FBX Index: A new element of freight rate risk

The development in freight rate levels has been extreme over the past year. Nothing historically comes close to describing the rate increases seen on major head haul trades, and yet despite the sharp increases this is not even the most dramatic development. There is a secondary element of the freight rate developments where the changes - and hence risk to the costs of a supply chain - have diverged to an even larger degree.

First, to set the stage, consider the developments in the spot rates as measured by the Freightos Baltic Index (FBX).

The trade subjected to the largest boom in demand is the Transpacific. Rates to the USWC were mainly around 1500 USD/FFE in the beginning of 2020 prior to the pandemic. By the end of 2020 they had increased to 4000 USD/FFE and by the end of June 2021 they are just below 7000 USD/FFE. This is a dramatic 367% increase.

But this is not even the worst impacted trade. Before being impacted by the rate increases, the Asia-North Europe trade came from a level around 1500 USD/FFE. By the end of June 2021 we are now at 11000 USD/FFE. An increase of 633%.

But as if such increases did not in themselves elevate freight risk to an entirely new level, there is a second component which has seen an even more extreme development.

The FBX also provides data on the spot rate pricing range - i.e. the spread between the high and low end of the market.

For the Pacific trade to USWC this spread was 550 USD/FFE in June-August 2020. Coming into 2021 this initially escalated to more than 2000 USD/FFE, by mid-May it expanded beyond 3000 USD/FFE and the measurement for 21 June saw the gap widen to as much as 6,000 USD/FFE. In other words, the rate difference in the market has grown by almost 1000% over just a single year.

This development is potentially even more important than the rate increase itself.

In a simple world where everyone pays the same freight rate, a sharp increase in rate levels would ultimately lead all importers to increase their sales prices.

But consider the development in the Pacific. A shipper able to obtain pricing at the lower end of the spot market would have seen rates increase from 2200 USD/FFE a year ago to 5300 USD/FFE now. At the same time a shipper unable to secure rates at the lower end of the range would have paid 2700 USD/FFE a year ago but today have to pay 11200 USD/FFE.

Consider two US shippers both importing large appliances. The retail value of their cargo is 30,000 USD if they are selling appliances at the lower end of the market.

An importer able to secure the lower rates would have seen his freight costs go from 7% of the retail value to 18%. Indeed problematic. But an importer only able to secure the higher end of the rate levels would have seen freight costs go from 9% to 37% which would not be financially sustainable.

Another way to look at it would be that the importer with the low freight rate used to have a revenue of 27,800 USD after freight but is now seeing 24,700 USD. The importer with the higher rates has seen his revenue after freight decline from 27,300 USD to 18,800 USD.

If the importer with the lower freight rates decided to pass on the extra costs to the customer, their retail price would increase to 33,100 USD. In this case the importer maintains same port-freight profitability as before.

But if the importer with the higher freight costs also increases his sales price to the same level they would still see their margin reduced from 27,300 USD to 21,900 USD - a 20% decline.

This means that managing the risk exposure to not only the freight level itself, but also the widening spread in the market has become a critical competitive parameter for importers - and if the spread persists this will result in significant shifts of market share and profit within importer business segments.

About Lars Jensen, CEO, Vespucci Maritime

Lars is a leading expert and thought leader in analyzing global container shipping markets. Lars has 19 years' experience hereof the last nine within multiple companies he has founded, with the main focus as CEO of Vespucci Maritime.

Receive monthly container market reports direct to your inbox.