Fluctuating freight rates are forcing a rethink of how businesses ship products from the Far East to Europe.
The sea freight industry is as unpredictable as the waters the ships cross. Freight rates can be calm for days on end before hitting an all-time high and then crashing down again.
The Far East to Europe shipping route, one used by many UK clothing retailers, has long been fraught with volatility, usually as a result of supply and demand. The Shanghai Containerised Freight Index (SCFI), which reflects the Shanghai export container transport market’s spot rates, reveals prices for a Twenty Foot Equivalent Unit (TEU), otherwise known as a unit of cargo, have ranged from $649 (£403) to $1,934 (£1,202) over the past few years.
Sea freight rates have been particularly volatile this year, according to Suzanne Reid, fashion logistics manager at GAC Logistics. She puts it down to “a void in the supply chain caused by a drop in demand for goods in the US and Europe and the subsequent slowing of clothing production in countries like China, India and Bangladesh”.
To tackle the spiralling costs, many carriers have announced price rises from November, although like many times before, whether this hike will remain in place remains to be seen.
This constant volatility is an issue for everyone involved in the supply chain, from freight forwarders to shippers and retailers.
Paul Miller, director of inbound logistics at home shopping business Shop Direct Group, says: “Why can’t we agree that TEU rate in a form of contract? There will always be vagaries in the spot market and some businesses can operate in that way. But for those that need assured regular supply of space, there is a need to align to the necessary lines and agree what success looks like.”
Budgeting and forecasting is the key challenge for retailers, because nobody can guess where the market will go.
Mike Danby, chief executive of logistics firm Advanced Supply Chain, says that due to the majority of companies placing orders from their overseas suppliers up to four months in advance, retailers can only plan and budget using historical figures.
“This means retailers are left with no option but to guess future freight prices and continually gamble with their forecasted profitability,” he adds.
Miller concurs: “It creates a whole set of issues for budgeting, not to mention the obvious difficulties for trading teams in making sourcing decisions across the globe.”
This volatility is impacting retailers’ margins, according to Dave Gaughan, operations director at freight forwarder Kerry Logistics. “Ultimately margins have been eroded this year since some shippers have been unable to factor the increase in freight costs into the product price.”
However, Ian Morrissey, finance and logistics director at streetwear brand Supremebeing, says: “The increase in rates does affect us but not a huge amount.” He says if the price of a container rose by $500 (£315), for example, it would increase the cost of each item by around 1p. “It’s not such a big squeeze on margins,” he adds.
And despite the major challenges, experts suggest there are some ways retailers can attempt to ride the wave.
Jonathan Gibson, principal of supply chain consultancy Crimson & Co, says retailers should first try to combat any rises by addressing internal processes, particularly the management of supplier timelines and ensuring products are delivered on time.
“This ensures money is not wasted through having to deliver products late or producing and shipping products that aren’t required,” he adds.
Many suggest working together with logistics providers to manage their supply chain.
“Retailers and supply chain providers alike should be looking to drive down costs in all areas of the supply chain, particularly in making every effort to achieve container fill by means of consolidation,” recommends Danby.
Maintaining relationships with industry peers and freight forwarders is also important, according to Steven Toovey, head of import export and global logistics at Aurora Fashions.
“We have excellent partnerships with our key forwarders which negotiate on our behalf,” he explains. “With them we carry out plenty of live benchmarking and have the ability to change routing very quickly between services if there’s a clear advantage not to be missed or we need to react to a situation.”
But one industry insider disagrees that retailers should attempt to ease the situation by building relationships with carriers.
Instead, he says: “When there’s slack in the market loyalty with the containers gets you nowhere. They forget loyalty when the market picks up. If you want loyalty go down to Battersea Dogs & Cats Home and get a dog.”
Many retailers, typically the bigger players, try and combat the volatility by fixing their rates 12 months ahead. However, this brings its own disadvantages, according to Stewart Firth, head of operations at supply chain logistics firm Torque Logistics. “This comes with a premium and limits the options to use alternative carriers mid-term if changes to transit times make another line more desirable.”
Gaughan adds that many shippers remain concerned that fixed-rate contracts may lead to more limited flexibility and carrier choice. He says they are “concerned about the implications if carriers renege on the rate agreement or limit space allocations if more attractive business is available on the spot market”.
Another way Aurora Fashions deals with the turbulence of freight rates is by forward managing the costs. Toovey says: “We look at our projected and actual rates throughout the year and fix what we call a trend uplift for our buyers. This has the effect of smoothing the potential peaks and troughs and ensures buyers do not need to constantly consider rates and can focus on buying the right product.”
One way to try and remove the constant volatility in the market is to fix a rate by using freight derivatives, which allow shippers to hedge their freight costs. Container derivatives are settled against the SCFI, which shows a weekly all-inclusive Cost Insurance and Freight (CIF) rate on 15 routes out of Shanghai.
Gaughan says there are plenty of advantages to this business strategy: “Freight derivatives give shippers a natural hedge that essentially guarantees a fixed rate for a future period.”
Richard Ward, research analyst of container derivatives at broker ICAP, says that as fixed-rate contracts are not usually legally binding, and either party has been known to walk away from the agreement, derivatives can offer shippers “certainty and flexibility”.
While a possible solution to this fluctuating market is air freight, Toovey believes it’s not a cost-effective solution. He says: “Sea freight at the highest rate so far absolutely outweighs the cost of putting stock in the air.”
But predicting what will happen with freight rates continues to be difficult. As Michael Flanagan, chief executive of sourcing information firm Clothesource, says: “When it snows we all ask ourselves whether it will stick or not. Then the moment we go out it’s melted. This is how it works with price rises. They announce them and there’s no way of knowing whether they’ll stick or not.”