Would Commoditizing Work for Ocean Freight?

Would Commoditizing Work for Ocean Freight?

As ocean freight rates have been in a near steady decline, carriers have been in a scramble trying to find ways to offset the weak demand and glut of over capacity with little to no success. With shippers benefiting from low prices, some carriers, the Hyundai Merchant Marine (HMM) and Hanjin, are balancing on the brink of bankruptcy. Other carriers like Hapag-Lloyd reported USD 48.5 million losses for the first quarter of 2016 alone.

Because of the low shipping cost, consumers are getting a good deal, so why is it so bad? Well, if Economics 101 taught us anything, it could be disastrous. The problem here is that if a few of the carrier companies merge or drop out of the game, leaving only a few of the biggest carriers on the market, rates will skyrocket; Xeneta CEO Patrik Berglund commented in an interview with Professor Andrew Lubin.

However, since neither multiple GRIs, nor slower steaming couldn’t make anyway at improving the situation for carriers, not even temporarily, what can be done?

Berglund in the same interview revealed his vision of turning containerized freight into a commodity. A possible solution that some have called revolutionary or even radical, while others doubted if this old fashioned industry would ever come around to using this new technique.

Why Commoditizing Would Work

There are a number of resources and goods that have been made into commodities such as coffee, sugar, aluminum, and other materials. Trading with commodities are highly regulated and protected and can be sold and bought forward for many years. Making containerized freight a commodity would not only create price transparency in the industry but it would also mean shippers can use hedging techniques to reduce their exposure to prices going extremely high or low.

What is Hedging and Why is it a Good thing?

Although it’s more complicated than simply paying insurance, hedging is a form of investment that works very similar to it in a lot of ways.

Let’s see how this would work with an example. A shipper who worries about the volatility of freight rates and skyrocket shipping prices would mean serious losses in profit can enter into future contract which allows the company to buy TEU space on vessels at a specific price at a set date in the future, three, four or even more years ahead.

This would be a completely new way of doing business, however, whether the conservatism of our industry will let such new waves to reach the shores remains to be seen.

About BlueGrace Logistics:

Founded in 2009, BlueGrace Logistics is one of the fastest growing leaders of transportation management services in North America. As a full service third party logistics provider (3PL), BlueGrace helps businesses manage their freight spend through industry leading technology, high level freight carrier relationships and overall understanding of the complex $750 Billion U.S. freight industry. BlueGrace is headquartered in Riverview, Florida with over 60 corporate and franchise locations across the U.S. For more information, visit www.mybluegrace.com

 

 

 

 

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