Why freight rates are high right now and how shippers can adapt?
Swelling freight rates and container shortage have become a global challenge disrupting supply chains across industries. Over the last six to eight months, shipping freight rates across transportation channels have gone through the roof. This has had a consequential impact on allied functions and industries, such as auto, manufacturing among others.
To mitigate the soaring impact, one needs to scrutinize the key reasons behind the absurd rise in freight prices globally
The COVID-19 pandemic
The shipping industry has been one of the worst-hit sectors by the Covid-19 pandemic. Firstly, all the major oil-producing nations have cut down production drastically due to the pandemic, which has created a demand-supply imbalance resulting in pricing pressures. While crude oil prices were hovering around US$ 35 per barrel until recently, they are currently, more than US$ 55 per barrel.
Secondly, surging demand for goods and shortage of empty containers is another reason for distribution going haywire which has in turn caused freight rates to rise so significantly. With the pandemic bringing production to a halt in the first half of 2020, companies had to step up manufacturing to meet the sky-high demands. Also with the pandemic-related restrictions disrupting the aviation industry, there was enormous pressure built up on ocean shipping for the delivery of goods. This in turn had a knock-on effect on the turnaround time of containers.
Continued reliance on split shipments
Ecommerce retailers have been comprehensively using split shipments for years now owing to multiple reasons. Firstly goods need to be picked from inventories across different locations. Secondly, breaking order into sub-orders, especially if it belongs to different categories can help enhance the speed of delivery. Thirdly with not enough room on a single truck or plane for an entire shipment, it may have to be divided into individual boxes and transported separately. Split shipments happen on an extensive scale during cross-country or international shipment of goods.
Additionally, customers requiring to ship goods to multiple locations may also encourage split shipments. The more the shipments, the higher the shipping costs, therefore the trend ends up being an expensive affair and often harmful to the ecosystem.
Brexit increases freight rates for goods to and from the UK
Besides the pandemic, Brexit has caused a lot of cross-border friction, owing to which the cost of shipping goods to and from the country has surged exorbitantly. With Brexit, UK has had to give up on several subsidies it availed under the EU umbrella. With the transfer of goods to and from the UK now being treated as intercontinental shipments, coupled with the pandemic complicating the supply-chains the freight rates for goods to and from the UK have already quadrupled.
Additionally, friction at the border has also prompted shipping firms to reject previously agreed contracts which again meant that companies trying to transport goods were forced to pay increased spot rates.
Global freight rates have got further escalated owing to this development.
Shipment Imports from China
Apart from the above reasons, another major reason behind these surged prices is the tremendous demand for containers in China. China being the largest manufacturer in the world there is a huge dependence of western countries such as the US and Europe on China for various goods. Therefore countries are willing to shed double or triple the price to procure goods from China. So while container availability has anyway shrunk drastically through the pandemic there is a huge demand for containers in China and the freight rates too are substantially high there. This has also contributed significantly to the price hike.
Other factors in the current scenario
Apart from the aforementioned points, there are a few lesser-known contributors to the high freight rates. Communication issues stemming from last-minute diversions or cancellations in the current scenario are one of the reasons for booming freight prices. Also, the transportation sector, like other industries, tends to have ripple effects when corporations take major actions. So, when the market leaders (the largest carriers) decide to increase their costs to recuperate losses, the overall market rates are inflated too.
The industry can resort to several measures to put a check on the rising freight rates. Altering the day or time for the shipment and transporting during ‘calmer’ days such as Mondays or Fridays, instead of Thursdays that are generally earmarked as the busiest can reduce freight costs by 15–20% annually.
Companies can plan in advance to club and ship multiple deliveries at once instead of individual deliveries. This can help companies avail discounts and other incentives from shipping companies on bulk shipments. Over-packaging can augment the overall shipment costs, besides damaging the overall ecosystem. Therefore companies should look at avoiding it. Additionally, smaller companies should seek the services of integrated transportation partners for shipments as outsourcing can help them focus on their core operations.
What can be done to counter rising freight rates?
One of the most effective ways to combat these high freight rates is advance planning of shipments. Cargo cost is increasing every day. To avoid paying surged charges and avail early bird facilities, companies have to strategically plan their shipments well in advance. This can help them save a considerable amount of cost & help them avoid delays. Using digital platforms to leverage historic data on the freight costs to predict the rates as well as the trends affecting the rates also comes in handy when planning in advance for the shipment.
It is digitization that can usher in a strategic transformation in the Shipping & Logistics industry. Currently, there is a tremendous lack of visibility and transparency amongst the players of the ecosystem. Therefore re-inventing processes, digitizing shared operations and implementing collaborative technologies can maximize efficiency and reduce trading costs. Besides building resilience for supply chains, it will help the industry to bank on data-led insights, thereby helping players make informed decisions. The industry, therefore, needs to adapt technologically bringing about a systemic shift in the way it operates and trades.
Source: CNBC TV18