Adjusted contract rates for season 2021-22
Carriers will seize contract rates due to the changing global demand
The last decade was dominated by overcapacity on the carrier side, which kept rates consistently low and led to very thin sales margins for shipping lines. The Covid year 2020 impacted the global economy and trade lastingly and set new rules for the logistics industry. The spike in demand in the second half of the year led to a breakdown of several supply chains and exhausted capacity within the global shipping industry.
Limited shipping capacity and high demand set a chain reaction for skyrocketing carrier rates and soaring share prices. This development will affect the coming months and the upcoming contract season 2021/2022 with a new framework between shippers and carriers. A rocky transition is expected to adapt the conditions to the “new normal.”
The carrier rate roadmap during the pandemic
Undoubtedly, Covid-19 impacted everyone and every sector around the globe. After a steep decrease in demand in the pandemic’s first wave, the durable and non-durable goods demand increased to a record high, peaking in the Christmas holiday season in the US and Europe. This demand spike led to a capacity bottleneck for many carriers overall in the Asia-Europe and Transpacific lanes.
This uneven recovery of global economics led to more demand than capacity and translated into record-high carrier rates. This problem grew more significant as the carriers exporting from Asia to the US or Europe couldn’t get their empty containers back. Industry watchers observed that desperate companies waited weeks for empty containers, paying premium rates in the process.
The container shortage provoked increasing rollovers in all of Europe and put shippers under pressure to balance costs, delivery on-time, and guarantee reliable customer service. Between October and December of 2020, delays went up by almost 50%, and by the end of January 2021, this problem is far from solved. The market became a “carrier market” that now dictates the price range for the global shipping market.
The future outlook of carrier rates and shipping capacity
The pandemic triggered the long-expected changes in the shipper-carrier-relation. A step back to the “old normalcy” is, in the current situation, unthinkable. A reformation of the contractual framework between shippers, forwarders, and carriers will come up in the next months. How this new contract will look is yet to see.
The current situation suggests that rates due to the high demand will stay high in the next months. Afterward, contract conditions need more dynamic pricing to a more flexible reaction for the global demand-supply-situation.
Shippers have to prepare to find a very different carrier industry on the negotiation table for the next season. Carriers managed the demand in a very profitable way during the pandemic and won’t go back to the low rates they charged before. Discrepancies already appeared as shippers accused carriers of breaching their short- and long-term contracts to charge enormous shipment rates. This outlook will make negotiations rocky as shippers will face a problem with the unpredictability of the contracts regarding capacity, time, and price.
Carriers will change the near-term and long-term perspective to react to altered shipping dynamics and react more flexibly to the situation. The “new normal” may change the contract cycle from an annual to a semiannual or quarterly contract. Short-term contracts may be an excellent compromise to adapt rates and capacity more dynamically. Until a solution for long-term contracts is found, the carrier also may have a higher focus on the spot market, which steadily grew in 2020 and presents an interesting alternative for carriers instead of relying on long-term contracts.
Nonetheless, in the upcoming months, carriers will continue to profit from the capacity crunch. As demand keeps increasing, contracts between carriers and shippers will most likely remain an unenforceable promise than a binding agreement. After years of shippers enjoying a capacity surplus, the ball is now on the carriers’ court. Carriers are expected to keep rates buoyant to reflect current demand until global demand-capacity equations are balanced out.