMA CGM — currently offer online instant quotes, but others are expected to do so in the coming months, sources have told JOC.com.

One critical element to understand, as it relates to online quotes, is whether the quotes are so-called “street rates” available to any potential buyer that registers an account with a carrier, or whether they are a set of managed dynamic quotes provided to specific buyers based on those buyers’ characteristics.

In that scenario, a shipper moving 100,000 TEU annually with little seasonal variability would get a different dynamic rate than a 100-TEU-per-year shipper, or a large volume shipper needing extra volume at precisely the same time as other shippers. The online rate would theoretically be driven by network dynamics on the carrier side as well, even if container lines are not quite at the point to factor those dynamics in completely.

Drewry’s contention is that an online marketplace where ocean freight buyers and sellers could agree on binding forward commitments would eliminate inefficiencies in the existing spot market. Those inefficiencies create supply chain uncertainty for shippers but also hurt carriers in terms of cost of sales and freight rate stability, according to a white paper released by Drewry with logistics software provider CyberLogitec.

“Our study concluded that many of the market’s pain points could be addressed through a capability to flexibly buy or sell ocean freight services in advance, using a neutral, global platform,” said Philippe Salles, head of e-business, transport and supply chain at Drewry Supply Chain Advisors. “Volume commitments and capacity guarantees would provide an early visualization of demand to the market, thereby reducing the supply-demand mismatch and rate volatility, to the benefit of all market participants.”

The study determined that such forward spot buying technology would enable container lines to improve dynamic capacity management and increase vessel load factors.

Forward contracts would protect shippers’ margins

For shippers, Drewry argued that forward contracts would “protect their product margins and provide an effective hedge against freight rate increases.”

“Together with space guarantees, enforced through a deposit scheme and vendor reliability scores, this would result in more stable and elevated service levels of their ocean providers that enable reduction of safety stock levels,” it said.

Maersk, for example, unveiled a digital product in June, called Maersk Spot, that guarantees shippers’ boxes will be loaded.

“An industry fully functioning in a dynamic pricing environment may do away with the need for the elaborate, and at times cumbersome, contract negotiations,” an executive at a top 10 container line told JOC.com. “However, Walmart and Home Depot will never go along with Bob’s Corner Trade Mart having access to the same rate levels.”

The trouble with comparing dynamic ocean freight pricing environments to those in other industries, such as airlines, is that the range of services offered by carriers doesn’t vary as much, so there’s less opportunity to differentiate on that service, the carrier executive said.

“Delta will do whatever is necessary to fill all of its seats on a given route,” the source said. “If you fly from Atlanta to Tampa at 7:25, you may pay a different rate than on the 10:50 flight. The value of the differentiation is up to you. Carriers do not have as many service options, so your decision may be based on whether you want to sail on a Sunday or Monday. Every slot on that ship is going to the same place and arriving at the same time.” 

“Unfortunately, it comes down to price,” the executive added. “In a normally functioning ocean market, there should always be a spread between contracted rates and spot rates, or those available on a dynamic portal. In a sick market, the narrowing rate spread is concerning to all.” 

A mid-sized raw materials importer and distributor told JOC.com “that [while] rates available through the online portals are reasonable, even when compared with contracted rate levels, it seems to overlook that carriers can change that in a moment.”

“More and more, procurement of shipping services [for small and mid-sized shippers] may become a one-sided ‘take it or leave it’ transaction … and surely the smaller to mid-sized companies that rely on international shipping for their business will be the first to feel the pain,” the shipper said.

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