How Will New Ships Impact Freight Rates?
Freight rate shifts in the shipping industry have been the primary focus for shipping analysts in 2021. Record-setting rates, coupled with supply chain breakdowns and port congestion, have contributed to profitability risks for shippers. As rate remain high, commercial marine insurance is only one of many risk management solutions available to shipping interests. Now, with a boom in new ship orders further creating turbulence within the industry, are these new ships capable of bringing freight rates back to near-normal levels?
Record Rates in Shipping
At the beginning of 2021, shipping index analysts began to report climbing freight rates. By the end of January, long-term contracted freight rates increased 6% over 2020 figures before settling just a bit lower at 4.5%. These are record-setting numbers not seen in two decades. Since the beginning of the year, these freight rate increases have impacted shippers around the world, impacting profits and creating challenges not easily overcome.
New Ships on Order
As the early waves of the coronavirus pandemic waned, driving up cargo demand, shipping companies around the world placed orders for new vessels. On paper, this seemed like a way to capitalize on skyrocketing consumer demand for goods; it was also seen as a way to help control freight rates by increasing capacity.
The reality may be much different, according to some shipping industry analysts. A supply side risk for new ships delivered in the early part of 2023 is a very real possibility, potentially threatening profits as well as presenting unforeseen risk exposures. While commercial marine insurance is designed to protect against many operational and liability risks, a fleet of new vessels may not result in the lower freight rates being predicted, thus putting shippers at risk of significant losses. There are several factors at play that influence whether new ships will ease freight rates or create new problems, including:
- Vessel capacity outstripping demand.
- Out of control expenses associated with shipbuilding contracts.
- The threat of carrier alliances forming that can limit the impact shippers have on controlling rates.
Existing carrier alliances have already threatened to cancel sailings through a process known as “blanking” and in some cases have already manipulated capacities by deploying fewer vessels. Carriers are enjoying the benefits of high freight rates while shippers are feeling the pinch on operations. These alliances have a financial interest in keeping freight rates as high as possible. As new vessel orders are delivered to shippers, blanked sailings may interrupt the best wishes of lower freight rates – the purpose of stepping up new vessel orders in the first place.
Additional Risks Associated with New Ship Orders
Shippers hoping for lower freight rates may be in for a shock when their new vessel orders do not have the intended outcome. This can create financial risks but are not the only emerging risk exposures shippers may face. When companies take risks to capitalize on emerging trends, and these risks can threaten business prospects. With a feverish demand for new vessels heating up the industry, emerging risks include:
- Setting aside quality control/quality assurance programs to get vessels into the water more quickly.
- Relaxing safety standards during construction to speed the process.
- Relaxing regulatory adherence.
If new vessels are rushed into service – and those vessels are not safe due to shoddy construction, quality, or workmanship – shippers face millions of dollars in losses. Commercial marine insurance can only do so much to protect shippers. To weather the fluctuating freight rates and consumer demands, shippers must continue to implement practices that will reduce risks, minimize overhead expenses, and maintain adequate vessel capacity.
About Merrimac Marine Insurance
At Merrimac Marine, we are dedicated to providing insurance for the marine industry to protect your clients’ business and assets. For more information about our products and programs, contact our specialists today at (800) 681-1998.