Freight rate rises squeeze trader profits

By Davide Ghilotti
Published: Tuesday, 19 January 2021

The recent surge in container freight costs and limited cargo space are disrupting flows and crushing traders’ profits.

A combination of fewer vessels on the water, an imbalance in trade flows to and from China, and competition between cargoes has kickstarted a rapid increase in shipping costs for container freight out of China. The higher rates have already affected prices for a number of commodities, including white fused alumina (WFA), graphite and manganese flake.

Costs are spiraling to record highs on major routes out of China, including to Europe, North America, India, the Black Sea, and North and West Africa. Several market sources described an increase in their container freight costs of anything between 70% and 150% over the past in November quotes, against second-quarter rates. Quotes increased every few days in the second half of November, sources said.

Quotes for the China-Northern Europe (main ports) route increased from less than $1,000 per 20ft container in April 2020 to $1,800-2,500 per container, although some sources said they were quoted close to $3,000 per container. Other routes recorded increases of a similar magnitude.

The China-India route was quoted by two Fastmarkets contacts at around $2,000 per full container load (fcl), compared with $350-750 earlier last year. For China-US, traders were quoted more than $5,000 per fcl in mid-December 2020. The China-Ukraine route via the Black Sea – quoted in previous months at $1,500-2,000 per container – increased to more than $3,000 per container, according to sources.

Caught in the middle

Traders, distributors and other intermediaries between producers in China and end-users in Europe and other destination markets will be the ones that bear the brunt of the freight cost surge on existing orders, sources told Fastmarkets. As a large share of supply agreements are settled with buyers on a cif destination port basis by intermediaries, any subsequent changes to logistics costs – such as those that have been happening recently – are owed by the latter.

Cargo Ships

"On all of our signed cif [agreements], there is nothing we can do. I, as a trader, have to make up for the higher costs. We’ll lose so much money [on those transactions]," a trader said.

"I spoke to my customers about this, but they said, 'It’s your problem. This is why we use you and don’t go direct.’ And they’re right: there is a degree of exposure that, right now, the buyer is protected from, if he has agreed delivered terms with us," a second trader said.

Three more intermediaries speaking to Fastmarkets all said they would be quoting only on an fob China basis in future offers, with the freight rate excluded.

"When I signed my supply contract, I had a calculation of $40 per tonne for freight, China to Rotterdam. That was based on our existing agreements [with carriers] to determine future costs. Now it’s $80 per tonne, $90 per tonne in some cases," a third trader said.

Space tightness

The surge in container freight costs has developed concurrently with a progressive tightening in vessel space available on carriers. Ship owners reduced the capacity of ships on water at the height of the Covid-19 pandemic last year, when global trade flows ground to a halt, and have yet to return those vessels to active operation.

Fewer ships are on water and those are running on a reduced sailings schedule. At a time of rising demand from the global trade industry (in conjunction with the end-of-year purchasing period as well as a rebound of imports while national economies try to bounce back from pandemic-induced weakness), the lack of space on ships has given way to long delays and tight availability.

"Space on the ship is, arguably, a more pressing matter than the freight cost itself," one distributor argued, suggesting that carriers, once a vessel is over-booked, would pick parcels with the highest agreed freight rate to maximize their per-shipment income.

This can generate a vicious cycle between shipping rates and space, the source added: "If you can find a slightly better rate, that might mean you won’t get the space on the ship because your cargo is cheaper than others. If then the cargo is not loaded and the quote loses its validity, you are left with no shipment and you have to start again."

Surcharges

Surcharges are another set of issues, on top of standard shipping rates. Sources maintained surcharges have also been rising fast, compounded by the limited availability on vessels: the tighter the space on the ship, the higher the surcharge.

One Chinese mineral supplier said of the latest quotes he received for routes to the Mediterranean and to North Africa: "To guarantee the container availability, there is a surcharge of $500 per box [for 38 containers in total]. Once you add the surcharge to the fob price, [I incur] a negative profit margin of 24% in [one route] and 17% on the second route."

Other sources added they are being quoted additional MFR (marine fuel recovery) surcharges of $310 and $296 respectively for North Europe and the Mediterranean.

While market participants have seen the highest increase in container freight costs from China to Europe and North America in recent weeks, other routes underwent the same rise earlier last year. Several destinations in Latin America went from $300-750 per container in previous months to around $4,000 [in December 2020], one exporter said.

One European importer said he "just about managed" to secure a cost of $1,850 per container into Rotterdam, although the peak season surcharge (PSS) added another $400 per container, adding: "My freight cost has increased by 150% with these quotes."