What are estimated rates?
Xeneta’s product is based on gathering data for container rates shipped between two ports within a given time period. Typically, these “point A to point B” contracts are where the core functionality of our product exists. However, this approach may be more difficult to use when one or both of the ports fall within a lane that has minimal traffic data available. In these particular cases, we’ve introduced the concept of estimated rates.
Why are estimated rates useful?
Estimated rates allow us to construct what we believe to be a reliable estimate for rates from port A to port B when there isn’t enough existing rate data. This means we can actually provide a rate estimate between two ports even though we don’t have any contract rates for that specific port pair. To understand how we do this, it’s important to understand the context of what makes this process possible.
As cargo container ship sizes have increased tremendously over the past several years, this means that shipping prices have decreased as the ships’ container capacity has increased. These large shipping vessels cannot enter every port, thus, only travel between the largest and most modern ports in each region. These large ports are what we refer to as “hub ports”.
Because the smaller ports still need to move container freight between each other and hub ports, they are serviced by smaller vessels that work like shuttles. These small ports are what we refer to as “feeder ports”, as they are the ones feeding the global shipping network.
To illustrate this chain of service, here’s a step-by-step example of the relationship between feeder and hub ports:
- Container is loaded in origin feeder port
- Container is shuttled from origin feeder port to origin hub port by a small or medium-sized vessel
- Container is loaded onto a large transcontinental vessel in origin hub port
- Container is transported via transcontinental vessel and arrives in destination hub port
- Container is loaded onto smaller vessel and shuttled to its destination feeder port
At the most basic level, we can see that the rate is typically composed of three “legs”, with the origin hub to destination hub being the middle leg.
In the example above, we can see the route a container can take to move from Jiaxing, China (CNJAX) to Aarhus, Denmark (DKAAR). The full trip is composed of the following three legs:
- CNJAX to CNSGH (via feeder vessel)
- CNSGH to DEHAM (via large vessel)
- DEHAM to DKAAR (via feeder vessel)
It is important to understand this concept because this is how we are able to estimate the rate between two ports, even if we do not have any actual rates between those ports existing within our data.
How are the rates estimated?
In the example above, we can see that the rate is not purely a “point A to point B” route. Because of this, we are able to reconstruct and estimate each leg of the journey piece-by-piece based on our existing price data for each leg, then add them together to form what we consider to be a close estimate to the actual rate. Because we have existing rates for the well-populated leg, and our estimated cost of the feeder leg, we can estimate the cost of the feeder transportation by carefully reconstructing the journey. Similarly, since CNSGH to DEHAM is a very popular trade lane, we should have a large number of rates available for this leg of the journey.
At a very basic level, the formula used to construct a rate estimate (referencing the illustration above) is:
Total price = leg 1 + leg 2 + leg 3
Obviously, there are many other complexities related to reconstructing these rates and we have developed several methodologies in order to address them, but this is intended to be a broad overview of the concept itself.
How are we sure that valid rates are being used to generate the estimate?
Xeneta maintains a pool of rates that are only considered “valid” within a particular window of time. Estimated rates are calculated based on current and valid contracted rates. This means that all rate estimates are formed from contracted rates that have been recently acquired. These estimates are never created from data that would be considered outdated or expired.
Additionally, other guidelines are followed in order to maintain a high level of estimate confidence. For example, only the same supplier and company are used when estimating the feeder part of the journey. This is primarily due to differences in rate structure between suppliers/carriers/companies, so it would make sense to only use the same ones in parallel with each other during the calculation. Once rates have been matched, added, and averaged, they are then constructed into what we refer to as estimated rates.
As shown in the short-term market trends image below, the variation between an “actual” contracted rate (yellow line), vs a rate that has been constructed from multiple feeder network contracts (gray line) is relatively low. The feeder network is able to adapt to volatility within the market accordingly because contract data pool is kept up-to-date.
What are the limitations of estimated rates?
While we can provide what we believe to be a reasonably close estimate for rates, it is still just an estimate and should be treated as such.
Rates between feeder ports and main hub ports have very different dynamics. Competition is much more prevalent on trade lanes between main hub ports, thus, rates are more volatile. However, since we typically have sufficient access to contract rates on these main hub lanes, we can generally solve this piece of the equation easily.
Conversely, feeder port transportation rates are relatively stable when compared to trade lanes between popular hubs. Since there are fewer providers and less competition, the prices are less volatile and more predictable.