Shipping and freight rates have risen deliriously high in the last few years:
• Along the EU-China shipping route, transporting a 40-foot container by sea costs a whopping 547% higher than the seasonal average of the last 5 years.
• The contract rates between Asia and North America were 25-50% higher than the previous year.
• Similarly, shipping costs have increased by 350% between China and the UK.
But why is this happening? We’re diving into 6 factors affecting Freight and Shipping rates in 2022.
The most significant blow to shipping rates comes from China’s Covid-19 crisis.
Just as the world economy started picking up, China locked down its borders to deal with the second pandemic wave.
It was observed that shipment delays between China and US plus European ports have quadrupled since late March this year. That’s because China shut down Shanghai, the city with the world’s busiest container port.
Many truck drivers also struggled to reach China because of Covid-19 testing requirements and travel restrictions.
Unfortunately, as demand continued rising and supply stayed stagnant, freight prices skyrocketed.
Once lockdown restrictions eased out, the economy expanded, and demand exceeded supply.
While most cargo is shipped by sea, the air has since long been a quicker alternative. But air freighting operations came under pressure due to reduced passenger jet capacities and, as a result, reduced cargo capacities.
The market continued to remain demanding as consumers awaited deliveries. And shipping prices still needed to compensate for unprofitable periods. Ultimately, freight rates were increased to recoup the losses.
Perhaps the most notable political crisis is Russia’s invasion of Ukraine. Governments levied an embargo on Russia, leading to a rise in fuel costs since Russia is the world’s second-largest natural gas producer (nearly 17% of global supply in 2020).
Not just gas prices, the sinking of ships in the Black Sea (connected to the invasion) resulted in an insurance premium hike of 1-5% compared to 0.25% previously. It only further added to shipping rates.
At the start of 2022, diesel buyers paid 41% more on fuel than in December 2020. Oil prices and freight rates have a lead-lag relationship, so if oil prices increase, so does freight.
It begins with the freight carrier, the trucking company, cargo ship or airline. Freight forwarders must absorb higher fuel costs which are passed down to the shipper and ultimately to the end receiver.
In the last few years, oil prices have steadily risen. Increased production quotas from the OPEC regions have further boosted the cost of oil, complicating freight rates even more.
As of May this year, Windward reported that nearly 20% of container vessels were waiting outside congested ports worldwide.
Container congestion has increased shipping costs in the last two years. As demand increased, businesses ramped up output. But with a shortage of workers and trucks to transport finished goods to the port, containers were often left empty or remained behind until filled.
It further delayed deliveries from other ports, leaving containers in places they weren’t supposed to be at a given time. As a result of container shortages, freight prices sprang up.
The Ever Given-Suez Canal accident of 2021 also had a lasting impact as it delayed ships all over the world for months to come.
The pandemic forced workers to stay home or look for alternatives, and ill health only added to their woes.
The EU Mobility package, 2022, reduces the working time for drivers to an average of four weeks. But the shortage persists nonetheless. As a result, the industry will have to hire more workers to fill the gap, adding pressure to prices.
Another critical reason is an ageing workforce and difficulty finding younger workers.
Then, in some nations such as the US, unfriendly immigration laws restrict the global movement of workers. While in China, workers are under extensive quarantine and not allowed to work.
While the rates haven’t reached pre-pandemic levels yet, there’s hope. Freight rates have come down by nearly 20% since the start of 2022.
Transpacific freight rates have decreased this year after consumer demand cooled down due to inflation and recession fears in the US, combined with Covid19-related lockdowns in China. Ocean freight rates are also linked to the retail sector, and with demand falling in this industry, ocean spot rates have declined, too.
The shortage of containers in 2021 led to an oversupply this year. When demand started rising, and container capacity was held up for a long time, businesses ordered new containers at record levels. As demand fell and the market eased out, the oversupply of containers brought down their costs, ultimately contributing to lower freight rates.
However, the reasons behind this decrease are temporary. To determine if prices will continue falling, businesses must wait and see how geopolitical crises and the pandemic-induced lockdowns play out in the second half of 2022.
Returning to pre-pandemic shipping rates will require rapid infrastructure investment and digital technologies.