Ocean freight tendering for 2022: What can shippers expect?

As we look in the rearview mirror of 2021, we see a long list of challenging dynamics that have resulted in unprecedented supply chain congestion and historic freight rates—as well as additional fees—that have threatened the viability of shippers without the means to adapt.

So what about 2022? Will rates come down and congestion begin to ease? There are many factors that have contributed to both—and the former has been significantly influenced by the latter. And though other factors also play a role, the latter has been significantly influenced by the variants of COVID-19.

First it was Delta and now Omicron that have been throwing a wrench in the world’s tentative moves back to some semblance of normal and the potential for ongoing supply chain stability that could be a secondary result. Unfortunately for shippers, the arrival of Omicron and its unpredictable impact coincides with a freight tendering season that has started earlier than normal.

As shippers sit down to negotiate the details of ocean freight contracts for the year ahead, experts say they can expect the historic rates to continue—along with additional factors that could also play a role. The following offers insights from S&P Global Platts and Xeneta regarding some of the 2022 freight tendering dynamics that may be in the mix.

Surging Rates, Evolving Terms

In a recent post, Platts provided a grim outlook for shippers hoping for some price relief in the year ahead: “Early term contract discussion ranges for 2022-23 have risen significantly in the containers market, market sources told Platts, despite shippers hoping that spot rates would cool off in the coming year. Rather, early negotiations for the upcoming contract season, starting April, point to an unrelenting bullishness as the discussed price range is sharply higher than the current year, by between 20% and 100%.”

Feedback from various Platts “sources” indicated that:

For further specifics, please see the Platts post: Early 2022-23 contract discussions see container rates surge, terms evolve.

Difficult Choices Ahead

Early reports such as these indicate that shippers will be faced with some difficult choices during negotiations for the year ahead.

In Xeneta’s recent webinar, Ocean Freight Rates Outlook 2022, Xeneta CEO and Co-Founder Patrik Berglund was joined by Xeneta Chief Analyst Peter Sand to provide their perspectives for 2022 based on Xeneta data—including that provided by those already involved in the freight tendering process.

Although the analysts said shippers can expect the high rates to continue, Sand said there were other important factors to consider: “In terms of pricing, for the first time in history, maybe that could be secondary to getting stability and predictability into those global supply chains…What shippers predominantly want is that goods are delivered in due time.”

Sand also noted that although the liners have experienced “spectacular profits” in 2021, “2022 is going to be even bigger. …It all rests on the assumption that carriers are now fixing long-term contract rates at a much higher level than what they delivered in 2021.”

And he said it’s going to be some time before things get back to anything resembling normal: “We’re going to see a gradual normalization that will take months, quarters, more than a year at least in terms of normalizing.”

Noting that the tender season has already started, Berglund said that although some may wonder whether they should wait to start the tendering process, others have no choice: “For a lot of businesses, there are no other alternatives. This is the way they’ve run their budgeting cycles for decades; this is how their internal financials are controlled and structured, and they need predictability.”

He also offered some advice for shippers who aren’t sure whether long-term contracts and multi-year deals are a good idea, even if they’re getting a discount. “First and foremost, it’s worthwhile mentioning that blindly striking a 12-month rate agreement without any mechanism in there to regulate the prices over the next 6, 12, 24 months appears to be very risky. …With that in mind, one of the biggest conversations and most important conversations to have is what will cause a renegotiation of the rate level, or what is the duration you should strike with? These conversations are crucial for the shippers to have and settle on at the moment, being fully informed [and] having data available to make those conclusions,” Berglund said.

Although Sand predicted “a little bit more certainty” going into 2022 compared to 2021, he said capacity may still be tight going into the peak season next year: “There is still clearly a chance for shipping capacity also to be in short supply come the peak season in July, August, September 2022. That’s worth considering as well…”

Saying that historically, there’s been a correlation “between the short and the long, meaning the short moves first, and the long follows,” Sand said “What we could see here, potentially, depending on whatever events might happen, is that companies agree to secure quite high elevated long-term contracts, and then the short term falls off. You would have a switch of position where the short-term market would be below the long. That’s a painful situation.”

Berglund said volume plays a role, too: “…there are substantially different results and treatment on the existing long-term contracts from companies moving 500,000 TEUs or a million TEUs versus the one with 10K. More so than ever before.”

He also predicted that carrier moves toward vertical integration may also have an impact: “This will continue and be a bigger topic over the next year in 2022, as the rate levels stay elevated.”

The following video clip provides a glimpse at some of the key points and data. For more details, you can access the full Xeneta webinar.