Tue | Sep 27, 2022

Factors that influence ocean freight rates

Published:Tuesday | September 20, 2022 | 12:05 AM
The freight shipping sector is vulnerable to shocks which can significantly affect prices.
The freight shipping sector is vulnerable to shocks which can significantly affect prices.

Elevated freight rates have had an enormous impact on the shipping industry and, by extension, the world over the past two years.

The ongoing coronavirus pandemic has prolonged and, in some instances, worsened challenges to the global supply chain system, which continues to reel from the impact of increased demand, container shortages, port congestion, increased fuel rates, and the war in Ukraine, among others.

As a result, freight rates, which are largely determined by supply and demand, have been driven up considerably throughout that period, leading to higher charges which usually pass from importers to consumers. With some ease coming from improvements to congestion, capacity and consumer demand as nations increasingly move towards adjustments to the pandemic, there has been some reprieve, much to the relief of consumers. This is due to those ordering cargo doing so earlier than usual to avoid peak holiday season delays – which typically begin in August – that mired the sector over the past two years.

Additionally, the Freightos Baltic Index reveals that a 40-foot container shipped from China to the United States West Coast costs US$5,400, a 60 per cent decrease from January of this year, despite still being above pre-pandemic levels. The index notes that the rate peaked at more than US$20,000 just a year ago.

With the freight industry susceptible to these fluctuations and shocks, understanding the dynamics that affect prices can help retailers anticipate rate adjustments more easily. Today, the Shipping Industry takes a closer look at some of the factors which impact ocean freight rates.

DESTINATION/DISTANCE

This is an important consideration for freight forwarders, who are charged with delivering goods. Generally speaking, freight will cost more the farther the distance between the point of origin and its destination. However, this may also be impacted by related matter such as complexity of the delivery. Having a trusted freight forwarder that can provide the best strategy to reduce shipping costs and maximise efficiency will be imperative to your business’ success.

SEASONS

Typically, the shipping peak season runs from August to October and is characterised by higher transportation costs and port delays, due to increased demand as companies head into the holiday period. While this annual increase is almost unavoidable, companies can limit its effects by forecasting its needs, based on experience, and ordering early to reduce the adverse impacts cause by market fluctuations.

DISRUPTIONS/GEOPOLITICAL EVENTS

Disruptions to the supply chain can have serious implications for freight rates if routes, fuel charges, capacity or the cargo source is affected. The war in Ukraine, the pandemic, lockdowns in China due to its zero-COVID policy, and higher fuel rates have had significant negative effects on freight rates, due to the ensuing unpredictability and shortages.

DEMAND

Where there is great demand, prices may be raised to maximise profit, but also due to limited capacity. This is typically experienced during peak season, when competition for constrained capacity is at a high. During the height of the pandemic, despite vastly reduced demand, prices soared as vessels were taken offline to reduce cost to shippers and empty containers left at ports with nothing to transport. This put greater pressure on the reduced capacity, which bolstered prices to historic levels.

FUEL PRICES

The cost of fuel is a substantial freight expense and affects all modes of transportation. Even minor increases in fuel prices can have an immense impact on freight charges, especially at the scale at which they operate. Where fuel charges are elevated, these will often result in a near-immediate reflection in quotes offered to customers as freight forwarders look to balance their expenses.