Preparing Your 2016 Budget for Ocean Expenditures

Putting your budget together for your expected ocean freight expenses in 2016 is a very complex undertaking, given the number of lanes and the factors that impact each lane.

LWL033 Ocean Around the Corner

In contrast to trucking rates, which are much more limited in geographic scope, ocean rate forecasting is much broader and more complex.

For instance, a downturn in the Chinese economy in 2016 will have a huge impact on the container rates from China to the Northern European ports, but less of an impact on the U.S. East Coast to South America traffic. That lane may be impacted by the strength of the US Dollar versus the South American currencies. And the Trans-Atlantic lanes will be heavily influenced by currency factors and the development of the U.S. and European economies.

In this article, we will provide some very general advice and resources for you to research as you plan for 2016, but you will need to check against the many factors that contribute to the final ocean rates.

Before looking into the future, a great place to start is to check out some historical rates.

One of the best indices to check is the China Containerized Freight Index. This index is operated by the Shanghai Shipping Exchange and sponsored by the Chinese Ministry of Communications. It provides non-seasonally adjusted data that measures how much it costs (in US$), based on contractual and spot market rates, to ship containers from China to 14 major destinations around the world.

LWL033 China Containerized Freight Index

Now, who would have predicted that chart at the beginning of 2015? So much for forecasts!

But we have to try!

You will then want to look at the major surcharges imposed by the ocean carriers:

  • bunker adjustment factor (BAF): fuel is the one factor that will affect all lanes throughout 2016, so we will be able to extrapolate the impact across the globe based on some of the major bunker or crude oil indices.
  • currency adjustment factor (CAF): the goal of this surcharge is to offset any losses from the fluctuating exchange rates for the ocean carriers. The CAF increases as the US dollar decreases; it is applied as a percentage on top of the base exchange rate, which is calculated as the average exchange rate for the previous 3 months.
  • peak season surcharges (PSS): this is a lane-specific charge.
  • general rate increases (GRI): this is also a lane-specific charge, but seems to impact many more lanes than the PSS.

Other factors include projected increases in container shipping volumes, operating profits of the leading ocean carriers and ocean carrier capacity. These metrics and forecasts are well documented by Alphaliner.

Another point to remember is that all months of 2016 cannot be treated equal: there is quite a bit of seasonality that occurs, especially for cargo originating from China. Every year is different, but, in general, there is a big push by the retailers to move lots of product out of China from between May to July thru October. Then, demand subsides and ocean prices per container dip in November and December.

In addition to the data, it is important to keep up with the industry news.

A recent article by Patrick Burnson titled “Ocean Cargo Carriers Face Rising Costs” some clues about the coming year when he writes “the cost of operating cargo ships is forecast to rise over the next two years after falling in 2015” followed by “the expected increases in 2016 and 2017 are likely to be modest in nature as we anticipate only small rises in the cost of lube oils and other commodities.”

In conclusion, there is no hint of a specific percentage increase, but we get a sense that costs will not be falling and, therefore, we can expect rates to remain stable or increase, but only slightly.

In a second article (though you should develop your conclusions with more than that!) from the Journal of Commerce, by Greg Knowler, he advises that “the slowdown in Asia exports shipped to Europe became more pronounced in the third quarter” and that “all logic was pointing to westbound BCO (Beneficial Cargo Owner) contract rates being fixed below $1,000 per TEU next year, ‘and in some cases, well below.’”

Most forward-looking resources in the ocean freight industry are subscription based.
Here are a few of the most reputable:

  • Drewry Maritime Research is one of the premier transportation research companies. While they offer many products (for a fee), the Container Forecaster is most relevant.
  • Alphaliner provides the Alphaliner Monthly Monitor, which costs Euro 1200 per year and provides key statistical indicators, fleet growth trends, forecasts, etc.
  • Ti Consulting provides the Ti Dashboard; a 12-month subscription will cost US$1335.
  • The Journal of Commerce
  • Lloyd’s List On-Line provides a single user with a 12-month subscription for US$3250.

Hopefully, we have provided you with some direction for 2016 and some resources to do the in-depth research needed for your specific lanes.

Good luck!

Click the following link for a PRINTER FRIENDLY VERSION of this article: LWL033 Preparing Your 2016 Budget for Ocean Expenditures

About Lenny

Many years of experience in a Fortune 1000 companies, especially in the logistics and I.T. areas of manufacturing companies. Through process improvements and the use of many of the tools mentioned here, I have been able to identify and implement savings opportunities worth up to $10 million. I hope that some of these real-life stories, suggestions and tools can help you!
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