While ocean shipping services continue to be the preferred mode of transportation for international trade, they are quite a volatile market — both in terms of available capacity and demand. This causes freight rate fluctuation, posing challenges for shippers, freight forwarders, and other stakeholders.
This article explores factors affecting freight rate fluctuation and different strategies freight forwarders and shippers can take to manage the situation.
Why Do Freight Rates Change Often? The freight rate is a complex structure with three components: the basic fare, surcharges, and other charges (such as documentation, customs clearance, and other charges). Of these three components, the basic fares are the most volatile and the main reason for fluctuations in freight rates. They are determined by the distance, weight/volume, and shipping routes of the transported cargo. The idea behind the basic fare is to cover operational expenses.
However, these operational charges and the factors that make up the basic fare are not static. They constantly change , often in unpredictable ways. For instance, shipping routes are outside the control of carriers. Sometimes, like with the Houthis on the Red Sea, these routes become much more complicated to transport cargo safely, triggering a rise in cost. Another reason for these changes could be due to inflation in operations costs and bunker fuel, as we have seen in recent years in various economies.
Ultimately, the surcharges and other components of the freight rate are constant and will only change when there is a general change, which isn’t quite often. The basic fare, conversely, is subject to market forces and will vary depending on market volatility. This unpredictability underscores the need for adaptability and resilience to effectively manage freight rate fluctuation.
Factors Affecting Freight Rates Unfortunately, the market factors or forces that influence freight rate fluctuation are outside the control of shippers and freight forwarders. However, understanding them can help ensure the business is better positioned to navigate these pricing fluctuations.
1. Market Demand and Supply Like in most other markets, the price of goods and services is determined by customer demand and the capacity of the businesses in that market to meet that demand. In the shipping industry, too little demand will often mean overcapacity, meaning more carriers must reduce their rates to attract more customers.
On the other hand, when there is high demand, carriers struggle to meet demand and often increase freight rates to increase their bottom line. A typical example is during the run-up to the holiday season when increased demand for capacity causes freight rates to spike.
2. Fuel Prices Fuel prices are another critical factor in shipping operations, especially since they make up most operational expenses. For example, the geopolitical crisis across the Middle East has impacted oil prices . If prices continue to rise, shipping rates will rise along with it. The same correlation also works in reverse, as fuel surcharges go lower, making shipping prices more manageable.
3. Global Events and Economic Conditions With the rise of logistics technology and increased international trade, the world has become more intricately interconnected. Unfortunately, it also means headwinds to trade in one market can have ripple effects across many other countries and economies.
For instance, during the pandemic, freight rates increased because of port closures and congestion, which forced carriers to carry shipments for longer durations, increasing the cost of operations. Geopolitical crises like that in the Middle East have forced shippers to take longer routes, resulting in higher rates to compensate for the extra distance and fuel consumption.
4. Seasonality The shipping industry is subject to seasonalities and trends. There are peak seasons for various industries. Take, for example, the consumer packaging industry's peak season, which usually picks off in August. Now, shippers are focused on bringing as many goods as necessary to cater to the rising demands of tourists and the holiday season.
5. Carrier Capacity and Surcharges There are times when there isn’t an increased demand in the market but limited carrier capacity for any number of reasons, including blank sails, maintenance, or decommissioning of vessels. When that is the case, the carriers tend to increase freight rates to manage the rise in requests effectively.
Carriers also leverage surcharges as a form of control. It helps them manage prevailing market forces such as peak season surcharges, bunker adjustment, or currency adjustment factors.
How to Manage Freight Rates Although freight forwarders have little to no impact on the fluctuation of freight rates, there are strategies they can leverage to manage them for their clients or customers.
1. Using Rate Management Tools To Acquire Optimized Rates Rate procurement platforms like Freightify can help shippers and freight forwarders compare rates across different carriers, helping them lock up optimized rates. Rate management is especially helpful when:
Market volatility is high, and carriers are expected to increase rates. Shippers have limited or constrained budgets, making optimized shipping costs essential for profitability. A company can maintain a steady shipping capacity or volume, making it attractive to carriers. Managing and acquiring contract rates offers several long-term benefits for shippers:
It provides predictability and budget certainty, which facilitates better financial planning. It fosters stronger relationships with carriers, potentially leading to improved service and priority access to capacity. By maintaining good relationships with carriers, shippers and freight forwarders can be somewhat shielded from price hikes, particularly in a highly volatile market. 2. Developing Relationships With Multiple Carriers Beyond using rate procurement tools, building relationships with carriers must be a priority as shippers and forwarders are more likely to enjoy priority access and negotiating power with these carriers. Because of continuity, carriers prioritize and value shipments from businesses with long-term relationships.
Strong relationships also streamline collaboration and problem-solving with carriers, ensuring quick and seamless resolving of issues or disruptions.
Importance of Carrier Diversification When building relationships with carriers, it is essential to ensure diversification of carriers. This strategy not only strengthens operational resilience but also offers several key advantages:
Risk Mitigation : Relying on a single carrier can expose businesses to significant supply chain risks and disruptions, especially if the carrier fails to fulfill its responsibilities due to unforeseen circumstances or factors beyond its control.Operational Flexibility : A diversified carrier base enhances a shipper or a forwarding business's ability to maintain flexible shipping operations, allowing for better accommodation of varying schedules.Strategic Advantage : As market conditions continually evolve, diversification enables businesses to optimize their shipping strategies, thereby gaining a competitive edge in the industry.Balancing Cost, Reliability, and Speed Different carriers and transportation modes offer varying trade-offs between cost, reliability, and speed. For instance, sea freight is generally more cost-effective but slower than air freight. By partnering with multiple carriers and leveraging different modes, businesses can choose the optimal combination for each shipment, balancing cost considerations with the need for timely delivery and service reliability.
3. Consolidate Shipments Many shippers cannot send over large volumes that could fill up an entire container, forcing them to pay more for less. By consolidating shipments, freight forwarders can bring multiple shippers together, especially those of the same product category, and ship through the same routes.
This way, the shippers only pay for their container space, helping them reduce the impact of the fluctuating costs. This shipping method is also known as less-than-container load (LCL) shipping , and it is very helpful in ensuring more shippers can ship any volume of shipments irrespective of the going rate.
How Freightify Helps Plan & Contain Fluctuating Rates? Freightify is a cloud-based logistics platform that empowers shippers and freight forwarders worldwide to streamline their end-to-end operations through effective rate management and procurement solutions. Our systems are flexible, adaptable, easy to maintain, and upgradable with minimal fuss.
Over 200 forwarders in 45+ countries trust our platform to procure and manage rates, track and trace shipments seamlessly, and generate speedy quotations. With powerful integration abilities, freight forwarders and shippers can seamlessly leverage Freightify to coordinate and manage information. All of this while never having to worry about technical debt. Schedule a demo to see what our platform can do for you.
