The Hidden World of the LCL Consolidation Market - Part 1

The practice of consolidation through less than container load (LCL) shipping of cargo - which involves multiple shippers and consignees in a single shipping container - has allowed thousands of shippers to move their cargo at economical prices when they cannot fill an entire full container load (FCL) solely by themselves. The global LCL market is dominated by 4 global players, also known as co-loaders or consolidators. They are Vanguard Logistics, Shipco, ECU Worldwide and CWT Globelink. The bulk of their customer base comes from the overflow volumes cascaded down from the top 50 global forwarders, and the rest comes from local forwarders. They are considered ‘neutral’ due to the notion that they support the cargo of multiple forwarder competitors in the same consolidation boxes, and they do not go after the retail shipper market and undermine their forwarder clients.

To get a sense of the scale of the volumes they can get from the bigger forwarders, the top five global forwarders each move more than two million cubic meters annually, of which roughly 25 percent cascades down to the consolidators. That is massive volume, but there are good reasons why global forwarders rely on consolidators.

Firstly, dangerous goods cargos (DG) require higher levels of compliance and regulation in terms of trucking and freight movement, warehouse storage and customs documentation. This complexity cannot be managed at scale so easily due to Material Safety Data Sheet (MSDS) checks. There are also fixed surcharges implemented at destination ports for containers with DG cargo. It therefore makes sense to co-load such cargo with a consolidator who has the specific expertise to handle it and split the surcharges across more shipments.

Secondly, some far-flung ports such as those in the Pacific island nations, South America, Africa and the Caribbean have relatively low demand, and to make it profitable enough to run a regular consolidation service would require stable and regular amounts of cargo. The alternative to this is to run an inducement service (demand-pushed) where a cargo can sit at the container freight station for weeks and it only moves out when the container is full or it becomes profitable enough to do so. This is not something most customers can accept due to unpredictable and long waiting times. Consolidators can fill this niche effectively as they can collect cargo from multiple forwarders and build a consolidation box service that is also regular to these places.

Thirdly, the big forwarders mainly run ‘gateway’ models where they route cargo from the region into a major port hub and then re-export the cargo out to the final destination. An example of this is how shipments going out from Bangkok to Jakarta are usually transhipped via Singapore for re-export into Jakarta. However, that forwarder may not be able to either run a regular service from Bangkok to Singapore for the 1st leg of the journey and may therefore co-load with a consolidator who will then deliver it to their container-freight station (CFS) in Singapore where they then handle the 2nd leg or if the consolidator can offer that direct service from Bangkok to Jakarta, the forwarder has the option of using that as well.

Low FCL rates are generally detrimental to the LCL business because margins are shaved off or business is converted to FCL otherwise. A high FCL base rate mean higher margins for LCL, and this has made the long-haul lanes - Europe-Asia, Transpacific (US West and East Coasts-Asia) and Asia-Latin America - into some of the most lucrative segments of the business for consolidators.

Over the last 10 years, due to the overcapacity of boxes in the global market, the Asia Pacific has seen much growth - especially the Intra-Asia region, which has some of the most competitive markets in the world. Here, freight costs for a 20GP container from Singapore to Hong Kong dipped to $5 per container territory in 2016. Rates have moved upwards since and hover around the $100 to $200 region, and with the exception of industry-related surcharges (VGM, AMS, AFR and BAF, GRIs, IMO 2020) have remained relatively stable.

However, the relatively low rates mean that it is hard to profit from consolidating loads, and one of the most profitable ways to make a margin from an LCL shipment in this region is to stack the margin at the destination port. The way some forwarders do this - and what some would consider opaque - is to offer negative freight rates at the origin port to the shipper. The forwarder actually rebates the shipper for shipping with them instead of accepting payment, then collects the amount back from their destination office whom in turn collects it from the consignee. Thus, the market pricing ends up with very lopsided charges and overwhelming costs back-loaded in destination markets.

Some destination markets like South Korea, Japan, Taiwan and Singapore are highly transparent, and consignees there are very well-informed of prevailing market rates - as opposed to the wild west of Southeast Asian markets (Philippines, Indonesia, Vietnam, Cambodia, Myanmar), where a mix of confusing customs regulations and laundry list of line charges continue to befuddle consignees or shippers. The best way for shippers to manage this is through requesting all-in charges or a breakdown of origin, freight and destination charges from the very beginning and indeed most global forwarders today do that.

Luke Robert consults for SME and MNC clients in navigating trade tariff agreements and advising on industry-wide regulation and the impact of political and economic trends on their supply chains. He is currently with one of the largest logistics MNC’s in the world. The views expressed here are entirely his own.