Ocean freight rate indexes have multiplied, causing confusion among capacity buyers, making them better suited as procurement guidelines than real-time rate indicators.
Directional Trends
- Shippers struggle to comprehend the data sources and their translation into actual rate movements, reducing the indexes’ value to mere trend indicators.
- The surge in executive scrutiny of these tools is due to supply chain disruptions and high transportation costs during the COVID-19 pandemic, with each major index offering a slightly different market perspective.
“From a macro perspective, indexes are helpful to identify directional trends in the market,” a shipper that imports and exports vehicle products told JOC.com. “Spot market rates falling equals a softening in the market.”
“This is essentially a ‘pay no attention to that man behind the curtain’ moment for me,” the shipper said. “I have researched the source organizations and have confidence in the methodology. While I think the actual data collection and analysis and reporting details would be neat to know, it is not a deal breaker.”
Although they all track ocean freight pricing, each of the five major rate indexes measures a different slice of the overall market.
Dividing Lines
Forwarders and NVOs find limited value in rate indexes due to their direct knowledge of real-time market rates and the pricing differentials between regions.
Shippers need to consider whether an index measures spot pricing, contract rates, surcharges, and data sources when evaluating their relative value.
“When I see the rates in the indexes, I just don’t see them applying to the business I’m doing,” said the CEO of a mid-sized forwarder based in the US Midwest that handles both import and export shipments.
Stemming Challenges
The type of index (spot, contract, or mixed) can lead to significant variations in rate trends during different market conditions.
Publicly available index data differs from paid, granular data, but mainstream reporting often focuses on public indexes, impacting discussions between executives and logistics managers.
The increased prominence of rate indexes can complicate discussions about logistics costs with management, as they rely on these indexes for benchmarking and decision-making.
Index Readings
“Executive management has access to numerous public indices, which leads to interesting discussions,” the shipper said.
The logistics team frequently needs to clarify to executives why index rates may differ from carrier and forwarder offers, especially when existing relationships lead to rates above market averages.
A comparison of peak readings for the various indexes bears out not only that they measure different parts of the market, but that they don’t move in lockstep.
The XSI’s high point from Asia to the US West Coast over the last year came March 3 at $9,177 per FEU, while the WCI saw its high point coming nearly six months earlier on Sept. 23, 2021, at $12,424 per FEU. The FBX peaked two weeks earlier, at $20,586 per FEU on Sept. 9, 2021.
Rate Indexes vs. Direct NVO Rates
Logistics managers must question if rate indexes reflect current NVO quotes or preferential rates for contracted shippers.
“The problem with freight indexes is that they do not compare real rates,” Jon Monroe, a consultant to NVOs operating in the trans-Pacific trade, wrote in an Oct. 10 LinkedIn post.
“Rates are so competitive right now, the best way to follow rates is to get on an NVO rate list. Why choose an index when you can get a real rate?”
Eytan Buchman Words
Eytan Buchman, chief marketing officer at Freightos, told JOC.com the FBX is based on “solid, externally audited data sources and paired with transparent methodologies to give the absolute median price of the spot market, and not merely a directional indicator.”
“Many times, shippers will book as part of a bigger contract with volume commitments, with specific port pairs which differ from the average of the trade lane, or will require equipment other than the standard 40-foot dry container, and in all those cases, an adjustment will be required,” Buchman explained.
Critical Choice
Freightos allows direct booking, while other index providers do not, raising the question of whether direct inquiries are more effective than relying on indexes for real-time rate guidance.
Brian Nemeth, managing director at AlixPartners, a consulting firm said that to understand actual rates at a particular moment, shippers are still better off surveying a group of ocean carriers or NVOs.
“For the real rate, the best way is word of mouth,” Nemeth told.
Insights Of Nemeth
Nemeth said the indexes can help shippers understand how to leverage the pricing they receive against the market average.
“We’ll say, ‘You should be getting a percentage off the index based on your size,” he said. “And we’ll look historically to benchmark”
Nemeth said the indexes are a valuable source of information, but the nature of the work he does means AlixPartners will always have data points that are more accurate and precise.
“I’ll look at all of the indexes,” he said. “But I Iook at them for trends, not absolutes. The more there are, the better it is. All this competition drives more attention and resources.”
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Source: S&P Global
