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05 Aug, 2021

Impact of Ocean Freight Rates on Businesses

With ocean freight rates surging since last year, many businesses are feeling the crunch of increased shipping costs, particularly when it comes to ocean freight coming into the West from China. Businesses like e-commerce sellers who rely more heavily on imports from China are feeling it even more than others. What’s causing this and what do these increased ocean shipping costs mean for companies?

Ocean Shipping Rates are Up…Way Up.

Container shipping rates to Canada and the rest of North America from the Far East have soared, even in just the past few months. The Freightos Baltic Index says that currently, rates to the West Coast are up nearly 1,000% since just October of last year, with the average 40 hq container shipping costs sitting at over $13,000. The increases for shipping to the East Coast are even more poignant, with shipping costing more than $16,000 per container.

Cause of Soaring Sea Freight Rates

There are several reasons that sea freight rates have climbed so high over the past year. Because there’s not one simple problem to solve to level out ocean shipping prices, there’s a lot of uncertainty surrounding when prices might become more moderate or even if they ever will. Here are some of the issues that have impacted prices.

Pandemic Problems

As is the case in so many industries around the world, the pandemic has introduced a whole new set of hurdles in the ocean shipping industry.

At the beginning of the pandemic, global trade came to a standstill. Lockdowns led to factory closings and inoperable ports, which led ocean shippers to cancel and reschedule trips and slower ocean transit times. Then, as things began to get back to normal, pent-up demand for goods across the globe combined with labor shortages meant large quantities of containers to go out and no one to get them out. Demand steadily increased while shippers were forced to cancel ships, creating a backlog.

As the virus surges on, new lockdowns in China are leading to more shipping troubles, fueling the price surges.

Container Shortage

The container shortage has made the news several times since the beginning of the pandemic, but it’s not necessarily all Covid 19’s fault. Despite the reasonings for it, the shortage has made it difficult to even secure a container sometimes, leaving businesses at a loss for inventory.

Trade imbalance is part of the reasoning for the container shortage. For every 3 containers of goods China ships to North America, we only have 1 to send back. It has led to a container shortage in China, and the scarcity has brought on a fierce battle for control of containers that jacks up container prices further.

The shortage is so bad and the demand for North American products in China so low that many shippers are finding it more lucrative to unload containers and drop the empty containers directly back onto the ship they came in on. Not allowing the containers to sit empty on North American shores is more cost-effective despite that shipping an empty container generates no revenue and creates expenses.

The Suez Canal Disaster’s Domino Effect

Despite being a short-lived disaster, the blockage of the Suez Canal by an Evergreen ocean shipping vessel in March 2021 sent shockwaves through the global shipping market. The delay caused by the blockage wasn’t limited to the cargo on board the ocean liner that got stuck; hundreds of ships were held up behind the ship run aground. Experts predict the ripple effects of this disaster are still being felt now.

Trade Contention

The US’s trade war with China also plays a role in high shipping costs. Despite that a new administration has taken over, uncertainty about how it all might play out has led shippers to push goods out faster than they normally would have. More containers to ship lead to higher prices as the laws of supply and demand dictate.

Added Fees by Ocean Shipping Companies

Since the pandemic began, and even before that, importers have been finding new fees on their shipping bills. The massive quantity of goods being imported into North America has led many shipping companies to add hefty port congestion fees onto their bills starting in August, further raising already surging prices.

How are Businesses Being Affected?

Let’s face it. Pretty much every business is importing goods from China. If they’re not importing directly, they rely on those imported goods for operation or retail sale. Since more than 60% of global goods are shipped via sea, almost everyone is feeling the pressure right now. Increased shipping costs mean increased expenses, and for industries still struggling to recover from the pandemic and facing down the second wave of lockdowns, those increased expenses can look scary.

These higher costs leave a lot of online merchants in uncertainty. They often import Chinese goods because they’re inexpensive enough to leave sellers with a decent profit despite the costs of importing, but with shipping prices like these, is that still the best tactic? Should they consider more expensive goods that are manufactured closer to home? Is there any way they can combat soaring shipping costs? Should they pass on these extra costs to customers or try to wait it out and see if the shipping market does a course correction?

There are a lot of questions and fewer answers, but there are some things importers can do to help make shipping more affordable.

What Can They Do to Stay in the Black?

For some companies, this situation will require a total overhaul of their supply chain if things continue as they have been. It could mean reshoring or nearshoring becomes even more common than it has in recent years.

In the meantime, companies can look into other logistics practices that could help cut shipping costs. Improved visibility can help companies predict the need for containers sooner so they can book earlier and avoid spot market rates. Foregoing some of the tenants of the lean supply chain can also help in a situation like this, ordering larger quantities to fill containers and insulate against stock shortages so that companies don’t have to ship when prices are at their highest.

Companies can also diversify their carrier pool to help them shop around for the best rate. This is a strategy that can take time, though, so a relationship with a freight forwarder from China to Canada or your North American port of choice can be very beneficial. They can help you find better shipping rates, potentially offer better LCL freight quotes, and their contacts could prove invaluable in these unsteady times.

Any new contracts companies must create across their supply chain during these trying times have built-in renegotiation clauses. The current radical market likely won’t last forever, and companies must be able to renegotiate in a more moderate market as things level off.

 

If we continue to see increased costs for ocean shipping, costs will eventually have to be passed onto the consumer. Since there’s no way that most companies who import freight can raise prices at a rate commensurate with the increased costs of shipping, whether their product’s final destination is a manufacturer in North America or a retail store or e-commerce site, smarter logistics is critical. Taking mitigating effects now to cut shipping costs could help reduce the impact of necessary price hikes down the road.

Does your company need help to navigate today’s volatile ocean shipping market? Contact us here at Newl to see how we can help.

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