Container freight volatility
– fluctuation at most, clarity at worst
As a measuring the service price of the world economy, there are different types of approach. If we approach measuring freight transport, statistic division in each country produces import/export service price index under the agreement in the inter-governmental organisation, to measure buying/selling price of commodity, there is a consumer price or manufactoring index. At the same time, raw materials or energy such as coal, fuel oil prices are being measured in the global association.
Likewise, for the ocean container freight rate, some institutes are producing the freight rate index. Shanghai Shipping Exchanges are producing SCFI(Shanghai Container Freight Index) and CCFI(China Container Freight Index), Drewry is also producing the container freight index called WCI(World Container Index). Those two can be deemed as the 'classic' index in the industry represents ocean container spot freight index. Otherwise, new model of index are being produced by the logistics startup. Freightos are producing multiple types of freight rate index in real time with the co-operation of Baltic Exchange. For more practical data, XENETA is producing freight rate with distinguishing spot and non-spot term. Those two models are being introduced in the market just 2~3 years before, so it can be considered the reliability of the indices are being reviewed in the market players.
<Figure1. Shipper's satisfaction against carrier service and cost>
(data source: Drewry, produced by Cyberlogitec, 2019)
Then the question comes to the volatility of the freight rate as it is visible. Simply, Figure 1. decribes volatility differences among different sector of the service price measurement. The data period is between 2012.01 ~ 2019.07. SCFI and WCI equally shows the volatility variation from 7% ~ 35% among different trade routes. On the other hand, WTI shows 3.6% , S&P 500 shows 1.4%, Air Inbound Index in US 1.7%. Regardless we compare minimum or maximum variation of the different ocean trade routes, the volatility in the container ocean freight rates are 3 times or even more than 10 times volatile than the other sector.
Why volatile? Clarity and flexibility is the issue
It is definately visible that the ocean shipping industry has huge volatillity. There are multiple researches and assumptions to identify the origin of fluctuation.
One of the reason is the supply market is the oligopolistic market. We can actually count every company involved in the ocean container transportation, and they are linked each other under the alliance. As a result, ocean transportation is being provided 3 large alliances, 2M, Ocean, THE alliances. Inevitably the supply market bears more conventional startegies and lesser innovation and flexibility.
As another reason, the supply strategy is long-term approach. Carriers need huge capital and time to increase their supply volume. Therefore, the fact contribute the supply become inelastic and have a tendency to hide their price strategy to the market but do face-to-face approach to the existing customer. On the other hand, the demand is more sensitive and flexible than the supply. They are not bind to the time constraint, and also doesnt need huge capital to be operated. Therefore, mismatching between them are self exelerating freight rates themselves.