Falling freight rates and the concept of ‘negative’ rates.

The fluctuations in shipping rates have intensified since the pandemic first struck, and in the aftermath of it, some trade routes experienced unprecedented downward pressure on prices. In recent news, it was reported that freight rates on the India intra-Asia trade lanes have tumbled to as low as USD 1 per teu (Nhava Sheva or Mundra to Port Kelang). On the other hand, the rate to Singapore has fallen to USD 5 per teu, and to Hong Kong has sunk to USD 10 per teu.

According to freight forwarders in real terms, cargo is often booked at ‘no freight cost’, but has to be invoiced for a nominal freight amount for insurance reasons. Additionally, the Indian Customs regulations also have a major impact on the India intra-Asia rate trends. Regulations require carriers to re-export empty boxes, covering duty-free cargo, within six months of landing at an Indian port to avoid incurring import duty. As such, excess inventory is generally shipped back to origin or demand locations.

Amid the falling rates, an intriguing price concept that has emerged lately is ‘negative freight rates’ – a situation where cargo is booked for shipment at rates so low that, in real terms, it is effectively transported for free, or in some cases, the shipper may even receive payment for carrying the cargo.

A well-placed industry source explains, “Freight consists of multiple components like slot cost, bunker charges, etc. Because bunker prices fluctuated consistently during the pandemic, for the most part, shipping companies made the freight rates all-inclusive.”

Basically, even when the bunker charges fluctuated due to fuel price volatility, the freight rates remained the same, keeping a certain level. The freight prices skyrocketed initially as COVID-19 took over, however, a year later, the industry saw a stark reversal with excess capacity in ocean freight shipping and other critical supply chain components. This surplus capacity suppressed prices, eased inflationary pressures, and contributed to the decline in global shipping rates. Being a demand-supply game, if the supply increased and demand dropped, the rates needed to be reduced.

If it became zero, it was actually possible that containers had to be moved so that they could be sent and could collect terminal handling charges at various ports. And the containers were shipped full, rather than going empty to their destination. If these containers have to be evacuated from ports where demurrage and detention costs are high, or from ICDs, for not being utilised in the present and near future, they would be sent to ports where they’d be utilised.

Consequentially, freight forwarders and carriers are now accepting bookings at ‘no freight cost’ in many cases i.e. documenting, for insurance reasons, nominal freight amounts. Despite this nominal invoicing, the actual revenue generated for carriers may be minimal or even negative, as the rates offered to shippers barely cover operational costs, making them somewhat ‘pseudo-earnings’.

Interestingly, rates in the reverse direction i.e. imports, for some of these port pairings have trended up in recent weeks. For instance, imports into Indian ports like Nhava Sheva and Mundra have seen a rise in teu rates offered by major carriers from destinations such as Singapore, Shanghai, and Hong Kong. This increase is reported to be around 30% higher compared to previous prices.

Also Read: Maersk hikes rates on Asia-North Europe lane, intimates for other regions too

But hopes are turning up for shipping companies now that few carriers have started adjusting their rate strategies, especially for Asia. For example, Hapag-Lloyd and MSC have announced modest rate hikes for container loads from India to the US East Coast, with Hapag-Lloyd implementing a USD 200/teu hike and MSC considering a USD 500/teu hike, both effective from 1st August 2023. Also, there is optimism surrounding trade and demand resurgence in Asia, and trade diversification in the region is being observed as a potential catalyst for growth.

Negative freight rates, a concept that could only be imagined a few years ago, have become a reality in the post-COVID world. The surplus capacity in ocean freight shipping, combined with regional factors like Indian customs rules and trade dynamics, has contributed to this phenomenon. While carriers are cautiously implementing rate adjustments to maintain viability, the market remains uncertain.

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