In September 2021, the freight prices reached an all-time high of $10,400. A whopping 466% increase from the previous year. Many people blamed the pandemic.
In 2022, the prices will drop by 30-40% compared to the previous year, but it won’t return to the 2019 rates.
- What causes the rates to be so volatile?
- What caused the freight rates to increase so much in such a short period?
- What rates can you expect to see in 2023?
- And how to navigate through such times?
In this article, we’ll talk about the factors that cause freight shipping rates to be so volatile and how you can try to minimize the impacts these cause.
The Increased eCommerce Demand
Ultimately, every price is set by the laws of supply and demand. If there’s more demand than supply – the prices spike – simple as that.
The pandemic brought a change in our lifestyle that shows no signs of slowing down. During that time, eCommerce sales in the US increased by 46% and reached $815b in 2020. And it reached $5.2 trillion worldwide in 2021.
These staggering numbers brought an equally huge number of deliveries. Resulting in historical pressure on the supply chains – transportation and warehouses are feeling it. And eCommerce sales are only expected to rise more (it’s projected to be at $6 trillion by 2024).
So, expect this factor to keep increasing freight rates in 2023, especially while the next factors are still making it harder for transportation companies to adapt to the growing demand.
The Truckers Shortage
A driver shortage is a lack of qualified CDL holders - a contrast to a capacity shortage, which signals a lack of trucks: you can have vehicles with available capacity, but no drivers to pilot them
In 2021, there were up to 425,000 unfilled trucker positions in Europe. A sharp 41% increase from the previous year. Even after the pandemic, it’s showing no signs of slowing down. We might notice another 8% increase in 2022.
The increase in demand, long working hours with a sometimes low payment, the high average age for truck drives in Europe and political/territorial challenges all combine to create what is now one of the biggest challenges in the transportation industry.
Increased Fuel Costs
Fuel costs represent 50-60% of a ship’s total operating costs.
A war with one of the world’s leading fuel suppliers, Brexit, and inflation – all these spell a complex fuel shortage, resulting in a price strike. European gas prices are on average 10 times more than they were a decade ago. Meanwhile, electricity prices reached a record high of 343 euros per megawatt hour in August 2022.
For 2023 the numbers are looking a little bit better, but still not close to a pre-pandemic scenario. According to Mackenzie, crude prices will remain at an average of around $100 per barrel next year - compared with $110 this year. Benchmark Brent crude prices are currently near $120 a barrel.
Peak Season Complexities
The increased demand during the peak holiday season always causes the shipping process to cost more, and, as a result, prices tend to take an expected jump - the temporary extra freight rate is known as Peak Season Surcharge. It happens during the holiday season, which can vary depending on the national holidays of every country. Common events that normally impact global eCommerce:
- Black Friday and Cyber Monday;
- Chinese New Year;
- Thanksgiving;
- Christmas.
Navigating the gap between peak demand and low supply can be hard, involving multiple processes. That’s why it is so important to understand prior peaks and problems generated by them and make sure your carrier and freight forwarding network is prepared, including backup plans.
Political Changes and Challenges
The whole world is going through political and economic changes like:
- A raging war with one international superpower going on;
- The UK is leaving the European Union because of Brexit;
- The US is facing the worst inflammation it's seen since the great depression;
- Inpredctibility regarding China
When suppliers are forced to shut down because of such adversities, the demand goes up. Events of such scale spell disaster for logistics as unions and trade agreements start falling apart, impacting shipping prices.
How To Deal With The Increasing Shipping Costs
All these reasons for the fee increases must be frustrating for you. So sit down, and we’ll tell you how to deal with them as well:
Multimodal Transportation:
Excessive dependency on a single mode of transportation is especially tricky when dealing with high demand and increased rate periods. Choosing multimodal transportation provides you the opportunity to compare prices, carriers, and routes;
Digitalization and End-to-End Transparency:
It’s time to embrace the future, and technology will help you with that. Digital freight forwarding allows you to gain accuracy and efficiency, reducing costs.
One of the main benefits of digitalizing the freight process is end-to-end visibility, making sure you have real-time data from booking to delivery. This guarantees you can not only choose the best transportation option but also use analytics to improve your decision-making and reduce costs.
Diversification of Suppliers:
Sea freight now carries 80% by volume and 70% by value of all international trade. However, this resulted in excess dependency on China.
Here’s where the “China+1” strategy comes in. Additional suppliers should be created in places like Europe and south-east Asian countries, resulting in newer shipping lines and less dependency, making the trade lanes more competitive.
Conclusion
Even though volatile shipping rates are normally presented as one of the most complex challenges of the transportation industry, it can also mean a competitive advantage - if you have all the understanding and tools to navigate it, getting ahead of the market.
Solutions like rouvia can give you the resources you need to use the information for quickly planning, managing, and analyzing your freight forwarding process, staying always one step ahead. Book a meeting now with one of our transportation experts and know how to start.
