Supply Chain Consulting

Big Reductions in Container Contract Rates for East-West Shippers

Big Reductions in Container Contract Rates for East-West Shippers
Logistics Manager

Ocean freight rates for cargo moving under contracts on the major East-West trade routes have already dropped by 20% in the year to February and are on course to see further deep reductions from May, according to Drewry’s Benchmarking Club, a closed user group of multinational retailers and manufacturers who closely monitor their contract freight rates.

The Drewry Benchmarking Club Contract Rate Index, based on Trans Pacific and Asia-Europe contract freight rate data provided confidentially by shippers, declined by another 5% in the three-month period between November last year and February.

This meant a 20% cut when compared with rates in February 2015, showing an acceleration of contract rate erosion, even though lower fuel charges accounted for the minority of the reduction in rates.

Because many transpacific exporters and importers are finalising negotiations of new eastbound Pacific contracts to be effective from May 1, Drewry expects a further fall in contract rates during the 2nd quarter of 2016. The specialised procurement consultant is involved in freight tenders via its new eSourcing Ocean Freight SolutionTM platform and has also seen large reductions in contract rates in the confidential bids received in recent months from carriers but not yet implemented into new contracts.

“Following the price war in the spot container shipping market started in late 2015, the contract market is now also going through a catch-up reduction in prices,” said Philip Damas, Director of Drewry Supply Chain Advisors, speaking at the Global Liner Shipping conference in London earlier today. “By monitoring contract rates every quarter within the closed user group, companies can determine how well they rank on contract rate levels among their peers and can get increased confidence on actual contract rates which can be secured in today’s very weak market.”

While exporters and importers are enjoying big reductions in their ocean procurement costs this year, the next trend for shippers could be how to identify and work more with carriers who can maintain reliable service levels despite their revenue pressures and the risk of carrier service instability.

The closed user benchmarking group monitors not only detailed comparative contract rates, but also comparative transit times and direct/transhipment service features. Rate validity and free time days are also provided.

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