Are Spot Rates an Effective Metric for Ocean Freight?

The news of declining spot rates is a welcome development among shippers, whose wallets have been lightened by soaring freight costs over the last year. The limelight is on the transpacific trade route, where the spot rates have now fallen below the contract rates signed in late 2021 and early 2022.

Whereas the decline should be seen as a positive trend for shippers, most analysts contend it is still early to celebrate.

“This is the noisiest and most confusing micro/macro environment any of us have seen at this point of any container shipping year. It is very unclear of how things are going to unfold, but it is clear that the next 2- 6 weeks will be quite pivotal,” commented Eric Johnson, Director at S&P Global Market Intelligence.

Since the pandemic started, spot rates have been used as an important benchmark to model the chaotic container-shipping scene. The seesawing of spot rates against long-term contract rates is a constant concern for many supply chain professionals.

In a recent blog post, John McCown, a renowned shipping expert and founder of Blue Alpha Capital, takes issue with widespread use of spot rates as a metric to predict changes within the shipping industry.

“Based on a review of data, informed by experience as an operator and investor in the container sector, we see 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,” wrote McCown.

While the spot rates may have relevance directionally for a relatively small group of loads, the disparity among various spot indices suggests that they are not a refined measure. Spot rates do not reflect the level and trend of the larger category of contract rates, which drive both the inflation impact of shipping cost and the profitability of the container-shipping sector.

“Spot rates may well be the three card monte of container shipping,” remarked McCown.

The crux of this discussion is to propose a solution that ideally befits the dynamics of the shipping industry. According to McCown, regular public filings by industry groups and individual container carriers of factual historical information should cure the problem.

Take for instance, 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 the rates that appear to give them preferential treatment while in fact those rates are higher than most of the carrier’s other contracts. One side has all the facts while the other side is operating with an impaired vision.

To give a context of how the shipping industry can provide more actual pricing clarity, McCown cites the model of the Securities Exchange Commission (SEC), which acts as a clearinghouse for filing detailed and comprehensive information that allows investors to make their own judgement.

In the case of the shipping sector, regulators such as the Federal Maritime Commission (FMC) could also become more of clearinghouses for detailed factual information, readily available on their websites for shippers and the public at large.

The recent Ocean Shipping Reform Act (OSRA), which came into law in June in the US, has a provision requiring additional disclosures by carriers. This will be in form of quarterly report published by FMC on its website showing total import and export tonnage and the total loaded and empty TEU per vessel making port calls in US.