Spot bidding: what to expect in Q3-Q4 2020?

Decisions made in logistics and supply chain always have had a strong impact on a company’s bottom line. It was, is and always will be a major factor to accomplish competitive advantage in any industry.

One of the decisions enterprises confront is the question of utilizing the freight spot market (one-off spot shipments) or negotiating long-term freight contracts (contract rates) for the overall freight and logistics procurement strategy.

What is Spot bidding? (Spot Freight buying?)

Spot bidding, sometimes referred to as spot shipments or spot freight, is the practice of sourcing multiple quotes from logistic service providers (carriers) for specific shipment of goods good from point A to B. A spot freight rate is a price a carrier or logistics service provider (LSP) offers a shipper at a point in time to move their product from point A to point B. Therefore, the spot freight rate is the result of this exercise and is often, but not always, leading in the final decision. Others can be lead times, availability, use of the equipment and possible certificates and licenses required for a shipment (e.g. chemical transportation).

Globally shippers make use of spot bidding. Whether a company is large, mid-size or small, across all industries and any type of transportation (road, parcel, sea freight or air freight). it is used. It’s a simple concept to grasp, but there’s much to understand about spot-buy freight, such as the rate variations, benefits, challenges and usage.

Spot freight rates market impact

The spot rate is considered by many a leading indicator of the direction of contract rates, but not an absolute indicator of contract rates that are available at the time. Freight and logistics work has many tie-ins to various economic concepts. It is a key leading indicator of the direction of a country’s economic growth or contraction, and as you will find, is the basis for spot freight rates.

As a result, spot freight rates fluctuate all the time and are EXTREMELY dependent on market conditions. An example of external factors that have an impact are; peak periods/high season, political changes (e.g. Brexit), holidays and festivals, global oil prices and general supply vs demand fundamentals.

In March, Liquefied natural gas (LNG) suppliers flooded the market with excess spot cargoes, generating fresh headwinds for prices, as demand crumbles globally due to the coronavirus pandemic that has disrupted industrial output and people’s movement. As a result, spot supply increased partly because of a big drop in demand from countries like India in Asia as well as Italy and Spain in southern Europe that have imposed lockdowns and strict travel curbs to slow the spread of the virus.

All these factors influence spot pricing, and therefore, spot shipments come with ZERO guarantees. We want to give you a short overview of what is happening in the world of spot bidding from our perspective. And a forecast for the 2nd half of 2020.

Spot bidding and the Coronacrisis

Early 2019, prior to the Coronacrisis, the market was much of a story of polar opposites with spot demand cooling off significantly since last summer while contract business continues to be strong.

It needs little to no explanation that there are times when market conditions cause spot rates to lower. This is excellent news if your company relies heavily on spot rates for transportation. Nevertheless, the other side of the coin…spot rates also go up sometimes, which has the opposite effect, meaning your freight costs will increase.

While writing this article (mid-April 2020), we notice that most companies are focusing on working with their current partners and use the spot market where it makes sense. The spot market is seeing quite some negativity as there seems to be a tendency of brokerages and forwarders to offer very low prices for the transports on offer.

What happened in Q2 of 2020?

The state of Air freight rates after the Coronavirus

“The prices have surged because the capacity on passenger airlines is no longer running,” Stallion said. On a lot of international flights, passenger jets are carrying cargo, too. Usually, 80% of transatlantic cargo travels this way, but those passenger flights have all but evaporated. At the same time, demand has ramped up; for example, for medical supplies.

Calling this moment a “perfect storm,” Neel Jones Shah, executive vice president for Flexport, an industrial shipping company, said passenger airlines are taking advantage of surging prices and adapting.

“Most of the major airlines around the globe are all offering what they call ‘mini freighters,’” Shah said. Loading up passenger planes with cargo is not an easy thing to do, physically or economically. Samuel Engel, senior vice president at ICF in the aviation consulting group, described air freight as “directional.” There’s a lot more air freight that comes into the U.S. from China, for example, than the other way around.

“What you’re asking is to use half of the plane, largely in one direction, to cover the costs or profit that would have been covered by the whole plane in both directions,” Engel said. “That’s a tall ask.”

For now, though, prices are high enough for that to work.

Spot rates versus contract rates (Freight sourcing)

For shippers, it can be a difficult matter to choose between freight contract procurement and spot shipment procurement. It is a decision between two counter-forces: avoiding market price increases, and on the other side losing out on the benefits from a softening market, with dropping freight rates as a result.

The truth is, there is not a One size fits all solution for companies in general. Moreover, some businesses choose the best of both worlds, securing a part of the shipping volume on a contracted basis and then use the spot freight market with the remainder

Freightender – Spot freight bidding and freight sourcing platform

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Pieter Kinds

Pieter Kinds

CEO Freightender.com

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