Earlier this week, the Wall Street Journal reported on the arrival of new mega-container ships and the impact this is having on a market that already suffers from overcapacity. The gargantuan new vessels were ordered by shipping companies 3 years ago, when they were charging significantly higher prices and turning away business due since they were filling every ship.

My how times have changed. As the Journal noted, carriers are desperate to fill some of their capacity and prices have plummeted (thus far without having the desired effect of stabilizing prices and stimulating demand):

The rate for shipping a container from Asia to Europe, the world’s busiest trade lane, has fallen to around $300, one-tenth the cost of a year ago (ed. it’s actually between $300 and $700, or 1/10 to 1/4), even as some shippers cancel regular runs. Some ships have gone so far as to take containers free. The only cost to the shipper is roughly $500 in fuel and transit fees, which are assessed on all containers.

It’s important to note that in the face of shrinking demand and profits, carriers are cutting routes and service. Recently, Evergreen announced its withdrawal from the TANGO service between ports on the east coasts of North America and South America. Maersk announced that it will remove eight 6,500 TEU (twenty foot equivalent units) vessels from service in the APAC region until at least the summer of 2009.

However, according to our research and the recent transportation sourcing projects we’ve worked on, the ocean freight industry is now facing market conditions that have not been encountered in almost six years. Eastbound Transpacific volumes have been flat since the middle of 2007, and Asia to Europe trade lanes are predicted to only grow five percent this year, a 10 percent decline compared to last year. Major ports in China are reporting growth of only 10 percent this year, a large drop from the 30 percent increase seen last year.

All in all, it sounds like a pretty good time to source ocean freight, right?

YES…but be aware of the potential pitfalls.

Current sourcing projects for ocean freight are currently averaging savings of three to eight percent. In the middle of the peak season for negotiating ocean freight rates, shippers remain in firm control of price negotiations.

But, while carriers are becoming aggressive with freight rates in order to secure business, shippers should be wary of going with the lowest-cost carrier under all circumstances. Many analysts are predicting that as freight rates continue to decrease, service levels will decrease accordingly. Shippers should continue to monitor their contracts and charges assessed by carriers to make sure carriers are not trying to recover cost through “value-added” or ancillary charges.

The time to act is NOW. There will come a tipping point in which enough shippers have examined their ocean freight that a carrier will feel a bit more secure about freight levels and be less inclined to offer such aggressive deals. It’s always best to catch the first wave instead of waiting for the next one, right?

***Portions of this post appear in the transportation article in the upcoming issue of SupplyWatch. Subscribe here if you’d like the electronic version to be delivered via email when it is published. Also, I provided an overview of ocean freight and other transportation sourcing opportunities in the recent Top 5 Categories to Source Now webinar. The replay is available here.***

Rachel Rutkoski is a Category Manager for Transportation and Logistics in Ariba’s Global Services Organization. Rachel is recognized by the Institute for Supply Management as a Certified Professional in Supply Management (C.P.S.M.) and has several years experience as a supply chain and transportation analyst in Fortune 500 companies.