Container Shipping Spot Rates: Impact On Inflation & Other Adverse Consequences
The sharp price increases in container shipping during the pandemic have contributed to overall US inflation in a recognizable way. While only a relatively small percent of total loads actually move under spot rates, the spot rates play a meaningful role in the level and trend of rates in contract renewals moving the large majority of overall loads. We will use credible factual data to bracket that inflationary impact, the breakdown between loads moving under spot and contract rates as well as the differences in the level and trend of rates at both components.
Based on a review of the data, informed by experience as an operator and investor in the container sector, we’ve developed a view that the prevalence and credibility of spot rates are broadly misunderstood. As a result, we see this leading to confusion and uninformed decisions at best and manipulation and bad decisions at worst. These facts open up the possibility that the impact on inflation goes beyond the price increases actually experienced by shippers. We present an actual case supporting that hypothesis. Here again, the information content in questionable spot rates plays a direct role.
While shippers are the group that are most adversely affected by this misinformation, other constituencies including government agencies need to have better factual information on the actual level and trend of pricing in the container shipping sector. Whether its navigating a ship or charting a course toward improved performance, if you don’t know where you are it makes getting to the destination more difficult.
This article will raise serious questions regarding the importance of spot rates as they are currently used in the container shipping sector and will highlight other available broad metrics that better describe actual pricing. While they may have relevance directionally on a relatively small group of loads, the disparity among the various spot indices suggest that they aren’t even a refined measure of that group. More importantly, they don’t reflect the level and trend of the larger group of contract rates that drive both the overall inflation impact and the profitability of the container shipping sector. Spot rates may well be the three-card monte of container shipping. When new contract terms are being discussed, trade lane spot rates that present a favorable comparison for the carrier are highlighted. Shippers will often agree to rates that appear to give them preferential treatment when in fact those rates are higher than most of the carrier’s other contracts. One side has the all the facts while the other side is operating with impaired vision. The shippers and others who give spot rates more credence than they deserve do so at their own risk.
Believing that any problem that is identified should ideally be followed by a proposed solution, we present several. The suggestions would involve regular public filings by industry groups and individual container carriers of factual historical information that is neither burdensome on them nor reveals any confidential customer information. With this straightforward solution, much more clarity will be provided on the overall pricing of the container loads actually moving in key trade lanes. That in turn can lead to better, more informed decisions by shippers and other groups that are involved with the container shipping sector.
Shipping Industry Spot Rates In General
Two of the three major shipping segments have pricing that is dominated by spot rates. Whether its bulk carriers moving commodities like iron ore, coal or grain or tankers moving crude oil or various petroleum products, what the ship owner gets will vary on a daily basis. Credible longstanding indices like the Baltic Dry Index for bulk carriers or Worldscale for tankers are large databases established using the actual fixtures that are entered into hundreds of times per day. That pricing is typically expressed as a daily time charter equivalent (TCE), the amount the vessel owner gets for providing the ship to a charterer who also pays directly for the fuel expense. The charterer directs the movement of the ship and its only cargo is the full load iron ore, crude oil of whatever commodity that is being moved. Owners will know exactly what their daily crewing and other operating costs are, so the difference between that and the TCE is the return on invested capital.
There is an active chartering market for both bulk carriers and tankers and all of the participants have access to the credible indices that are recognized as representing actual transactions. They have been the benchmarks for pricing in those segments for generations, with Worldscale going back almost a century and the Baltic Dry Index origins tracing back more than two centuries. Those indices remain the main pricing metrics in both the bulk carrier and tanker segments.
The spot pricing nature of shipping in those segments is consistent with the commodities those ships carry which change each day based on prices in the various commodity markets. There is symmetry between the frequent and often volatile changes in pricing of the underlying commodity and the cost to delivery it by ship, although they don’t always move in tandem. But like the commodity itself, the shipping spot rate is set where demand intersects with supply. I suppose a key reason pricing in those segments developed almost entirely on a spot basis was to fit with the inherent variability of the commodity and the processes the end users had developed to pass along that key cost. In other words, their business models expect and have adapted to variability in the pricing of the full load cargoes they move on ships they have hired for a period of time.
The use of spot rates in container shipping is much more limited and that distinction can be traced to fundamental differences between the segments. Each container ship will be moving cargo for hundreds of customers in a larger transportation system that includes terminal, equipment and an array of mostly fixed costs. While costs related to the ship itself are the very large majority of all costs in the bulk carrier and tanker segments, they are the minority of total costs for the container shipping companies. Both the companies and their customers have reasons for wanting to know what the amount per container will be to move loads between specific points over a given period of time.
For these reasons, pricing in the container shipping sector is driven typically by one-year contracts that layout the amount per container for shipments between an array of points, often including inland points, where the shippers loads move. That rate per container is fixed over the term of the contract except for changes in fuel prices. Most contracts include a fuel surcharge mechanism that is intended to adjust the rate for any changes in the per load fuel surcharge announced by the carrier after the date the contract is signed. While contracts are renewed throughout the year, a disproportionate number of contracts are entered into in around May to coincide with the beginning of the buying season for many large retailers. Those purchases coincide with the buildup of inventory for the key holiday shopping period and retailers want to know what their shipping costs will be for that season.
Any shipper that has regular and consistent container volume will want to have a contract stipulating the rates for their shipments. It is parties who are not regular shippers or ones who can’t commit to a minimum volume that may be subject to the prevailing spot rates when they book a load. One exception to this is that there will sometimes be large shippers with contracts with multiple carriers who will keep some of their expected volume unallocated to potentially respond to an attractive spot rate offered by yet another carrier. This practice will generally be found out about later from customs filings by the contract carriers involved and is frowned on as an attempt to game the process. I’ll avoid getting into a discussion of contract adherence in the container shipping sector, but there are shenanigans played by both sides. In general, however, it is shippers that historically have gotten the most benefits from not always adhering to the letter or spirit of the contract.
Inflation Impact Of Container Shipping
Inflation is measured based on actual expenditures. The impact of container shipping can therefore only be measured by looking at all loads and not just the relatively small group moving under spot rates. The best overall metric for that is the global pricing index issued monthly by Container Trades Statistics (CTS), a data collection affiliate of an organization comprised of most of the container shipping companies. CTS collects actual volume and pricing data from its members and publishes monthly container import and export volume by major area along with a global pricing index that measures all activity worldwide. That macro monthly data is available for free on CTS’s website (https://www.containerstatistics.com) and more granular data by trade lane is available for a fee.
The global pricing index issued by CTS is based on actual pricing data collected from all the carriers and is expressed as a number relative to actual pricing in 2008, which is set at 100. That number is based on the actual container rate per equivalent unit along with all surcharges but excludes any charges related to inland haulage in order to have comparable total port to port revenue. Because the global pricing index comes from actual data supplied by all of the carriers, it is clearly the most authoritative measure of the relative level and trend of worldwide pricing in the container shipping sector. The following chart shows the actual CTS global pricing index by month from 2019 through May, 2022, the latest available index value.
As the chart clearly shows, there was no noticeable pricing impact until the latter part of 2020 or some six months after the onset of widespread concern regarding the pandemic. The beginning of that pricing impact would coincide with the growth in container volume as consumer expenditures in services were switched to tangible goods. Prior to that, the global pricing index was hovering in the 70 range, meaning that overall actual pricing was 30% below what it was a dozen years earlier in 2008. From that level, index has shown fairly consistent growth and has almost tripled.
While the global pricing index is the most authoritative in terms of overall container shipping pricing, is it a relevant measure to use to arrive at the US inflation impact? Yes, both because inbound containers to the US represent one of the largest markets and because the similarity of the changes is confirmed by another credible index focused on the largest inbound lane. The Asia-North America container lane accounts for some 25% of the total container-miles involved in container shipping. Ocean Network Express (ONE) includes the container shipping operations of three large Japanese shipping companies and in its quarterly review discloses its actual pricing index on the Asia to North America lane. Like the CTS index, the ONE index shows a number relative to 2008 which is set at 100. Comparing the latest quarter of 1Q22 to the index seven quarters earlier of 2Q20 prior to any upward movement, the ONE index for the key Asia to North America lane increased 176.4%. Over that same seven quarter period, the increase in the quarterly measures of the CTS global pricing index was almost the same at 178.8%. Because the three large Japanese companies that make up ONE are one of the largest volume carriers in the transpacific lane, their actual pricing trends should be fairly consistent with those of all carriers. Given that close similarity, it is reasonable to use the CTS index as a proxy for the pricing changes of all inbound loads into the US in order to estimate the inflation impact.
One way to estimate the inflation impact is to compare the annualized pre-pandemic shipping costs for all inbound containers to the US to what those costs are post-pandemic using the change in the index. Going through that exercise results in an estimated annual container shipping pricing impact of $66 billion, which is equivalent to 1.20% of the total annual personal consumption expenditures on goods. The specific numbers used in arriving at that figure are shown below.
2021 Inbound TEU’s: 24,592,023
Est Average Rate/TEU: $1,500
Pre-pandemic Costs: $36,888,034,500
CTS Increase Factor: 2.788x
Post-pandemic Costs: $102,834,096,177
Increased Costs: $65,946,061,677
Goods Expenditures: $5,481,400,000,000
Increase/Goods GDP: 1.20%
The 1.20% is the estimated overall impact over the entire seven quarter period and as such doesn’t fit with measures of inflation that tend to look at sequential periods and come up with a seasonally adjusted annual change based upon the differences in those sequential periods. However, what the above exercise demonstrates is a $66 billion increase in container shipping rates into the US over a short period of time has had a noticeable impact on the cost of the goods moved. The 1.20% estimated impact is based on the assumption that the price impact on the goods moved is limited to the underlying freight rate change. As a later case will demonstrate, those two things may not always be symmetrical.
Breakdown Between Spot & Contract Rates
Using the CTS global pricing index and a broad spot rate index, a relative index that depicts the level and trend of contract rates compared to spot rates can be developed. The first step in developing that is to select a spot rate index that is as equally broad as the CTS global pricing index. The index that most fits is the Drewry World Container Index (WCI). Drewry is a well-respected independent maritime consultancy based in London. The WCI is a composite overall rate per 40’ container that is determined weekly based on a weighted average of rates at selected major container lanes worldwide. It is generally considered the most credible of all the broad spot indices.
To compare the CTS global pricing index to the WCI, they both need to be recast as common size indices relative to 2Q20 as the base period that is set at 100. Quarterly averages are used to coincide with the financial reporting schedule of the carriers. This comparison of both the CTS global pricing index and the Drewry WCI is shown in the following chart.
The CTS global pricing index shows the same 178.8% increase over the seven-quarter period that was noted earlier. The Drewry WCI shows spot rates increasing two and one-half times as much at 473.5% over the same seven quarter period. Some of the other spot indices showed even more growth. In an indication of the variance in spot indices, in one recent example there were differences ranging up to three times for the claimed spot rate in the same trade lane. However, the credibility of the Drewry WCI is reinforced by the fact that the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index (SCFI) increased 444.8% over the same period. The SCFI is a composite measure of all export spot rates out of China. In addition, the change is the Drewry WCI is almost exactly the same as the Drewry index on the key Shanghai to Los Angeles lane that increased 436.7% over the same period. So the two indices being used to depict worldwide trends in both overall pricing and spot pricing are broadly consistent with US measures of the same trends.
As the chart shows, the CTS index measuring all loads has increased each quarter. The WCI index measuring just spot loads ramped up to a peak in 3Q21 but is lower in 1Q22 from decreases in subsequent quarters. With the sharp increase in spot rates, it is clear that the relative trend in spot rates would need to be below the CTS index to have the numbers fit together. Just from looking at the chart, spot rates can’t be a significant portion or otherwise the CTS index would need to be higher. By definition, what the relative value of a broad contract rate index would need to be at various spot rate percentages can be precisely calculated. With both the CTS and WCI indices known, the only variable effecting what the relative contract rate index would be is the percent of loads moving under spot rates compared to all loads. The higher that percent, the lower the relative contract rate index needs to be to solve what is a straightforward algebraic function.
The following table does just that. It first lists the common size values of the known CTS and WCI indices by quarter from 2Q20. To compare the cumulative change by quarter between the two indices, the factor by which the WCI increase exceeded the CTS increase is calculated and shown. For instance, through the 1Q22, the former had increased 2.65 times the increase in the latter since 2Q20. Using the known overall and spot indices, we can calculate what the relative contract rate index would need to be at various spot percentages. At each spot rate percentage, the weighed average contribution of spot rates to the CTS index is measured, with the difference representing the weighed average contribution of contract rates that is then adjusted to get the actual relative contract rate value. Those relative contract rate values at various spot percentages and at different times are shown in the table below. The spot percentages are in increments of 1% through 10% and then in 5% increments through 30%.
While all combinations of intersecting spot percentages and relative contract values can be aligned to fit with the known indices, spot percentages on both the low and high side can be eliminated, as they require relative contract values that are nonsensical. For instance, obviously any value below 100 doesn’t work, as that would have contract rates actually declining through that period at the same time spot rates were ramping up even more. With a typical contract having a one-year term, the way the relative value table works we need at least that long of a period to measure the full effect. The 1Q22 period relationship is therefore the best one to focus on as its two quarters after the spot rate peak and involves sufficient time to see full transition. On the right-hand column of the table, there is a comparison of the cumulative increase from 2Q20 through 1Q22 of spot rates compared to contract rates which provides a further metric to assist in selecting the most reasonable combination.
Taking all the above into account, the numbers point to a sweet spot in terms of loads moving under spot rates of being at least 10% but no more than 20%. Choosing the former results in a relative contract index that would be up 146.0% while the latter would result in an increase of 105.1%. As the spot index is up 473.5% over the seven-quarter period, its gains are 3.24 times and 4.50 times the relative contract rate increases based on 10% or 20%, respectively, as the measure of loads moving under spot rates. That latter difference is as high of a gap likely possible over that extended time and we circle on 20% as being the more conservative of the two estimates.
The CTS global pricing index is clearly the best measure of pricing of all loads moving worldwide as it includes loads moving under both contract and spot rates. The Drewry WCI appears to be the most credible index of spot rates worldwide. With those two fixed benchmarks, we have calculated the percent breakdown between loads moving under spot rates and loads moving under contract rates. The best fit with these numbers points to no more than 20% of total container loads worldwide moving under spot rates, with the remaining 80% moving under contract rates.
Trends In Contract Rates Versus Spot Rates
Having set the 1Q22 relative contract rate index as being 146.0% above its 2Q20 starting point, we can ratably fill in the intervening quarterly values. The table below shows those values along with the WCI and CTS indices. It also includes the spot percentage that intersects with each contract index along with sequential and cumulative percent changes in all three indices as well as comparisons between contract and spot indices.
Those indices and the trends they represent can be more clearly seen in the chart below. Over the entire seven quarter period, the Drewry WCI of spot rates showed the highest growth with a 171% CAGR. That growth rate was brought down by declines in the last two quarters and through the first five quarters the growth rate was almost twice as high. Both the estimated contract rate value and the CTS global pricing index including all loads have each shown consistent growth in every quarter with CAGR’s of 51% and 80%, respectively.
One Possible Case Of Shipper Overreach
From my operating days in the container shipping sector, I’m aware that it isn’t unheard for shippers to reference increases in container rates as the basis for increasing their own prices. In those circumstances, it also isn’t unusual for the price increase to be something more than the actual shipping cost increase. Using well publicized increases in certain cost elements has often provided the cover for a price increase that overreaches beyond that specific cost element.
With that in mind and being aware of the striking difference in well publicized spot rates and the quieter contract rates as detailed above, I’ve been on the lookout for a noteworthy price increase blamed on container shipping. While I wouldn’t have access to detailed internal figures, the amount of a specific price increase could be compared to an estimate of the increase in container shipping costs.
That opportunity came in finding a December 31, 2021 press release by IKEA that it would be raising its prices 9% on average to address the effect of higher container shipping costs resulting from supply chain disruption. IKEA is based in Sweden and is the largest furniture retailer in the world with 470 unusually large stores. While its broad array of furniture products is designed in Sweden, almost all of its products are manufactured in Asia.
IKEA is a privately owned company that doesn’t disclose its financial statements. However, it does disclose total revenue, which in 2021 was $44.0 billion. Therefore, a 9% increase would be equivalent to $3.96 billion. IKEA is one of the largest shippers of containers into the US and was in a list put together by the Journal of Commerce which showed total inbound volume in 2021 was 113,902 TEU’s. With 69 stores in the US, that is an average of 1,651 TEU’s per store. Using that average and applying it to 276 stores in Europe and 125 stores in the rest of the world equates to another 455,608 and 206,344 TEU’s, respectively, for a grand total of 775,854 TEU’s.
The 9% increase totaling $3.96 billion works out to an average increase of $5,104 per TEU for each of those 775,854 total TEU’s. In the earlier section we had used $1,500 per TEU to approximate the average pre-pandemic container shipping cost for inbound loads. Given IKEA’s volume and sophisticated freight purchasing skills, their pre-pandemic container shipping costs would be lower than the average. If a 20% difference is assumed, that makes IKEA’s pre-pandemic cost $1,200 per TEU and their post-pandemic cost $6,304 per TEU. That is equivalent to a 425.3% increase in container shipping costs.
The problem with the exercise above is that it is impossible that IKEA is now actually experiencing container shipping costs that are 425.3% higher than their costs prior to the pandemic. As noted earlier, a reasonable estimate for the overall increase in the contract rate group of which IKEA is most certainly part of was 105.1%. That is less than one-fourth the increase resulting from the exercise above. Few companies are as efficient as IKEA is in all aspects of moving products through their supply chain. For instance, their 350,000 square foot New York City area store is located in Elizabeth, New Jersey adjoining a major container terminal in order to avoid the time and cost of a local delivery by truck. Indeed, if anything the actual change in IKEA’s container shipping costs over the pandemic period could be less than the 105.1% contract rate group average.
Interestingly, the 425.3% increase from the exercise above lines up almost exactly with the Drewry World Container Index related to spot rates that increased 439.8% over the same period. When IKEA was calculating its pricing increase related to increased container shipping costs, was it basing it on changes in the Drewry WCI rather than changes in its own contract rates? Was there a concern that IKEA would see further actual cost increases that needed to be addressed in a one-time pricing adjustment? Were there mistakes in my estimate that resulted in inaccurate numbers for either pre or post pandemic costs or both?
We can’t know the answer to those questions. But we can say that this exercise underscores that there will be cases where the price increase referred to as being driven by higher container shipping costs is actually more than the actual underlying cost. The dichotomy between increases in contract rates versus spot rates, and even versus anecdotal press accounts of higher increases, is the fog that increases the likelihood of such differences.
The inflation impact from higher container shipping costs will ultimately be determined by the price increases put in place by the shippers. While we showed earlier that the cumulative effect of that over the last seven quarters based on the actual underlying cost increase was 1.20% of goods expenditures, it will be more if attempts are made to overreach under the cover of well publicized increases in container shipping costs. At the extreme, if all shippers engaged in moral rationalization and implemented price increases based on changes in the WCI spot index, the cumulative inflation effect relative to goods expenditures would be 2.96%. The specific numbers used in arriving at that figure are shown below.
2021 Inbound TEU’s: 24,592,023
Est Average Rate/TEU: $1,500
Pre-pandemic Costs: $36,888,034,500
WCI Increase Factor: 5.398x
Post-pandemic Costs: $199,124,093,964
Increased Costs: $162,236,059,464
Goods Expenditures: $5,481,400,000,000
Increase/Goods GDP: 2.96%
The broader point here is that it is fairly opaque what effect the geometric increase in container shipping costs have had on the price increases shippers pass on to their own customers. A big part of this is the broad range of what those actual cost increases have been. In addition to the direct impact, when shippers are looking at the three-digit percent increases in their container shipping costs, it injects a bluntness and upward bias in their own pricing actions.
Container shipping’s actual inflation impact will continue to be driven by the overall pricing in the sector which obviously includes both contract and spot rates. As demonstrated earlier, the former has continued to trend upward even with declines in the latter. Unfortunately, almost regardless of what happens with spot rates, this tail effect from the impact of contract rates that this analysis shows represent 80% of loads will be with us for longer than most folks are envisioning.
Suggestions To Provide More Actual Pricing Clarity
Let me preface my suggestions by indicating that I view the Securities and Exchange Commission (SEC) as an exceptional model of an efficient and effective federal government regulatory agency. They don’t judge or render an opinion on the efficacy of any investment, but they act as a clearinghouse for filing detailed and comprehensive information that allows investors to make their own judgment.
The federal regulatory agency most involved with container shipping is the Federal Maritime Commission. I strongly believe that, as much as possible, the FMC should become even more of a clearinghouse for detailed factual information that is readily available on its website for shippers and the public at large. This enhanced disclosure will allow shippers to make more informed judgments of their own and will provide other governmental entities with useful macro-economic data that enhances their ability to fulfill their own mission.
There is way too much opaqueness related to historical macro-economic data in the container shipping sector that in many cases is already publicly available and that in all cases doesn’t disclose any customer specific data. FMC would do well to marshal as much of this factual information as they can and make it readily available. That overriding view informs my suggestions which relate to both refining newly enacted disclosure requirements and charting a path towards additional disclosure requirements.
The Ocean Shipping Reform Act (OSRA) signed into law on June 16, 2022 includes a provision requiring additional disclosure by carriers. That disclosure will be in the form of a quarterly report by published by the FMC on its website that will show total import and export tonnage and the total loaded and empty TEU’s per vessel making port calls in the US. This will be useful factual information.
What would make it more useful would be to disclose this information required by the OSRA on a rolling monthly basis. The value of information like this is directly related to its timeliness and granularity. In that sense, monthly information is geometrically more informative than quarterly information. Monthly historical information lends itself much more to discerning the actual underlying trends at work on whatever is covered by the data.
With the amount of information that OSRA requires to be disclosed on a per vessel basis, when it is just made available quarterly it may not only be stale but it will also be an overwhelming amount of information to digest at one time. Monthly disclosure avoids such a data dump and filings in smaller increments should result in disclosure closer to the end of each period. The carriers already maintain such information on a monthly basis, so that more frequent cycle isn’t adding to their filing burden. It may even make it easier by being consistent with their normal cycle and avoiding a new project of accumulating such information on a quarterly basis.
In terms of new disclosure requirements, the initial focus should be on the monthly data presently provided by CTS. High level volume data along with the global pricing index, both of which are an aggregation of data from all the carriers, are available for free on the CTS website. But for a relatively modest fee, additional aggregated volume and pricing data by trade lane are available. All of this monthly data is generally available 35 days after the end of the month. Presumably there is a process where CTS receives all of the same data from the individual carriers at some earlier point and then aggregates it to show overall industry volume and pricing data by trade lane.
By providing their detailed actual monthly volume and pricing data to CTS where they know it will be aggregated to show overall industry data that is made publicly available, the carriers have already acknowledged that such historical industry data is not confidential or proprietary. As such, at the very least all of the aggregate industry data that is now available, including the more granular trade lane data, should be similarly made available on a monthly basis to the FMC. The FMC will in turn make that industry data available on its website in a readily accessible format that will include all previous historical data. The by trade lane pricing data is, like the global pricing index, a common size index based on overall pricing of all loads with 2008 set as the base at 100.
In addition to the aggregate industry wide volume and pricing data, for the same reasons it is not unreasonable to move towards requiring each of the carriers to provide their portion of the same data. First and foremost, this actual information is their overall volume and pricing and discloses no customer specific data. It is the same information they now provide to CTS, so it is imposing no additional burden on them. It is factual information on what has already happened. The same pricing format using a relative index with 2008 set at 100 can be used to preclude carrier concerns that actual average pricing per TEU is giving competitors information. For the container shipping companies that are publicly listed, this information is similar and often less invasive than what they provide during quarterly earnings calls. Based on all of these facts, it's difficult for them to say this aggregate historical information is confidential.
With aggregate actual overall pricing per trade lane, a shipper can and will be in a position to make a more informed decision. That would be even more so if the shipper had access to the same information on the carrier they are considering. Having those facts on the relative level and trend of actual overall pricing is beneficial information, particularly when it can serve to inoculate the significant misinformation that appears to be embodied in container spot rates. It is useful as a benchmark by itself. The overall pricing data can also be compared to trade lane spot rates in an effort to see what it says about the relative level and trend of contract rates in an analysis similar to the above.
The bottom line is that readily available factual data that doesn’t reveal any customer specific or confidential information should be required to be filed on a timely basis with the FMC which will then make it publicly available on its website. It will replace pricing opaqueness with more clarity by providing shippers and others with factual information they deserve to see.
Conclusion
Spot rates are the bright shiny objects in container shipping. Perhaps because there is such a dearth of easily available pricing information, they are constantly and sometimes breathlessly focused on. But as I believe this article has shown, they provide little clarity on what is actually happening related to pricing levels and trends in the container shipping sector. In many cases they can actually distract from what is really occurring related to pricing. The focus should be more on broader pricing metrics that embody all of the loads actually moving. In addition to those that can be accessed now, the FMC should consider finding ways to augment the disclosure requirements of the OSRA by looking into the suggestions above.
There will undoubtedly be some who claim that my analysis concluding that spot rates represent just 10% of worldwide container loads can’t be correct and that it must be higher, particularly in non-US trade lanes. But that is what the math says based on the CTS global pricing index and the Drewry World Container Index. If it is materially higher, then either the CTS or the Drewry WCI is materially inaccurate, either of which would be concerning. The credibility of the former is buttressed by the fact that it comes from the financial statements and statistics related to actual transactions by the carriers themselves. To the extent that there are issues with the latter and other spot indices based on how they are put together, they are the ones that anyone who sees more spot rates should be most suspect. That position, of course, makes the relevance of spot rates even more questionable. I would encourage anyone with a view that the spot rate percentage is higher to delve into the numbers, as everything in the end needs to tick and tie and to fit together.
In most business situations where there are spot and contract rates, the main difference is simply timing. When a contract ends, if it is renewed, it will be renewed at or near the spot rate. It is patently obvious that has not been the situation in container shipping. Enough time has elapsed where almost all contracts prior to the sharp increase in spot rates have expired, yet just looking at the charts it is clear that they haven’t been renewed anywhere near the then current spot rate. That fact is another strong indictment related to the efficacy of spot rates in the container shipping sector.
The continuing uptick in the financial results of the container shipping industry since the 3Q21 peak in the Drewry WCI belies the impact of spot rates. In 1Q22, the Drewry WCI was 10.2% lower than it was two quarters earlier. Despite that pricing decline, industry net income was 22.1% higher. During 2Q22, the Drewry WCI declined another 15.0%, bringing its total decrease since the peak three quarters earlier to 23.7%. However, the early indications based on two months of CTS volume and pricing data are that 2Q22 industry net income will be similar to 1Q22. Put simply, higher net income at the same time that spot rates are down 23.7% underscores that spot rates aren’t a particularly relevant factor.
Below is a graph of actual container shipping industry net income by quarter from 2016. The industry went from being an extreme under-performer to performing at never anticipated levels as a result of sharp pricing increases. Those increases have fueled six straight quarters of record net income.
The $59 billion in first quarter earnings was three times last year, which itself was a record. The industry net income to revenue margin was 45%, with some individual companies over 60%. Those actual industry margins were well above Microsoft, Apple and all of the FANG companies. On an individual company basis, 7 container shipping companies reported higher first quarter net income than UPS, historically the world’s most profitable transport company. There is no transport company coming even close to the net income to revenue margins of the container shipping companies. Three container shipping companies actually had higher first quarter net income than Exxon.
My complete analysis of the 1Q22 results of the container shipping industry can be accessed via the following link: https://conta.cc/3m6CyBQ
