Ocean cargo rates continue to fall…is that a good thing?

Ocean freight rates for cargo moving under contracts on the major East-West routes have seen a sharp reduction since the beginning of the year, 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 7 percent between May and August this year, the steepest fall since the Benchmarking Club was established in March 2014.

The fall in contract rates has been driven by a combination of lower fuel costs, excess vessel capacity and intensive competition between shipping lines. Bunker costs have fallen notably since the fourth quarter of 2014 and this has contributed to a reduction in contract rates negotiated since the first quarter of this year, which has accelerated in recent months. This trend has also been reflected in the spot market.

Prior to this there was some strengthening in Asia-Europe contract rates agreed at the end of 2014 when market conditions were stronger.

However, as the spot market has weakened and bunker surcharges fallen, contract rate levels have since deteriorated. Some of the fall in contract rates was the result of carriers granting shippers temporary reductions in contract rates to secure cargo. As a result, the Drewry Benchmarking Club contract rate index declined 5 percent in the 12 months to August 2015.

“We expect contract rates to fall further through the remainder of this year, given falling fuel costs and continued overcapacity in the market,” said Philip Damas, Director of Drewry Supply Chain Advisors.

Due to non-disclosure agreements with all shipper members of the Benchmarking Club, Drewry cannot share detailed cost benchmarking intelligence with companies which are not members of the Club. Unlike other indices, the Drewry Benchmarking Club contract rate index measures freight rates under annual contracts rather than spot freight rates