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.

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.

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’?

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