The higher shipping costs have been sparked by a combination of factors, including soaring demand amid stimulus money, saturated ports, and too few ships, dockworkers and truckers. The problems are too broad to be remedied by any short-term fix and are creating ripple effects across U.S. and International supply chains.
Ocean Freight Battling Equipment Imbalances
Commitment agreements with the shipping lines used to be a space and equipment guarantee in the past, but it doesn’t solve the problem anymore. Even with commitment in place, it’s close to impossible to get an empty container in China these days. Carriers introduced a number of surcharges, pushing rates even higher.
This is very frustrating to shippers. They have to accept the new rules of the game: “Ongoing service unreliability, coupled with the record profits of shipping companies at times of crisis, clearly depicts a seriously disrupted market and demonstrates that carriers have been passing tremendous hikes on spot rates, imposing heavy surcharges above the fixed-term contractual rates,” says Denis Choumert, president of the European Shippers’ Council.
COVID-19 and the equipment shortage are both valid reasons for the current freight rate spike. However, the main cause for the rate fluctuations on the market is always the supply & demand balance, or imbalance to be precise. The lockdown contributed to increasing demand and the lack of shipping containers in Asia resulted in a limited supply. Consequently, freight rates have doubled.
Market forces are the main driving factor behind the freight rate fluctuations. Factors such as fuel prices, distance traveled, terminal costs, etc. don’t impact freight rates as much as supply and demand do. Shipping lines are finally in a good place, making up for the previous years of low margins. Ships are loaded with high yielding containers, the spot market is at an all-time high, and the customers are forced to accept higher rates when signing new long-term contracts.
Over The Road Trucking Rates Are Up As Well
Truckload carriers have continued to struggle to provide consistent coverage through the first quarter of 2021, and in return costs have increased. This relationship seems counterintuitive at a base level. Why would you spend more to get less? It’s simply a common result of demand exceeding supply in just about any industry.
Unlike previous years when the market was more stable, shippers will have a tough time finding the sweet spot that balances price and service/compliance levels. Optimizing this function with so many uncertainties makes budgeting transportation spend a nightmare. The traditional strategy of relying on leverage will probably not work as well this year.
Rail rates have been driven largely by two domestic factors: Regional tightness in the trucking spot market and increases in parcel businesses driven by e-commerce. The airfreight market is as tight as any mode. Cargo carriers are overbooked with freight and passenger carriers are so full of passengers and luggage that there is little room for freight.
What Are Options for Shippers
Developing an in house private fleet might be an option if it’s in the budget and you could find someone to drive the trucks. The only practical option to manage both your freight budget and customer service is to increase efficiency by improving your logistics planning. Increasing supply chain efficiencies is the expertise of 3rd party logistics services. At Land Link Traffic Systems this is what we do best.
Contact us @ www.Land-Link.com to explore options for your organization.
Stay Safe Everyone.
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