Do Shippers Share Blame for the Mess Ocean Freight Rates Are In?

It’s the historically low ocean shipping rates that have in large part created the ongoing Hanjin crisis and the pervasive insecurity in the global ocean shipping markets. A lot has been written about the cause and effect of such low shipping rates with most articles coming to the simple conclusion that it’s all the carrier’s fault.

This is something we have written about ourselves a few times:

What’s Behind the Continued Low Ocean Freight Rates?

Why Are Ocean Rates So Low?

But while carriers clearly own a big part of the responsibility, it’s actually not quite that simple.

Shippers are, understandably, motivated to act in their best interest. Usually this means negotiating to get the best freight rates possible. No one would expect otherwise. In fact, many logistics managers would be fired for doing anything different.

While the pricing tactics used by the carrier lines are sometimes questionable, shippers have played a role in the lower freight rates. Shippers want stable pricing to be able to determine margins. However, pricing can be volatile and many shippers do not want to abide to their contracts when prices drop.   When spot rates fall, shippers want to make sure they are getting the best rate, and can be quick to move volumes to ocean carrier competitors in order to take advantage.

With some consideration, this discussion feels like another variation on the age old logistics dilemma of choosing cost or service. But now, ocean shippers are getting what they pay for not just when it comes to service and transit times, but also by risk and insecurity for the industry. By paying rates shippers know are not sustainable, everyone is setting up themselves and the entire ocean cargo industry for a potential catastrophe.

Here’s a recent article on the topic – Shippers ‘played a major role in Hanjin collapse’

In other words, it’s not the individual shipper’s poor decision that created the Hanjin problem and got their cargo stuck on a ship, but the collective action of all shippers that pushed such risk into the system.

It’s interesting because overcapacity and low pricing aren’t new concerns, nor is the perspective that shippers have some accountability too. Here’s an article from back in 2012 – Who’s to Blame for Ocean Carriers Loses?

From the article, “even major shippers say they would be open to higher freight rates, if the result were more reliable service – but their actions don’t always match their words.”

Again, this is not an argument blaming shippers for the current state. But given the history of the industry and trajectory of ocean prices these current problems shouldn’t be a surprise to anyone. It logical to anticipate many similar problems are on the horizon for shippers if the trend does not change.

What’s Behind the Continued Low Ocean Freight Rates?

It’s well publicized that global ocean container rates are at near historic lows. And despite speculation about things improving for carriers, every attempt by the industry to change this has failed to gain traction – at least yet.

Of course, there is no single reason why ocean shipping rates are so low or why the industry is hurting. Like any other, global shipping is a highly cyclical industry which is very much dependent on market forces and the economic principles of supply and demand. It’s commonly accepted that, at the moment, there is an over-supply of ships and tonnage capacity whereas the demand for trade has dwindled. But of course, there’s more to the story.

The Shanghai Container Freight Index shows the extent of the drop in cargo freight rates over the past 2 years.


The initial catalyst for what the industry is experiencing stems from the “Great Recession” going back to 2007. Leading up to this period was a lot of global economic growth, as well as optimism for the future. Ocean lines invested aggressively in bigger and better ships.

This was encouraged by infrastructure changes as well, like the ability of many large ports to accommodate bigger ships and the now complete Panama Canal enlargement project. Both enabled carriers to build bigger ships and have added significant capacity to the industry.

Today, this has continued despite many container lines coming to a realization that these large ships haven’t offered the economies of scale that they had expected. Industry experts are predicting that the global economy is not, and will not, grow fast enough to absorb the increase in the global container fleet. The story is not looking to improve either. By virtue of pending new ship orders, capacity is expected to grow by 4 to 5 percent per year through 2018.

To counter this oversupply and attempt to lift dismal freight rates, some ship owners are resorting to scrapping and recycling. This is happening with ships as young as 15 years old. The average age for scrapping a ship is normally around 30 years.

Container lines are getting desperate in other ways, such as increasing the frequency and types of surcharges being added to invoices. This is much to the frustration of freight forwarders and shippers. Some are even offering $0 rates with the simple goal of covering a portion of their costs via these same surcharges.

Oversupply, competition, and dwindling trade are forcing the container lines to fight for bigger market share of a pie that is now much smaller. And, here we are with freight rates at historic lows.

For now, it’s a good time to be a shipper. But the market is cyclical and things will come around to the benefit of carriers eventually. They have to. Smart freight forwarders and shippers realize this and are taking a long term approach with their procurement strategy for the upcoming bid season.

Why Are Ocean Rates So Low?

Few things have more impact on the global economy than ocean cargo rates. Along with labor, the efficiency of global ocean networks is what’s enabled the globalization of manufacturing and impacts the price of almost everything we buy.

Despite their importance, ocean shipping rates are surprisingly unstable at times – and right now are at near historic lows. This is obviously good for many reasons in the short term, but not necessarily a positive in the long run.

The following is a graph of the Baltic Dry Index (a common industry benchmark index) showing the declining tendency of rates over the past few years.  According to the Telegraph:  “The Baltic Dry Index, a benchmark for the health of the global shipping industry, has recently plumbed all-time lows.”

There are many factors that have pushed ocean shipping rates to these historically low levels. The primary reasons are a function of supply and demand – with political and economic uncertainty, as well as equipment overcapacity being the largest.

As happens with other industries, the current state of the ocean shipping market was shaped by decisions made by many in the industry a long time ago. In the early 2000’s, optimistic projections about global growth pushed many ship owners and carrier lines to increase the average TEU capacities of the new vessels they built.

Better port infrastructure and other improvements, like the planned expansion of the Panama Canal, also enabled bigger ships to be built. New technologies and international regulations led vessel owners to seek to improve the efficiency of their outdated fleets with the promise of cutting costs and operating better. It’s for these reasons the capacity in the industry exploded and the term “Mega-Ship” was born.

For a time during this period, the available capacity was not enough to keep up with demand. But as capacity increased it eventually exceeded demand, helping to push rates down to where they are today.

So if larger ships explain supply, what happened to demand?

For one, much of the forecasting and optimistic expectations for global growth that led carriers to add for capacity never happened (see the global recession from 2008). Recession aside, the current economies of many important countries and regions are still struggling – including Russia, Brazil, and the European Union. Uncertainty about China sustaining its growth is also a persistent concern for the global economy.

So, what’s next?

Struggling with low base ocean rates, most shipping lines have increased the fees and surcharges they charge on top of base rates as a way to protect their margins. This helps the carriers, but makes rate and contract management challenging for freight forwarders and shippers. It’s likely this tactic will not go away anytime soon.

Shipping lines will continue to remove equipment and, in some cases, even scrap ships in an effort to reduce capacity. The trend for large ocean lines to form alliances will also continue as a way for carriers to operate more efficiently and control over-capacity.

In the end ocean shipping rates are like any cyclical marketplace – rates move with supply and demand. An equilibrium will be established in time, continuing the cycle.

Why Are Freight Rates So Volatile?

Change is the only constant – or so the adage goes. This is especially true when it comes to global logistics and ocean freight rates in particular.

There are several reasons why ocean carrier rates change so often and are subject to extreme volatility. The main forces impacting rates can be factors like the state of the global economy, equipment capacity, and the cost of fuel. Of course, in the end rates are really a function of supply and demand.

In the current market, the Chinese economy plays a pivotal role in determining global shipping rates. China is now, by many measures, the largest economy and imports the majority of the world’s natural resources such as iron ore, copper, chrome and coal. Adding to that, the rest of the world buys a huge amount of finished goods from China. The point is, a lot of the world’s freight moves into, or out of China impacting the ‘demand’ side of the equation.

China’s growth rate has slowed to 6.5% in 2016 which is the lowest it has been in almost a generation. This lower demand from China has been disruptive to the logistics marketplace pushing freight rates to their lowest levels since 2009 – which was considered to be one of the worst years in history for ship owners and container operators.

Recent spot rates from Asia to the US West Coast and US East Coast ports were around $815 and $1,520 per 40 foot container respectively – also the lowest for this trade lane since 2009. Things are so critical there have been reports of carriers charging a base rate of $0 for lanes exiting China.


But China is not the only reason. The current drop in ocean freight rates is also the result of a massive oversupply of container ships. As capacity is added, or leaves the market, freight rates move as well.

Buoyed by the promise of cost savings, the deployment of mega ships by the major ocean carriers like Maersk, MSC, CMA-CGM, China Shipping, Cosco, and MOL has increased in recent years. However, as noted by Drewry Maritime Research, mega-vessels have failed to produce improved economies for owners as promised and the gamble seems to have backfired. Carriers are faced with overcapacity (as much as 20 to 30%) which has resulted in freight rates dropping drastically. Maersk Line, the world’s biggest container shipper with more than 600 container vessels, reported a 61% drop in net profit for the third quarter of 2015.

There does not appear to be much optimism for rates to stabilize anytime soon. Drewry further advises that insufficient measures to reduce ship capacity will lead to a continued acceleration of freight rate reductions and industry-wide losses through 2016 at minimum.

Other factors contributing to volatile freight rates have been the fluctuating price of oil, the impact of the newly widened Panama Canal, and the formation of new carrier alliances or others being dissolved.

But, as with most markets, ocean cargo rates are cyclical. Despite how it seems today, it’s likely just a matter of time until carriers better optimize capacity and the Chinese economy comes out of its slump.

Of course, no one can say for sure exactly when this will happen. When do you feel freight rates will stabilize, or are we in the ‘new normal’?