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Q: What is a good freight rate?

In Articles Freight Supply Chain Posted May 10, 2018 at 1:33 pm
By Bernadette Habkouk

freight rates

A: Depends on how you define good freight rates.

Getting the right deal is based on your point of view and the importance you place on your supply chain. It depends on the nature of your supply chain, what type of service you need and the focus and attention you place on supply chain optimisation.   In short, it depends on you.

The saying “you get what you pay for” has never been more relevant than in the current market conditions. The costs and business consequences of something going wrong can far outweigh a minor saving in rates.

We recently met with a shipping line representative to get a global perspective on the Australian shipping market as well as some insight into future pricing trends.  We put to them some of questions we are often asked in conversations with importers and exporters. Here is what they said.

“Demand and supply has a big impact on freight pricing. The past 12 months have been interesting for the Australian market. The start of last year was one of the strongest export years of late, the second half flipped, and imports were very strong.

The good weather and a quality crop season meant high exports last year. This year is the opposite. Low crop yields have delayed the start of the export season. Conversely, we have seen a very strong import year and import volumes are on the rise.

We expect freight rates to hold strong during 2018 based on the current trend. We also expect peak season will start earlier with higher import volumes putting pressure on space.  Importers need to be prepared.

Changes amongst shipping lines have had a big impact on the rate shifts we are seeing now. At present demand is high and in some parts of the world supply is scarce for various reasons. If the space stays the same, the pricing will stay strong.

There has been an increase in the Named Rates levels each year for the last couple years and minimum TEU requirement has also been set on higher levels. The appetite overall has changed.

As in other business contexts, relationships matter. Shipping lines will always prioritise the space requirements of long terms clients or regular shippers, especially in peak season when space is tight.  This can mean that those who shop around for rates throughout the year might find it difficult to get bookings at all when space is at a premium.”

If you pay a comparatively premium price, you will most likely get your goods faster, on a more reliable service and experience fewer space issues. In times of need you will experience better service from your close partners than someone you transact with only occasionally.

We have written before about the importance of mitigating your supply chain risks and creating sustainable relationships with your partners. One important question to ask now is, do you have an effective supply chain rate strategy in place that considers market intelligence and delivers on your goals?

The following list is some of the factors that contribute to freight pricing.  We think we will be a few in here you might not have been aware of:

  • Bunker Prices (or BAF) the floating part of sea freight charges which represents oil prices.
  • Currency adjustment factor (CAF) is a fee placed on top of freighting charges to offset any losses from fluctuating exchange rates.
  • Service Changes: Whenever there are significant changes in services, capacities, alliances etc., this affects rates and opens opportunity to renegotiate.
  • Space: The bigger the imbalance between supply and demand for space, the bigger the discount or premium.
  • Weight: Some trades can be weight restricted prior to being space restricted.
  • Equipment: On each trade lane carriers know whether they have a deficit or surplus of each container type.
  • Cross Subsidies: Both customers and carriers can use cross subsidy tactics between trade lanes or container types to their advantage.
  • Risk: Your volatility of a trade will determine whether you pay a premium for a longer validity or get a discount for the promise of long term support.
  • Extension to detention free time can increase rates as the lines prefer their empties returned quickly.
  • Intended destination: In simple terms, the longer the journey, the higher the shipping rates.
  • Season: Seasonal cargo (eg fruit and vegetables) will have higher cargo rates during their seasons.
  • Fines and Fees: If there is any delay in reaching port due to over-crowding, there might be a fine imposed.
  • Terminal Fees: Fees at origin and destination known as terminal fees also affect freight rates.

Finding the balance between price and service isn’t easy when so many factors must be considered but investing the time to ensure you are sitting comfortably in a range that provides value to your business is key.

Smart supply chain professionals understand that true savings are in the innovative and creative ways they can successfully measure and improve their supply chain and not just in freight rates.

Questions you can ask yourself include:

  • Does your partner give you a deal which delivers on value as well as price?
  • Is your partner transparent and are you being informed of key relevant market intelligence?
  • Does the rate reflect your supply chain goals or is there pressure on your operation because of a tight agreement?
  • In times of need, have you been offered solutions?
  • Have you been able to rely on your partner through the high season as well as the low season?

Your supply chain is one of the most critical parts of your business – you should always be looking for ways to improve it.  Choosing a logistics partner you can trust to navigate in this uncertain environment is essential if you want to get ahead and stay there.

Partner with a forwarder who understands this and will work with you to develop shipping solutions that weigh rates against your long-term objectives. For a confidential discussion about your supply chain get in touch with me today on +612 9153 0864 or via email.

At Magellan Logistics, we provide a variety of services including digital freight management, importing from China and more throughout Australia. Contact us today for more information.

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