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Expert Column Ocean Freight Rate Defense Strategies for Shipping Companies

Registration dateFEB 22, 2024

 

Ocean shipping companies have been facing immense pressure to maintain freight rates amidst falling demand and overcapacity. With spot rates plunging, carriers are employing various strategies to defend freight rates and stabilize the market. This article examines the major freight rate defense tactics deployed by shipping lines.


Slow Steaming

Slow steaming involves deliberately sailing container ships at lower speeds to reduce the supply of vessel capacity on trade lanes. With lower sailing speeds, fewer voyages are made over a fixed period, tightening capacity.

The average speed of container ships this year was 13.88 knots, the lowest on record since tracking began in 2008. This is down about 3% from last year's 14.29 knots and down 4% from 14.49 knots in 2021, when freight rates were particularly high. It is also about 3.5% lower than the pre-pandemic 2019 rate of 14.36 knots[1].

As mentioned earlier, slow steaming of container ships is an effort by carriers to reduce total supply during the recession. Slow steaming can also reduce costs, as slowing down a container ship by one knot can reduce fuel consumption by as much as 10%.

However, there are also downsides to slow steaming. Customers may be dissatisfied with the increased transit time, and if they need their cargo delivered quickly, they may prefer a carrier that offers faster service over one that slows down. Therefore, when applying a slow steaming strategy, it is important to understand customer needs and market conditions to determine the appropriate vessel speed and schedule.


General Rate Increases (GRIs)

General Rate Increase (GRI) is a strategy used by shipping lines around the world to periodically increase fares on some or all routes. It is usually based on a specific date and is applied when a shipping company sees the necessity to raise fares due to various factors such as an imbalance in supply and demand, changes in the market, etc.

GRIs are implemented periodically for reasons such as rising costs. The purpose of GRI is as follows:

  • To respond to rising costs - By applying GRI, fares are raised to offset costs such as fuel costs, labor costs, and port charges.

  • To improve profitability - When there is oversupply of ships, shipping companies are not profitable due to lower freight rates. To address this problem, they will try to improve their profitability by applying GRI. In other words, they can use GRI to offset the increase in operating costs and stabilize their revenue.

  • To respond to market changes - The flexibility to adjust freight rates according to changes in the market can help maintain or improve competitiveness.

However, GRIs are not always successful. For example, the U.S. West Coast and East Coast routes saw fare increases in April, but a GRI in May failed, resulting in no fare increases. In June, the fares increased again, but then decreased back down.

GRI has continued to be applied up to date, with major carriers announcing their GRI plans in September. For example, Maersk announced a significant per container freight rate increase on the India-North America route.

There are also downsides and risks involving GRI. Consistent and large rate increases can lead to customer dissatisfaction. In addition, an excessively high GRI can cause customers to move to other carriers, which can lead to a loss of market share in the long run. Therefore, carriers need to exercise careful judgment when determining and applying GRIs, taking into account market reactions, customers, and business strategy.


Adjusting Vessel Capacity and Routes

As one of the strategies to stabilize freight rates and reduce costs, carriers consider adjusting their vessel capacity or choosing different routes.

In recent years, major carriers have significantly reduced their vessel capacity on North American routes compared to last year. For example, MSC reduced capacity by 35%, Maersk by 19%, HMM by 25%, and COSCO by 7%[2]. As a result, weekly supply on the North American route in June fell 23.3% year-on-year.

In another strategy, following the Suez Canal's transit fee hike, carriers have opted to use the Cape of Good Hope in South Africa, where no transit fee is charged, instead of passing through the Suez Canal on the Europe-Asia route. The steady increase in transit fees by the Suez Canal Authority over the past year, coupled with declining volumes, are the main reasons for this decision. Currently, the tolls of the Suez Canal is about 100,000–300,000 per container vessel, while bypassing the Cape of Good Hope can save around $1 billion per year including additional fuel costs.


Introducing and Adjusting Surcharges

Another strategy for freight rate defense is the introduction and adjustment of surcharges.

Container Imbalance Charge (CIC) plays a key role in solving the issue of unbalanced container supply and demand between import and export destinations. The CIC enables an efficient response to the supply and demand of empty containers.

In addition, Bunker Adjustment Factor (BAF) enables carriers to respond to rapidly fluctuating global oil prices. This surcharge mitigates the burden of fluctuating oil prices and serves as a basis for carriers to adjust their fuel costs. The BAF allows carriers to effectively overcome the instability of oil prices and mitigate the burden of rising fuel costs.

Exchange rate instability also has a significant impact on shipping companies' business. To minimize the risk of exchange rate fluctuations, many companies have introduced Currency Adjustment Factor (CAF) to minimize the exchange rate risk of international payments.


Conclusion

In an oversupplied market with falling freight rates, ocean carriers employ various strategies to defend rates and stabilize the industry. Slow steaming, general rate increases, capacity and route adjustments, and surcharge mechanisms are some of the key tactics used. However, each approach has its pros and cons. Shipping companies need to carefully evaluate market conditions, customer requirements, and long-term competitiveness when determining the optimal freight rate defense plan. With prudent strategy and execution, ocean carriers can ride out the market storms.