East-West Shippers See Contract Rates Slide

Ocean freight rates for cargo moving under contracts on the major East-West trade routes saw another reduction in the last quarter of 2015, 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 5 percent between August and November last year, another fall on top of the sharp decline we saw during the third quarter of 2015.

The reduction in contract rates was driven by a combination of lower fuel costs, excess vessel capacity and intensive competition between shipping lines. Bunker costs fell notably from the fourth quarter of 2014 and this contributed to a reduction in contract rates negotiated over the course of last year. The fall in the Drewry Benchmarking Club Contract Rate Index between February and November 2015 was as much as 14 percent. This trend was also reflected in the spot market.

Some of the fall in contract rates was the result of carriers granting shippers temporary reductions in contract rates to secure cargo. Drewry notes that a small number of shippers are using spot market rates for a proportion of their volumes. We advise some caution with this approach as volume and space guarantees are not normally warranted which may pose a risk, especially during peak periods.

“As expected, contract rates reduced further through the latter part of 2015, as the effect of falling fuel costs and continuing overcapacity weakened market rates,” said Philip Damas, Director of Drewry Supply Chain Advisors. “Given the volatility of rates in both the spot and the contract market, more shippers are turning to Drewry’s Benchmarking Club to ensure that they are securing the best rates in the market”.