SPOT Market: An Opportunity For SME Freight Forwarders

November 3, 2021

What’s in this article:


Why are SME freight forwarders being excluded?

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. 


The spot rate market

What are spot rates, though? A spot rate, also known as a spot quote, is a one-time cost charged by a shipper in exchange for moving a load (or shipment) at the current market price. Spot rates are a type of short-term transactional freight price that reflects the market's real-time balance of carrier supply and demand.

The good news is that all this chaotic situation can offer an advantage for SME freight forwarders since there are software tools specifically aimed at the spot rate market. By using these platforms, freight forwarders can contract spot rates quickly and transparently, without long and tedious negotiation processes and with the anticipation necessary to obtain the best price.

Increasingly, however, it is also critical that companies and carriers know when rates drop and flow, allowing freight market participants to adjust their projections, learn how a liner sets freight rates, and understand the market and the services offered to justify fees. This concept explains why an increasing number of companies today switch to smaller and more frequent mini-offers. Smaller offers give companies and carriers more opportunities to renegotiate and reformulate rates, proposals, and service plans. This type of real-time data analysis and application is essential for freight forwarders to stay strategic and tactical while forecasting contract and truckload rates.


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.

FAQ

What is a SPOT freight rate?

A SPOT rate is the price that a shipper will bear as a one-time cost to transport a shipment between two destinations at the current market pricing. It is influenced by the real-time supply-demand balance in the truckload market. As the rates are determined for a point in time, they change on an hour-to-hour basis due to the dynamic nature of the market conditions. 


How do SPOT rates work?

Depending on the demand and supply requirements in the freight industry, SPOT rates are quoted by the carriers. The more the demand, the higher the SPOT rate. It is typically valid only for one shipment and only for a set date range through a specific vessel. Spot rates are for shippers who don’t typically work with contracts but need their freight moved regularly or if they are shipping beyond the contracted capacity. 


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?

When shippers and carriers are directly involved in price negotiation, the chances of longer-term rates are higher. The Shipper-to-Carrier Contract Rate is the rate shippers under contracts pay carriers. It is usually negotiated up to a year beforehand. When freight movement requirements are regular and planned, shipper-to-carrier contract rates are the most frequently used mode. 

What factors determine freight rates?

The freight costs are influenced by the economic conditions of demand and supply. Cost of fuel is another important factor in fixing freight rates. Cost of labour and the vessels’ capacity play a role in cost determination. Geo-political situations and government regulations also affect the 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 at multi-year highs. The major reason is the massive demand for shipping and the lack of supply due to restrictions and pandemic-led lockdowns. Further, there is a commodity boom that’s boosting demand for transportation, as economic recovery happens. Further, port-blockages and peak shopping season have led to drastically high freight rates.