The Importance of Reducing Freight Rates and Maritime Transport Costs

ABSTRACT. Freight rates in 2011 and at the beginning of 2012 often remained at unprofitable levels. Within containerized cargo substantial freight rate drops have been reported. Vessel oversupply can be indentified as a driving factor behind this development. The investment in large capacity within container segment accelerated competition as ship operators were willing to accept freight rates below or close to operating costs. While freight rates have declined or remained at historically low levels, ship operating costs have grown moderately. In addition, bunkering prices continue to recover from their collapse during the economic crisis, offsetting temporary freight-rate increases. This paper proposes and discusses three strategies for individual countries to influence transport within their seaborne network. These include development of costal shipping and efficiency programmes for ports. In addition, policies should be applied that aim at improving the port connections with hinterland markets.JEL Codes: N70; R41; R42; R48Keywords: freight rate; container shipping; transport cost; costal shipping; port connection1. IntroductionThis paper presents an analysis of maritime freight rate developments for containers shipping. It highlights significant events leading to major price fluctuation, discusses industry trends and gives a selective outlook on future developments of freight markets.Transport costs remain an important component of the price of the goods when purchased by the final consumer. High maritime transport costs for imported goods impact the price level of the basket of consumer goods. Conversely, excessive freight rates for exports affect the trade competitiveness of the products of a country in the global markets. Hence, countries may want to define approaches to reduce inbound and outbound maritime transport costs in their trade with partners.2. Container Freight RatesHaving experienced one of the steepest freight rate cuts in history in 2008, the recovery remains sluggish in 2011. Current freight rates are still far from reaching pre-crisis levels, having experienced another downturn in the second half of 2011 after a temporary resurgence. Time charter rates for container ships declined from May to December 2011 for most ship types, reaching a loss of 66% within the 2,300-3,400 20-foot equivalent units (TEUs) class (see Table 1 and Table 2). This is reflected by the New Con Tex index, a condensed container freight rate indicator covering a wide range of ship sizes, which experienced a dip of 60% of its value from May to December 2011. New Con Tex is a container ship time charter assessment index calculated as an equivalent weight of percentage change from six Con Tex assessments, including the following sizes: 1,100, 1,700, 2,500, 2,700, 3,500 and 4,250 TEUs. The purpose of the coverage of more vessel sizes within the New Con Tex index is to give a more comprehensive picture of container shipping market developments.An overstretched container cargo market on the supply side precipitated the low freight rate levels in 2011. While the demand is currently still recovering from the seaborne collapse during the financial crisis, the growth rates of the global container carrier have remained relatively stable, due in part to shipowners not being able to withdraw from their buying contracts. In addition, ship operators suffer from substantial bunkering price increases that are not reflected in developments in freight rates.As a result, the industry has experienced aggressive pricing policies of boxship operators competing for market shares (Drewry, 2011). Many box carriers are still operating at a loss, incenting them to cull capacity on unprofitable trade routes and/or raise prices for shippers. An example is Hanjin, which announced freight price increases of between $200 and $400 on routes linking Asia to Northern Europe and Western Africa.Companies such as CMA CGM, CKYH and OOCL cut their capacity on the transatlantic lanes (Lloyd's List, 2011). …