What Drives The Volatile Shipping Rates?

August 10, 2021

Extreme shipping rates are ruling the freight industry. Rates have quadrupled in the recent week due to market conditions that result in volatile shipping rates.

So, what influences this shipping rate volatility?

Why have the shipping rates quadrupled recently?

Why do experts expect a possible ten-fold increase in these shipping rates?

This blog explores the market conditions that result in volatile shipping rates. This blog covers the following :-

Current Increases in Container Shipping Rates

The highs and lows in shipping rates are cyclical. Yet, it is tricky to identify the length of a cycle and the extreme limits that it would enforce. 

During the first week of August 2021, Container shipping rates from China to the United States peaked drastically to approximately USD 20,000 per 40-foot box. In fact, the price has climbed over 500% in the last one year. For comparison, the prices stood at just under USD 11,000 in the last week of July 2021. Costs have doubled just as the US shopping season approaches. Also, the latest China-Europe shipping rate is at nearly USD 14,000. 

This strains the global supply chain networks as there is a further demand than what is expected. The ways to meet this increased demand seem insignificant when compared to the supply opportunities. 

Presently, the seller-centric market has created a large disparity in terms of the available supply and the expected demand. The Loadstar states that the current increased rates in the global freight industry will continue at least until the 2022 Chinese New Year. The apparent instability in this market is expected to stay until 2023. 

In such a seller-driven economy, it is only obvious that the shippers would ply through the routes that give them the best gains. They would cater to chartered requirements and reduce volumes in routes that they do not profit from. So, why is there the demand irrationally higher than the existing supply? And how does this make the shipping rates unusually unpredictable? 

Traditional drivers affecting the volatile shipping rates 

As in every market, the expectant demand and the available supply of a commodity drives the rates.

Every action within the supply chain network has a resultant impact.

Lack of container ships result in higher neglected demands and hence increased costs.
Reduced global manufacturing reduces the demand and reduces the shipping rates.
Sudden declines in e-commerce shipping results in lower shipping rates.
Unexpected alterations to the route will most likely hike the shipping rates, and so on. 

An important concept that we can identify is that shipping rates reflect the sentiments of the market. It embodies the spirit of any global change. It is closely associated with any international event (ranging from politics to calamities; exchange rates to festivals). 

Customarily, the rates remain on the higher side from May to November, as this is the peak season for shopping in the US. Carriers automatically add peak season surcharges and a general rate increase during these six months.

Another factor is when the Carrier is forced to increase costs when Terminal costs rise. This happens especially during unions strikes, political tensions and congestion problems, or when the US Rail costs increase for similar reasons. Carriers immediately take advantage of this situation and add new surcharges. 

Fuel costs represent as much as 50-60% of total ship operating costs. Usually, the floating cost of fuel has a linear change on the shipping costs, as and when the oil prices rise or fall. 

Lastly, short-term rate-cards and Mini-Bids are more common today when compared to long-term agreements. As a result, when shippers request for quotes from carriers, a “bidding-fatigue” sets in. Experts note that response rates have fallen from around 90% to just under 50%

The Pandemic-led Backlash on shipping rates

The pandemic repercussions on the demand and supply equilibrium can be singled out as the most evident reason for these disruptions in the recent times. It has created a vicious circle, where the reasons and the effects of one action create recurring spirals that are interdependent on each other. 

Statistically, 94% of Fortune 1000 companies have seen supply chain interruptions due to the effects of Covid-19. 75% of these companies believe that the corona virus outbreak left a negative impact on their businesses.

Over the past 18 months, reduced labor and constant restrictions of varying degrees have impacted the global economy. Initially, during the pandemic there was a slight lull in the shipping industry, as companies tried to plan and re-forecast for the future. 

However, since then, the shipping rates have been steadily increasing. The lack of available containers would be a major reason. Ports are taking an additional time of about a week to clear the containers. There is also a 75% increase in rollover cargo in 20 global ports.

The orders for shipping containers to be manufactured are in place. However, this relief would become a reality only in 2023. Until then, the massive demand and the reduced supply might be prevalent in this industry. 

During the pandemic, consumer buying patterns have changed. Online retail sales increased 32.4% y-on-y in 2020. The onslaught of e-commerce is expected to make up 22% of global retail sales by 2023. This results in last-mile delivery and a more global reach for brands, increasing shipping costs. 

Recently, the acceleration in the Delta-variant of Covid-19 outbreaks (informally termed as the possible third wave) in several countries, has slowed down economic activities. 

Effects of the Chinese slow-down 

A massive amount of the world’s freight moves into and out of China. Mostly finished goods, and in some instances, even raw materials are exported from China to all over the world. The port of Shanghai is known to be the largest port in the world in terms of volume handled.

Container throughput in China is expected to 505 million TEUs by 2030. Research shows that China is the overall leading maritime nation, especially with their impressive ports and logistics network. 60 percent of maritime trade passes through Asia, with the South China Sea carrying an estimated one-third of global shipping.
As a result, Chinese factors cascade onto the shipping rates and the available supply of containers in the rest of the world. 

Even in regard to manufacturing the necessary shipping containers, the world is dependent on China. The country’s factories make more than 96% of the world’s dry cargo containers and 100% of temperature-controlled reefers. 

Typhoons off China’s busy southern coast in late July and early August have contributed to the shipping rate crisis. Recently a few new Coronavirus outbreaks at the Yantian port caused a massive backlog in clearing containers.

Conclusion

Interestingly, the ships and containers that are currently waiting in factory outposts and shipping terminals are only increasing costs. This ultimately nullifies the less-cost advantage that Chinese manufacturing is known for. 

The pandemic virus has resulted in extreme highs and lows in the shipping industry. Simultaneously, it has also given fuel for thought on how the world is dependent on one region for all its shipping needs. Unfortunately, the sudden rise in shipping rates has once again left the freight industry reeling and reassessing their forecasts and plans.


Recommended Reading:-