Four priorities to consider for successful 2023 ocean bids
In this latest Logistics Executive Briefing we share our insights and thoughts from four key questions we are frequently asked by international shippers as we support the planning and management of their global ocean tenders.
1. Should we move away from fixed rates and switch to the spot market?
With spot rates on certain routes to and from Asia now 40% lower than contract rates, many exporters and importers are considering whether to move away from contracts and go instead to spot-rate arrangements with forwarders/NVOCCs. Some are even looking at switching mid-contract.
The pro’s and con’s of such decisions depend on the shipper’s circumstances, including contractual commitments and penalty clauses. But Drewry’s advice in most cases is that shipping is not just about cost and it is better to go to existing providers to request a reduction in contract rates than to damage existing business relationships and service levels.
For smaller shippers, who suffered the most and in many cases were unable to secure enough capacity from ocean carriers at fixed rates during the shipping boom, the spot market makes more sense. But it requires more staff, more time making or correcting ad hoc arrangements, and awareness that spot arrangements provide less support from carriers or NVOCCs when things go wrong (eg impact of the rising number of “cancelled sailings”).
2. Should we expect lower contract rates in 2023 and go to bid later?
Yes and yes – the later you go to bid, the lower the contract rates are expected to be, based on unique forecasts from the Drewry Container Forecaster research. Spot rates on many trade routes have plunged by up to 50% since their peak. Contract rates in early bids are coming out lower than previously and Drewry expects further falls in contract rates during 2023, as over-capacity increases.
(To support optimal bids and budgeting, Drewry’s Benchmarking Club provides route-specific rate forecasts and benchmarking services which enable shippers to set competitive target rates for bidders.)
The market is currently changing and uncertain – there is nervousness among carriers about how to price contract rates. This is another reason why, if possible, you should try to extend your contract rates by 3 months with your existing providers and go to bid later.
Contrary to previous ocean bids, when our advice was to go to bid as early as possible to make sure that shippers secure (scarce) capacity, this time the recommended strategy is to go to bid at the normal time (or after a contract extension) to take advantage of the weakening market and falling contract rates.
“Contrary to previous ocean bids, when our advice was to go to bid as early as possible to make sure that shippers secure (scarce) capacity, this time the recommended strategy is to go to bid at the normal time (or after a contract extension) to take advantage of the weakening market.”
3. How do we bring back more favourable terms to our shipper-carrier contracts?
In 2021/22, when carriers had the upper hand, many shippers had to agree to less favourable contract terms with their ocean carriers or NVOCCs.
When the market was under-supplied, it was also essential for BCOs to position themselves as “a shipper of choice” for the carriers. This included agreeing to reduce free times or to agree mutually-binding capacity commitments, so that the carrier could make more efficient use of their assets and plan operations better.
But with the market moving to over-capacity, the pendulum will swing again and shippers can review their contract and request more free time (within reason), longer payment terms and higher service level commitments from carriers, for example.
4. Should we drop the providers who treated our company badly during the under-capacity crisis?
We all know that the last two years have been hell for many transport executives tasked with moving products for their companies in a crazy shipping market. Many shippers have battled with terrible service levels and freight costs, straining their business relationships with ocean carriers and NVOCCs, who appeared to enjoy super-profits despite offering poor services.
Once we see many provider options become common to get capacity at reasonable prices, it will be tempting for logistics buyers to “seek revenge” against ocean carriers and NVOCCs they were tied-to due to lack of alternatives.
“It will be tempting – but not advisable – for shippers to ‘seek revenge’ against and drop previous ocean carriers and NVOCCs.”
Our view on these questions is that for most companies seeking reliable logistics and long-term improvements in operations, the continuity of business relationships remains critical and tolerating cyclical market stresses is necessary. There are now only 9 global ocean carriers. Most medium and large-size BCOs will need to work with 5 or more of them for the foreseeable future.
Restoring business relationships will be a key consideration in 2023.
Ocean freight and carrier management services from Drewry
Is your organisation best placed to meet the challenges of today’s market and prepared for the future?
Extreme freight rate volatility, unpredictable lead times and capacity concerns have exposed significant weaknesses in conventional bid and carrier management strategies. A new approach is now needed which gives ocean freight logistics teams a better understanding of the market and fosters long term supplier relationships that improve service continuity and cost predictability.