August 3, 2022
The Economics of Ocean Freight in 2021 and Beyond
As a logistics technology provider, Logward lives and breathes the economic model of ocean freight, which allows us to better understand the supply and demand side drivers of the capacity shortage in the ocean freight market, both leading up to and during the pandemic and its ongoing effects. Time and time again throughout 2020 and 2021 we've seen the benefits of allocation management as an approach to circumnavigating limited TEU capacity.
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TEU Capacity and supply side factors
Over the past 20+ years, the TEU capacity growth rate has decreased. When examining the decrease in supply, factors from “business as usual” times get compounded by events that happened in the wake of COVID-19. Example of those include:
- Vessel demolition - for 10 years preceding the pandemics carriers demolished old vessels at increasing rates
- Low vessel growth - orders for new vessels sit at historic lows
- Sailing speeds - vessels sailing slower leads to less ports reached per vessel
- COVID bottlenecks - carriers reduced vessels operating certain routes during port closures and sent empty containers from Europe/North America to Asia
World Throughput and demand side factors
Since Spring of 2020, containership earnings per day have soared as global demand rebounded significantly with consumers and companies ordering more goods. Taking a closer look at the underlying root causes, factors during normal times compounded by COVID-19 shipping consequences can again be seen:
- China opens, West closes - as goods became available to send from china, pandemics lockdowns ensued in the West, causing a build-up of containers to be sent
- People buying more goods - consumption switched from services to good during the pandemic economy, leading to more shipping to be needed
- Normal cyclical nature - freight market has constant shift in long and short-term demand
Allocation Management as a partial answer
To combat volatility in the ocean freight market, shippers procure their rates in advance through tenders. Despite running tenders to establish pricing and volume ahead of time, beneficial cargo owners (BCOs) struggle to track their performance against their allocations. As a result, when a carrier denies a booking request or attempts to roll their cargo, the shipper is unable to reference the commitment in a fact-based demand for space.
This is where Logward's Allocation Management product comes in. After automatically loading the tender results of the shipper, we match the volume by time period, port-pair, container size, calendar week, etc., with the service string of the respective carrier in synchronization with the carrier viewpoint. The result, available for easy viewing and searching, is the basis for a fact-based approach to transport planning.
To further explore this topic, and to learn more about the benefits of Logward's Allocation Management (such as improved OTIF performance and reduced rolled shipments).
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