A New Era For Container Shipping: What C-Suite Executives Should Expect as Shipping Pricing Models Change

We are on the cusp of a new era in shipping; one in which the basic practices to which we’ve grown accustomed will no longer exist. Competitive advantages will be achieved by the organizations who drive out inefficiencies and can interpret real-time data.

The market for container freight rates has long been analog and opaque. Carriers offered their best prices and services to shippers with the most volume, and shippers with less volume found themselves paying substantially higher prices. This practice caused a self-perpetuating cycle where the largest shippers leveraged their lower landed cost to grow market share, and smaller shippers struggled to compete and grow.

Today however, following a wave of digitization which hit the container shipping industry, carriers have begun to move away from volume-based pricing toward market-based pricing. Innovative shippers now have the opportunity to use proprietary freight procurement algorithms that allow them to dynamically match their shipping volumes with the optimal service and price that the carriers are offering. In this report, I’ll show you how.

The container shipping industry is digitally transforming in three phases.

Phase 1 - Past - Up to 2016: Since the end of the liner conference era (i), the market for container shipping has been opaque and relationship driven. Carriers competed fiercely for the largest shippers because the cost to serve per container for a large shipper was substantially lower than it was for a small shipper. Consequently, carriers would offer their best prices to the largest shippers, and all other smaller shippers would be offered higher prices. Another feature of the competition was driven by carriers being very flexible to the needs of the shippers; for example, allowing shippers to change and cancel bookings at the last minute.

Phase 2 - Current - 2016 to 2020: With continually declining freight rates and poor financial performance of the carriers, aggressive cost cutting followed. One of the key focus areas has been to digitize and reduce the cost to serve shippers by having them buy online, allowing the sales force to focus on more value adding tasks (ii). Another key focus area has been to stop the costly practice of booking changes and cancellations by shippers at the last minute, which causes vessels to sail underutilized (iii) and undermines the carriers’ ability to sell their shipping services online. 

Phase 3 - Future - 2020 onward: As the sale and pricing of container shipping moves online, and as carriers gather the wealth of data generated in the process, carriers will develop dynamic pricing capabilities that allow them to adjust their prices based on real-time changes in supply and demand. Furthermore, carriers will also use market data to optimize their networks and vessels (iv).

As we enter phase three of the digital transformation, carriers will begin to price based on the market, or more specifically, based on the available supply and demand. NYSHEX has been a facilitator of this change (v), providing a digital contracting platform to six of the top ten carriers and establishing a fair and compliant mechanism for contract performance monitoring and enforcement. Now the door is open for shippers to use the same supply and demand data, coupled with algorithm-based procurement models, to ensure they are optimizing shipping costs and establishing a strategic advantage in this area. 

NYSHEX technology overview and how savvy shippers can utilize it for a competitive advantage

  1. NYSHEX operates a multi-carrier pricing system where multiple shippers and carriers can buy and sell space on container ships. The NYSHEX technology dynamically matches offers and requests (bids) to form digital forward freight contracts between shippers and carriers. The system integrates directly with each carrier as well as the US Federal Maritime Commission, which allows contracts to be digitally filed to ensure compliance, and each shipment is tracked to ensure contractual fulfillment.
  2. NYSHEX holds security(vi) for each contract, providing a financial incentive for the carrier and shipper to meet their respective contractual commitments. Once the contract has been fulfilled, NYSHEX settles the payment of the freight with the carrier on behalf of the shipper. However, if the contract is not fulfilled, the NYSHEX system identifies where the breakdown took place in the shipment process, and determines which party is in default. NYSHEX then pays liquidated damages to the party who was not at fault, and offsets against the security provided by the party in default.
  3. Registered members of NYSHEX are therefore able to view and accept carrier offers digitally. In addition, shippers will soon be able to access the live offer and contract data in near real time through APIs. This data could then be utilized by shippers in three practical ways:
      • The merchandising teams can calculate landed costs on the fly, which is particularly useful when sourcing from origins that may not be included in the service contract and during peak periods where allocation on the service contracts may be exceeded.
      • The logistics teams can benchmark the live rates with long term service contract rates to ensure the optimal prices and services are always selected when each shipment is booked, provided the long terms service contract MQCs are fulfilled. This will allow them to take advantage of arbitrage opportunities (vii).
      • The procurement and supply chain planning teams can analyze historic and forward data to formulate market insights. For example, equipped with these insights, shippers will be able to plan shipments to take advantage of lower prices in excess supply periods, and avoid shipments in periods of excess demand (viii). Success in using freight procurement algorithms and NYSHEX to optimize landed costs will provide a strategic competitive advantage. 

Why NYSHEX?

  1. NYSHEX is widely used by many leading shippers, evidence by 468% annual growth rate in TEU contracted.
  2. NYSHEX is also trusted by six global carriers representing all three global alliances and 52% of global capacity (x).
  3. NYSHEX has an agreement with the US Federal Maritime Commission (FMC) that provides unique rights to establish standard form contracts for our participating six member carriers (xi).

A 2016 Alix Partners report Ocean Shippers Need to Think Short Term warns, “Shippers can’t count on the annual request-for-proposal processes that worked in the past. [They] need more flexible ocean freight procurement models—such as mitigating freight uncertainties through the spot market.” The writing was already on the wall three years ago. Today, the most innovative of shippers have seen this to be true and begun using a hybrid of both long term and short term contracting. Competitive advantages are no longer exclusive to the largest shippers, but to the most savvy.

Sources:
i US Ocean Shipping Reform Act of 1998
ii Seatrade: http://www.seatrade-maritime.com/news/europe/container-lines-should-follow-airlines-business-modelwith-digitalisation-maersk-chief-skou.html (April 2018)
iii JOC: http://www.joc.com/maritime-news/container-lines/issue-no-show-containers-highlightsindustry%E2%80%99s-inefficiencies_20160925.html (September 2016)
iv McKinsey: https://www.mckinsey.com/industries/travel-transport-and-logistics/our-insights/how-containershipping-could-reinvent-itself-for-the-digital-age (October 2017) 
v Maritime Executive: https://www.maritime-executive.com/article/maersk-joins-the-nyshex-platform (January 2018)
vii According to the NYSHEX Rulebook, security can be provided in cash deposit, bond, or credit agreement (June 2019)
viii NYSHEX does not recommend that any shipper move volumes off an existing service contract onto a NYSHEX contract unless the agreed MQC or allocation on the existing service contract is fulfilled, and the volume moved onto NYSHEX is surplus volume.
ix Adjusting cargo flows to benefit from changes in ocean freight rates will need to take into consideration the inventory holding costs and required in DC dates.
x NYSHEX member carriers are Maersk, CMA-CGM, Hapag Lloyd, OOCL, COSCO, HMM (June 2019).
xi Supply Chain Dive: https://www.supplychaindive.com/news/fmc-grants-nyshex-approval-governancecontracts/512573/ (December 2017)