what is spot market rate?
A spot market rate, often simply referred to as a spot rate, is the current price at which a particular freight service can be purchased and delivered immediately. This rate is typically determined by the current balance of supply and demand in the market, making it a real-time reflection of what carriers are charging to move loads.
Unlike contract rates, which are pre-negotiated for a fixed period, spot rates are transactional and can fluctuate dramatically based on various market conditions. Spot rates offer flexibility and can be advantageous during times of fluctuating market demand, providing opportunities for both shippers and carriers to capitalize on immediate market conditions.
What influences spot freight rates?
1. Supply and Demand Dynamics
The most significant influence on spot freight rates is the basic economic principle of supply and demand. When carrier capacity is low and demand for shipping is high, spot rates will likely increase. Conversely, if there is an excess of shipping capacity and lower demand, rates will decrease.
2. Economic Conditions
The overall economic health can greatly affect freight rates. In times of economic growth, there is generally more goods being produced and shipped, increasing demand for transportation services and thereby pushing up spot rates. Economic downturns tend to have the opposite effect.
3. Seasonal Fluctuations
Certain times of the year can drastically alter the demand for shipping. For instance, retail goods are often in higher demand during the holiday season, which can cause a spike in spot freight rates due to increased shipping volumes.
4. Fuel Costs
Fuel prices are a critical component of transportation costs. Changes in the price of fuel can directly impact spot freight rates; higher fuel costs may lead to increased rates, while lower fuel costs could decrease them.
5. Geopolitical Events
Political events, such as tariffs, trade wars, or regional instability, can influence shipping routes and costs. These events might restrict available shipping lanes or increase the risk associated with certain routes, thereby affecting the spot rates.
6. Port Congestion and Delays
Port congestion and delays in loading or unloading can create bottlenecks in the supply chain. This inefficiency can decrease carrier capacity in the short term, leading to higher spot freight rates due to the increased competition for available slots.
7. Technological Advancements
Advancements in technology that improve efficiency or reduce costs for carriers can also influence spot rates. For example, more efficient route planning software can reduce costs for carriers, potentially lowering freight rates.
8. Regulatory Changes
New regulations or changes to existing ones, such as those affecting environmental standards or carrier operations, can impact operational costs and influence spot freight rates.
Understanding these factors can help shippers and carriers better navigate the complexities of the spot freight market and make more informed decisions.
What is the difference between spot rates and contract rates?
When considering freight shipping, businesses can choose between spot rates and contract rates, each with its distinct characteristics and advantages.
1. Flexibility
Spot rates provide more flexibility, allowing businesses to choose carriers based on the best available rate at the time of shipment. Contract rates, by contrast, involve a commitment to use the same carriers regardless of fluctuations in the market.
2. Price Stability
Contract rates offer price stability, shielding shippers from sudden increases in freight costs due to market volatility. Spot rates, while potentially lower at times, can also be higher if demand increases sharply.
3. Volume Commitment
Contract rates often require a commitment to a certain volume of shipments, which can be beneficial for carriers and shippers with consistent shipping needs. Spot rates are more suitable for shippers with fluctuating demand or those looking to fill gaps in their logistics needs on an as-needed basis.
4. Market Conditions
Spot rates are directly affected by the current state of the market, making them ideal during periods of low demand when rates are typically lower. Contract rates are negotiated based on forecasts and historical data, potentially shielding companies from peak season price spikes.
Why are SME freight forwarders being excluded from contract rates?
In one way or another, COVID has impacted various sectors, with shipping and logistics being a common denominator.
The lockdown set in motion a chain of effects that led to port congestion, a shortage of containers, a lack of goods and raw materials, and, ultimately, an extraordinary rise in the freight cost that is still jeopardizing the global supply chain. This steep rise in prices is the leading cause for the liners being accused of maintaining an abusive monopoly. These practices have a particularly negative effect on SME freighters that often have limited financial reserves.
In this scenario, the large liner companies have decided to exclude SME forwarders from negotiating new contracts. In many cases, they have unilaterally chosen to breach the agreements already signed. Signed loyalty contracts with the shipowners are useless if they later claim that there is no equipment, the departure of the group/alliance ship has been canceled, or any other circumstance that forces the shipper to contract spot freight.
All of the above is causing that in some specific contractual cases (various freights, transport under the bill of lading regime, COAs, consignment, etc.), shipping companies are invoking, as a possible legal remedy against these breaches of contracts, the existence of force majeure. But the point is that, currently, SME freighters are still excluded from getting contract rates from liners and must resort to the spot rate market.
In the US, President Biden has urged the FMC to investigate the acts of these shipping companies, and several congressmen have asked to go further. Private companies are already taking action, like the Pennsylvania decoration and furniture firm MCS, which filed a claim for breach of contract with the FMC, both MSC and COSCO. Shippers allege that carriers are not respecting the agreements signed to transport a certain number of containers throughout the year, forcing them to go to the spot market.
When is Spot Freight a Good Option?
Spot freight can be an excellent option for shippers under certain circumstances. Understanding when to utilize spot freight rates can help businesses optimize their shipping costs and operations. Here are key scenarios where opting for spot freight might be beneficial:
1. Need for Flexibility
If your shipping needs are unpredictable or vary significantly, spot freight offers the flexibility to book shipments based on current demands without long-term commitments. This is particularly advantageous for businesses that face seasonal fluctuations or irregular shipping volumes.
2. Taking Advantage of Lower Rates
During periods of low demand, spot freight rates may be significantly lower than contract rates. Shippers can take advantage of these lower rates to reduce shipping costs. Monitoring the market closely allows shippers to capitalize on these opportunities when they arise.
3. No Volume Commitment
For companies that do not have enough volume to negotiate favorable long-term contracts, spot freight allows them to avoid volume commitments that come with contracted rates. This can be particularly useful for small to medium-sized enterprises or startups.
4. Immediate or Emergency Shipments
Spot freight is ideal for urgent shipments that need to be moved quickly. Since spot rates are for immediate booking, they cater well to emergency needs where waiting for the next contract slot isn't feasible.
5. Market Testing
For businesses testing new markets or products, spot freight provides a low-commitment way to manage logistics. Companies can assess the viability of continuing business in a new area without the long-term commitments required by contract freight.
6. Supplementing Contracted Freight
Sometimes, even businesses with contracted freight needs find themselves needing more capacity than their contract covers. Spot freight can supplement contracted shipments during peak times or when unexpected increases in demand occur.
7. Availability of Improved Services or Routes
Spot freight allows shippers to take advantage of new services or better routes as they become available. This can be crucial for improving delivery times, reducing costs, or accessing more efficient logistical options that were not included in previous contracts.
8. High Market Volatility
In highly volatile markets, locking in contract rates might not always be favorable. Spot freight provides the flexibility to navigate market changes more dynamically, potentially leading to better rate opportunities as market conditions shift.
The effectiveness of automated rate management
A product like Freightify allows companies to keep abreast of the spot rate market in real-time, which will enable them to make decisions in the shortest time and take advantage of the most favourable market circumstances. The ability to get quotes on demand can add a lot of efficiencies back into your day. Spot rates are also tremendously volatile in today's market, so it is essential to check prices at all times and not make the mistake of assuming that yesterday's rates are still valid today. On the other hand, the spot market can be advantageous and dynamic in assisting shippers in swiftly stocking up on capacity. However, it can be more challenging to estimate without accurate data-driven information.
Another important aspect when working with spot rates is that they are final prices that already include all the services and associated costs. It is very beneficial for forwarders to make inquiries in the spot rate market, including detailed information about their shipments. Currently, it is possible to obtain a quote with only a departure date and a delivery date. Still, the probability of this price being modified depending on the specific details included in the request is very high. For this reason, a platform like Freightify allows making queries with all the necessary data to obtain exact quotes providing better visibility for forwarders and a more transparent quotation process.
For these reasons, a rate procurement and management tool can make a big difference when operating in the spot market since it provides enormous amounts of information in real-time, enabling forwarders to make the most beneficial decisions.
Spot Market Rates - FAQ
What are SPOT rates in shipping?
SPOT rates is a price that can be given to one-off transportation. It is influenced by the supply and demand in the truckload market & hence constantly changes due to it's dynamic nature.
How do SPOT rates work?
Shipping rates vary due to demand and supply. If there is a greater need for freight, the SPOT rate will increase. This rate is only valid for a single shipment that must be completed in a set time frame on the designated ship.
What is broker to carrier SPOT?
The cost of transporting goods paid by the brokers to the carriers or vessel owners is termed as the broker-to-carrier rate. This price has the characteristics of a SPOT rate as brokers typically do not get into long-term contracts with the ship operators to have a contracted rate.
What is a shipper to carrier contract?
The Shipper-to-Carrier Contract Rate is the rate shippers under contracts pay carriers. These rates are negotiated up to a year beforehand and can change depending on factors like last minute changes in the requirements for freight movement.
What factors determine freight rates?
Freight rates are dependent on the cost of fuel, labor, and vessel capacities. Surrounding geo-politics and government regulations also affect freight prices.
A detailed blog on the factors affecting shipping rates can be read here.
Why are freight rates so high right now?
Shipping rates are high because there is a lack of supply with various restrictions, and increased demand. There's also an economic boom that has led to more demand for transportation. Further, port-blockages and peak shopping season have led to drastically high freight rates.
