Interest in long-term sea freight contracts likely to last throughout 2022

Singapore

COVID-19 is forcing businesses to look to long-term freight contracts as a means to hedge against price volatility and space constraints, and the trend is here to stay, at least throughout 2022.

A Fedex spokesperson noted that "given the volatile conditions, we have seen a desire from beneficial cargo owners to return to long-term pricing."

DHL meanwhile has seen "overwhelming demand", with many customers signing up immediately when long-term contracts are offered as an alternative.

"Before Covid-19, customers usually opted for shorter contract periods of a year, and we did not see much take-up of long-term contracts. However, with the global supply chain disruptions exacerbated by Covid-19, the industry has seen escalating freight rates like never before," said Kelvin Leung, chief executive officer, DHL Global Forwarding Asia Pacific.

"Longer term contracts of 2 to 3 years have become a good alternative, offering stability and better access to capacity in the new normal," he said.

According to benchmarking platform Xeneta, long-term contract ocean freight rates fell by 3.6 per cent in January. This is the second consecutive monthly rates decline but it follows 14 months of consistent increases.

"As such, despite the dip, contracted rates stand 98.1 per cent up year-on-year, demonstrating the commanding position carriers continue to occupy in shipping negotiations," said Xeneta on Jan 31.

Comparatively, spot rates have continued to break barriers.

Rates for Asia to Europe for instance are averaging US$14,258 per 40-foot container as of Feb 8. A year ago on Feb 10 2021, the market average was US$7,855 according to Xeneta Shipping Index by Compass which reports daily ocean container rates for 40-foot containers.

From Asia to the US West Coast, the market average was US$8,641, more than twice the year-ago figure of US$3,892.

Space, or the lack thereof, is also a key issue.

"A 40-foot container shipment that once took 15 days to ship from Shanghai port to Los Angeles port now takes at least 30 days to make the same trip. These ships are stuck waiting at anchorage for a berth which has decreased global container capacity by 10-15 per cent," said Vincent Tan, ocean services director, Asia, at C H Robinson.

Furniture retailer Castlery started looking for long-term contracts for precisely this reason.

"There were many times when there was no availability of containers even if you were willing to pay spot prices," said Castlery co-founder Declan Ee.

"I have heard of people paying 30 per cent over spot... if you have a valuable container load, those amounts may be viable, but for us, how many sofas can I put into a container?"

This experience is mirrored across sectors.

"We understand that companies enter into long-term contracts mainly to secure available vessel space at a fixed rate rather than spot rates which can be somewhat volatile and subject to rapid changes in supply-demand dynamics," said a source from the natural rubber industry.

The key reason Castlery is moving in this direction is to ensure the customer experience is not too badly impacted, said Ee.

"We have managed to keep shipping to under 3 months for most of our pieces," he added. "It's not even about staying competitive, it's about ensuring a good customer experience."

But not all businesses have been able to jump on this bandwagon.

As pointed out by Tan of C H Robinson, most logistics providers have their set of requirements such as meeting minimum annual volume thresholds of, for instance, greater than 1,000 20-foot equivalent units (TEUs) per year.

"For example, they prefer customers who have regular volumes on a weekly basis, rather than seasonal shippers who ship 70 per cent of their volumes during peak periods such as Christmas or Black Friday sales," he said.

Looking ahead, both DHL and C H Robinson expect this flight to long-term contracts to last well into 2022, and in the case of the latter, into 2023. This is in spite of the fact that there will be new capacity coming onstream.

"In 2021, ocean carriers invested in over 300 new vessel orders," said Tan. "These new ships will have a combined capacity of over 2.8 million TEUs or 11.75 per cent of today's fleet capacity."

This capacity increase does not account for vessels that may be retired.

"While the new vessels coupled with higher vaccination levels are a bright light to help with the ongoing capacity constraints, we will likely not see the capacity start to enter the market until the end of 2022 or early 2023," said Tan.

Said DHL's Leung: "Disruption in the supply chain is likely to persist through this year, particularly for air freight and sea freight, be it uplift capacity, availability of equipment or reliability of sailing schedules.

"Freight rates are also not likely to return to pre-Covid times when the market eventually normalises. We must adapt to the new normal."