Freight Ratesheets & Tariffs

 

Freight rates for shipping and transporting goods are going through the roof. What happened and why do we see such an unprecedented surge in freight rates?

 

Freight rates for shipping containers from China to Europe and the US have gone up to the unseen levels. The Shanghai Containerized Freight Index (SCFI), which is used to measure the average spot rates from Shanghai on the major trades, increased by 3x compared to last year (or any other year for that matter). For example, freight rates from Shanghai to the US West Coast rose to a new record of $4,054 per TEU – a 20% increase!

 

1. The Corona Combo

 

The lockdown is a direct effect of the COVID-19 pandemic in 2020. First, it was the lockdown in China at the beginning of the year, and a couple of months later  – everywhere else in the world. The economic lockdown affected the flow of goods: due to the closure of factories and plants, bookings were canceled. This resulted in blank sailings and capacity cuts. Passenger planes stopped the delivery of the airfreight cargo, causing a surge in prices for the limited capacity of the cargo planes.

During the summer of 2020, the flow of goods continued almost “as usual“.  But then, another unexpected Corona effect kicked in – the change in consumer behavior.

As Vincent Clerc (Maersk CEO) put it: “We hadn’t foreseen just how Covid would be able to change consumer patterns,” he said, adding that acceleration in demand has been the fastest in at least 10 years. “People use a much, much higher portion of their wages on goods.”

It’s true. There is a change in the spending patterns. When the services became unavailable (restaurants, beauty, tourism, entertainment just stopped), people switched to buying more physical goods that need to be transported. Retail sales in the U.S. in December rose by 4.8% compared to the same period in 2019, causing the surge in demand.

 

2. The Shortage of Equipment

 

A conspiracy theory goes like this: all shipping lines had a secret meeting and decided to send half of their equipment to an uninhabited island far away. This theory could be false, but the truth is that there is a significant imbalance of empty containers on Asia-Europe trade.

Commitment agreements with the shipping lines used to be a space and equipment guarantee in the past, but it doesn’t solve the problem anymore. Even with commitment in place, it’s close to impossible to get an empty container in China these days. Carriers introduced a number of surcharges, pushing rates even higher. For example, Maersk Line is working on a number of initiatives called ‘Delivery Promise’ which should replace the standard ‘commitment’ agreement.

This is very frustrating to shippers. They have to accept the new rules of the game: “Ongoing service unreliability, coupled with the record profits of shipping companies at times of crisis, clearly depicts a seriously disrupted market and demonstrates that carriers have been passing tremendous hikes on spot rates, imposing heavy surcharges above the fixed-term contractual rates,” says Denis Choumert, president of the European Shippers’ Council (ESC).

 

3. Supply & Demand is King

 

COVID-19 and the equipment shortage are both valid reasons for the current freight rate spike. However, the main cause for the rate fluctuations on the market is always the supply & demand balance (or imbalance, to be precise). The lockdown contributed to increasing demand and the lack of shipping containers in Asia resulted in a limited supply. Consequently, freight rates have doubled.

Market forces are the main driving factor behind the freight rate fluctuations. Factors such as fuel prices, distance traveled, terminal costs, etc. don’t impact freight rates as much as supply and demand do.

According to the United Nations Conference on Trade and Development (UNCTAD):

“In general terms, the demand and the supply of maritime transport services interact with each other to determine freight rates. While there are countless factors affecting supply and demand, the exposure of freights rates to market forces is inevitable. Cargo volumes and demand for maritime transport services are usually the first to be hit by political, environmental and economic turmoil. Factors such as a slowdown in international trade, sanctions, natural disasters and weather events, regulatory measures and changes in fuel prices have an impact on the world economy and global demand for seaborne transport. These changes may occur quickly and have an immediate impact on demand for maritime transport services. As to the supply of maritime transport services, there is generally a tendency of overcapacity in the market, given that there are no inherent restrictions on the number of vessels that can be built and that it takes a long time from the moment a vessel order is placed to the time it is delivered, and is ready to be put in service.

Therefore, maritime transport is very cyclical and goes through periods of continuous busts and booms, with operators enjoying healthy earnings or struggling to meet their minimum operating costs.”

 

The Conclusion

 

Shipping lines are finally in a good place, making up for the previous years of low margins. Ships are loaded with high yielding containers, the spot market is at an all-time high, and the customers are forced to accept higher rates when signing new long-term contracts.

Freight forwarders make the biggest margins on the fluctuating market, so they are in a good place, too. Although, their sales and booking teams must be under a lot of pressure now.

Importers and exporters, on the other side, have to deal with the new reality of shipping rates. Their dilemma is difficult – accept the “ridiculously high” spot rates, or wait until the market will “normalize“. But as the wise saying goes: “It’s very difficult to predict, especially the future”. Who knows, maybe these rate levels are the new normal?

by Marcin Zarzecki, CEO of Quotiss

This is the second part of the article, which covers the numerous errors in freight ratesheets distributed by the shipping lines. In the first article, I illustrated that there is a clear lack of unified standards across the carriers. Even within the same shipping company different offices use different formats when it comes to preparation and distribution of the freight ratesheets.

In this post, I will dig deeper into the discrepancies we’ve witnessed during our freight simplification journey at Quotiss. I will not give the names of the carriers for obvious reasons, but I can assure you that there is no single carrier in the world that has their rates structured to the optimal level.

So far, we’ve covered the most common discrepancies:

• Rate structure

• Delivery method

• Local exceptions

Now let’s look at other examples when things go bad because of the lack of standardization and proper tools.

 

Inconsistency in Location Names

 

 Shanghai is one of the biggest ports in China and in the whole of Far East Asia. Shanghai port is included in the rotation of all major shipping lines.

When you look for Shanghai in a freight ratesheet, you can see the following variations of its name: “Shanghai”, “Shanghai, CN”, “Shanghai, China”, “CNSGH”, “CNSHA” or even “China Main Ports” which sometimes is shortened to ‘CMP’ or ‘ECMP’ (for East China). These names are not commonly provided as a standard unified code (UNLOCODE).

The same carrier can use different abbreviations for the same port. We also witnessed the situation, where the carrier had one set of NCMP (North China Main Ports) in one contract and another set of NCMP in the other contract. Both contracts were sent to the same freight forwarder within the same week!

 

Inconsistency in Freight Surcharges

 

Freight rates consist of basic freight (BAS) and freight surcharges. Some freight surcharges are already included into BAS and some are excluded (quoted separately). There is no regulation of including or excluding freight surcharges and it can vary across the same carrier contract.

For example, in week 1, the bunker surcharge can be included in the basic freight rate. In week 2, the bunker surcharge is given as a separate freight surcharge. In week 3, the bunker surcharge is again included into the basic freight rate. This is common practice.

Obviously, there is no unified naming convention for the surcharges. For example, bunker surcharge can be abbreviated as BAF, SBF, or BUC. Low sulfur surcharge can be called LSS, LSF, or ECA – depending on the carrier you use.

 

Inconsistency in the Outport Rates

 

Many shipping lines provide the main port rates and attach a separate table with the outport additionals. For example, BAS for Shanghai – Hamburg is 1000 USD / FFE, and Hong Kong is 50 USD / FFE on top of Shanghai, which means that BAS for Hong Kong – Hamburg is 1050 USD / FFE. When Shanghai – Hamburg rate changes, Hong Kong additional remains the same – 50 USD / FFE on top of Shanghai. This is a relatively easy way to present the rates, as statistically, main port rates change more often, than outport additionals. This makes a lot of sense, and it saves time and resources on the rate reprocessing.

But we’ve seen freight ratesheets with all-in main port rates and a separate page with all-in rates for the outports. There is no logical commercial explanation for this – just a clear lack of proper tools.

 

Consequences

 

All these inconsistencies are both the cause and effect of the broken shipping process. They make it impossible to digitize pricing and bring the quoting online.

• Shipping lines waste time and resources on sending bulky freight ratesheets and struggle with invoice quality, losing millions on internal inefficiencies;
• Freight forwarders receive hundreds of freight ratesheets in unstructured and inconsistent formats, waste their time processing the data and struggle with the invoice quality;
• Shippers wait for freight quotes for hours and deal with the inconsistencies in the formats.

Some industry players vote against displaying freight rates online, as it may start the price wars and drive the margins down. Commercially valid reason. But still, there is no logical explanation for the mess in the pricing of the shipping lines.

What about the freight marketplace, where a client can compare the rates of different carriers and book his freight online automatically with the selected provider? What about digital freight forwarders, who promise a fully automated service from A to Z?

Any automation must start with the standardization. In the case of container shipping, it must start with the simplification.

We believe that until all shipping lines agree to use the same port naming convention, unify trade and port surcharge structure, and agree on the way the rates are presented and distributed to the client, it will be very difficult to build a platform to compare shipping rates online.

Once the pricing is simplified, the quoting can be dramatically improved, as we do it in Quotiss.

Click here to register online. We’ll activate your company’s profile and help with the initial settings and user onboarding. You can start uploading your freight ratesheets and quoting freight instantly on the same day we sign the deal.

by Marcin Zarzecki, CEO of Quotiss

There are many good things one can say about container shipping and its global impact on the world economy. But shipping lines are also very well known for sending very complex and unstructured freight ratesheets. During my time in Maersk, where I spent over 10 years in the sales function, I was often struggling with the challenges of the pricing and quoting policies, despite Maersk being one of the most advanced carriers and the global leader in this aspect.

One of the reasons why I started Quotiss 2 years ago was to simplify ocean tariff management. By this time, we have collected a lot of data.

By now, I have seen thousands of freight ratesheets from various shipping lines, and I had time to analyze their structure very thoroughly. Conclusions are surprising and not too cheerful: this tremendous complexity comes from the internal inefficiencies and ‘broken’ processes of the shipping lines themselves.

 

The Data

The analysis is based on the data collected from the ocean tariffs that are uploaded into the Quotiss software by freight forwarders. The data has a healthy mix of various parameters:

–         Freight forwarders who use Quotiss software work with most of the major shipping lines – we studied the specific rate formats of all major ocean carriers;

–        Freight forwarders who use Quotiss software come from different parts of the world – we studied the differences in the rate format based on the specific country/office which prepared the rate sheet;

–        Freight forwarders who use Quotiss software work with shippers in different industries – we studied the differences in the NAC / special freight rates/exceptions format.

The Analysis

 

Let’s look at Far East Asia – Europe ratesheet generated by one of the major shipping lines.

1.      The structure

This rate sheet contains 15 000 port pairs, 109 000 lines with rates and surcharges, 545 000 unique rates for all equipment types. It is 500 000+ unique rates in a single freight ratesheet for just one trade/direction, with the validity of 2 weeks maximum.

 

2.      The delivery method

This freight ratesheet has been emailed to a freight forwarder as Excel file in attachment. Freight rates on the Asia-Europe corridor change very often, sometimes even a couple of times per week. Let’s assume, the average update frequency is weekly. This means, that every week, a bulk load of freight ratesheets with half a million rates each is generated and sent by email to hundreds of freight forwarders globally.

That is 500 MILLION unique freight rates that are being updated and distributed on the market, all by just one shipping line on one trade/direction.

 

3.      Local specifics

Everyone in the industry knows that different shipping lines send their freight ratesheets in different formats, like .xls, .pdf, or just copy-paste Excel table to the email body. But only a few people know that even within the same shipping line, different offices might use different templates and formats. Sometimes, even within the same office, salespeople send freight rates in different formats.

These format discrepancies within one company usually come from the big list of exceptions that are specific to the country/port.

There is a clear lack of the unified standard across the ocean carriers, which comes from the lack of standard software solutions that would be capable to cater for the giant list of local exceptions in an automated way.

 

The Conclusion

 

The saddest part is that over 99% of contents inside these freight ratesheets will never be used by anyone. Statistically, almost all cargo traffic on Far East Asia – Europe trade lane is generated by 20% of ports. Pareto Rule works for all trades in ocean shipping.

There is a lot of waste in the process. Shipping lines realize this waste and work hard to improve the quoting process by trial and error, implementing various custom-made software solutions. But improving the ‘spreadsheeting’ is like putting lipstick on the pig – doesn’t make it any more pretty.

 

The Solution

 

Is there any solution to bulky freight ratesheets? There is an obvious and logical one: for the real change to happen in container shipping, ocean carriers have to simplify and unify their pricing structure across all offices/trades.

Once the pricing is simplified, the quoting can be dramatically improved, as we do it in Quotiss. In my next post, I will dig deeper into the most common errors which we see in the freight ratesheets.

Everybody loves pizza!

Over 5 billion pizzas are eaten every year in the world. It is a 30 billion dollar business, and more and more new pizzerias are opening. Probably, one of the reasons is that the ‘pizza model’ is universal and extremely simple to replicate! No matter which country you go to, pizza looks round, ingredients are similar and the menu has the same structure everywhere. There are traditional all-time favorites like ‘Margherita’ or ‘Peperoni’, etc (the base), with a separate list of customizations in the form of extra toppings.

Nobody Loves Freight Rates… 

Over 100 million containers are shipped every year in the world, forming the backbone of the current economy. However, the ‘shipping menu’ aka freight tariffs  – unlike pizza menu – is extremely complicated, with unique complexity to the freight pricing structure.

Imagine going to a pizzeria, where you have to wait for an hour to get a menu, because all possible customizations are put together manually upon request, for each table separately. And you can never be sure that you got the full menu at the right price. Well, this is the reality of the freight tariffs in container shipping.

 

Hub and Spoke vs Point to Point Model

 

You might say that pizzeria has nothing to do with freight shipping, but actually they share the same business model. The model is called ‘Hub and Spoke’, named after a wire wheel. The classic form of this business model is seen in the aviation industry: each airline has a hub airport, used as the base for operations. The airline provides a number of regular connections, some ‘unusual’ connections at higher prices, and presents a list of extra paid services for passengers.

The wire-wheel consists of many different parts and internal links, but in the end everything is interconnected and spinning. The great advantage of this model is that the pricing can be highly accurate. The product is consistent because there are no individual variations.

 

Hub and Spoke in Shipping

 

The shipping industry is the pioneer of the hub and spoke: large ship takes the container to a hub port, the small ship takes it to a small port, and truck delivers it to the client. Must be simple and efficient, right? Operationally – yes, but not commercially.

Commercially, each mode of transport for this container is a complex calculation in itself – it consists of various surcharges, special terms, seasonal add-ons, and individually negotiated charges. And the worst part – freight rates change weekly. At this point-to-point commercial structure, container shipping loses efficiency and creates long lines of unhappy clients, waiting for days for their freight rates.

At the attempt to solve the problem, many technology companies try to digitize freight pricing and quoting process ‘as is’, which does not bring the expected result – before digitization, the broken process has to be fixed.

At Quotiss, we tackle the main problem of the industry from a different angle: instead of digitizing the enormous complexity of freight rates, we dramatically simplify the freight rate management process, reducing the number of variables in the equation.

Freight rate complexity can be reduced by 99%, following the data patterns discovered by Pareto 100 years ago.

Quotiss sales automation software generates 100% accurate quotes in seconds. The software is user-friendly and tailored to the freight forwarding business. It brings order and structure.

 

Would You Like a Quick Start with Quotiss?

 

Click here to register your company. We’ll activate your company’s profile and help with the initial settings and user onboarding. You can start uploading your freight ratesheets and quoting freight from Quotiss on the same day we sign the deal.

In the previous post “Pricing Challenge in Container Shipping” we mentioned that it’s not easy to structure freight tariffs and send instant freight quotes. The reason being the high complexity of the transportation costs: up to 25 variable charges plus the overall rate volatility caused by the supply and demand imbalance.

Looking at the whole end to end process, it seems logical that transportation price consists of multiple components because the cargo literally travels half of the globe one way. However, importers and exporters do not like that complexity when it comes to paying freight invoices. The issue often sparks debates and the most popular solution on the table is to quote All-IN rates in order to limit the number of charges in question and simplify the pricing structure.

At Quotiss, we support any process simplification, and we also offer a solution to the complicated freight rates.

 

Why Do Freight Rates Change Often (Technically)

 

Rate volatility is an issue that adds complexity to the freight rate management process.

Let’s take a closer look at the ocean freight rate structure to check where this volatility originates. Out of all components, the majority of freight and local charges are fixed and change very rarely, for example THC (terminal handling charge). A few charges change approx. every quarter, like BAF (bunker surcharge). Some of the charges are seasonal, like PSS (peak season surcharge) or WSC (winter season surcharge).

There are many different surcharges when it comes to ocean freight, there is only one that changes very frequently. It is BAS (basic freight).

Technically, basic freight (BAS) is the main driving force for ocean freight rate volatility. Following the 80/20 rule of Pareto, if there is an efficient tool to manage frequent BAS changes, then 80% of the ocean freight tariffs will be updated automatically.

 

Why Do Freight Rates Change Often (Commercially)

 

Simple and straightforward – freight rates are determined by supply and demand. Market forces are the main driving factor behind the freight rate fluctuations. Factors such as fuel prices, distance traveled, terminal costs, etc. don’t impact freight rates as much as supply and demand do.

In recent years, shipping lines have been building bigger and bigger ships to benefit from the economy of scale. The global economy has also been growing but at a much slower pace. That distortion resulted in an increasing gap between supply and demand. This is the main and most important reason why freight rates are hitting the record low values in recent years. Cheaper fuel may also contribute to the overall picture, but it will never be the most significant factor. Ocean shipping companies won’t be able to keep rates from sliding if they don’t idle more ships.

According to the United Nations Conference on Trade and Development (UNCTAD):

“In general terms, the demand and the supply of maritime transport services interact with each other to determine freight rates. While there are countless factors affecting supply and demand, the exposure of freights rates to market forces is inevitable. Cargo volumes and demand for maritime transport services are usually the first to be hit by political, environmental and economic turmoil. Factors such as a slowdown in international trade, sanctions, natural disasters and weather events, regulatory measures and changes in fuel prices have an impact on the world economy and global demand for seaborne transport. These changes may occur quickly and have an immediate impact on demand for maritime transport services. As to the supply of maritime transport services, there is generally a tendency of overcapacity in the market, given that there are no inherent restrictions on the number of vessels that can be built and that it takes a long time from the moment a vessel order is placed to the time it is delivered, and is ready to be put in service.

Therefore, maritime transport is very cyclical and goes through periods of continuous busts and booms, with operators enjoying healthy earnings or struggling to meet their minimum operating costs.”

 

Complexity vs Simplicity

 

The end customer (importer or exporter) does not really care about all these factors. They just need to know what is the total price for transporting a container from A to B. They want the best freight quote, which is easy to understand, as soon as possible.

Shipping lines and freight forwarders face numerous troubles managing millions of ocean freight rates. They struggle to provide freight quotes quickly and accurately. The majority of forwarders still use MS Excel spreadsheets to manage rates.

E-mailing of the bulky MS Excel files back and forth is often the main communication channel between pricing and sales teams. Millions of MS Excel files are sent back and forth, which leads to the loss of revenues and increases the count of manual errors.

At Quotiss, we tackle the main problem of the industry from a different angle: instead of digitizing the enormous complexity of freight rates, we dramatically simplify the freight rate management process, reducing the number of variables in the equation.

Freight rate complexity can be reduced by 99%, following the data patterns discovered by Pareto 100 years ago.

Quotiss sales automation software generates 100% accurate quotes in seconds. The software is user-friendly and tailored to the freight forwarding business. It brings order and structure.

 

Would You Like a Quick Start with Quotiss?

 

Click here to register your company. We’ll activate your company’s profile and help with the initial settings and user onboarding. You can start uploading your freight ratesheets and quoting freight from Quotiss on the same day we sign the deal.