CAREFUL WHAT YOU WISH FOR - WHY CALMER WATERS ARE BETTER THAN LOWER RATES
Shippers may be wishing for lower rates but this probably isn’t the best solution for ocean freight. What’s required are higher, more sustainable freight rates along with logical, transparent implementation of a new device – the Emergency Bunker Adjustment Factor (EBAF). This article explains why.
Nobody wants to hear of freight rate increases right in the middle of a contract. But this isn’t the worst thing that can happen.
Over the past few months, a perfect storm has been building for ocean freight rates. While shippers everywhere have been wishing for lower rates to facilitate and ease global trade, there is more and more uncertainty about the global economic outlook, especially as the world’s key economies now seem to be moving along divergent paths. In March this year, global business optimism dipped sharply to a 16-month low and weaker business sentiment was seen across all four of the largest developed economies. This wasn’t helped by fears of rising interest rates in some regions and new tariff measures between the US and its main trading partners, as even a limited tariff war might begin to wear down global economic growth.
In this unsettled context, one certainty is that ocean freight carriers are under pressure. As of May 2018, they all appeared in the Drewry’s Altman distress zone and most reported significant operating losses. Clearly the usual balancing techniques are not working well enough – adjusting capacity and blank sailings, prioritizing high-volume cargo, inching upward with door rates and spot rates.
Despite three consecutive positive quarters in 2017, a turning point was reached in Q1 2018 when carrier margins and earnings started to sink. On average, the eleven largest carriers published a 3.3% drop in operating (core EBIT) margins, the worst performance since Q3 2016, and attributing this to increasing bunker costs and weakening freight rates. To remain buoyant, every company that transports ocean freight around the world desperately needs a new device to push through rate increases, and this has appeared in May in the form of the so-called Emergency Bunker Adjustment Factor (EBAF).
Ocean freight carriers are justifying EBAF as an effective method of offsetting fuel price increases that haven’t been factored into existing freight rates. This sounds fair enough, but it has plunged shippers into considerable confusion – different companies are taking wildly different approaches and using opaque calculation methods. DHL Global Forwarding has found that some carriers are simply charging a flat fee per container, irrespective of journey length, vessel size, or trade lane while other carriers are making a clear, logical link between fuel price impact on individual containers.
Given these recent waves and whirlpools across the world’s oceans, perhaps instead of low rates the best that shippers can hope for are calmer waters. To bolster carrier stability, the industry should wish for ocean freight rates that are a bit higher yet a lot more sustainable, along with increased EBAF transparency. Here at DHL, we recognize the need for floating BAF agreements going forward, and we are working closely with our partner carriers to help mitigate impact for our customers and for our own business. What are we wishing for? A much more settled situation in 18 months’ time.