icon19 Dec, 2022
Shipping Rates Across the Industry are Sliding. What Does it Mean?
We’re seeing it across the shipping industry. Shipping rates in the ground, ocean, and air shipping segments have dropped significantly over the past several months after nearly two years of soaring shipping costs. What does it mean?
What Do Falling Shipping Rates Signal for the Freight Industry?
The freight industry, almost more than any other industry, reflects the global economy at large. Nearly every other segment of the economy leans on the supply chain, both B2B and B2C. Freight volumes across all modes are directly affected by economic performance across other segments.
As such, these falling rates reflect the economic outlook at large, oftentimes even ahead of major turns across other segments.
It’s a Simple Display of Supply and Demand
Like the economy, freight rates on all modes tend to be cyclical and based largely on supply and demand. Demand (freight volume) rises and supply (available capacity) drops, supply and demand level off, demand drops and supply rises, then they level off again.
While freight rate trends are more complicated than a single factor, the laws of supply and demand drive prices in shipping just like they do across the rest of the economy.
When rates were sky-high just last year, it was because freight volumes exceeded the available capacity, whether that capacity represents trucks on the ground, space on ocean freight vessels, or intermodal rail cars. Carriers pushed to add capacity to take advantage of high freight volumes and rates.
Now, freight volumes are dropping as consumers pull back spending due to economic uncertainty, inflationary pressures, and expended Pandemic stimulus funds. This pull-back began resulting in reduced shipping volumes as far back as July. People are buying less so companies need less, which means less freight volume. As freight volumes dropped, carrier capacity moved from undersupplied to balanced, and now capacity is oversupplied.
According to DAT Trendlines, spot load posts dropped 28.1% from the last week of November to the first full week of December while truck posts rose 13.6% over the same period. DAT’s van load-to-truck ratio dropped 37.8% over that same period. This shows us that capacity is well and truly in an oversupply cycle.
Steep Drops Hit Ocean Freight Rates First
In the freight rate cycle, ocean freight rates tend to drop off first, and boy, have they dropped. Ocean freight demand offers a good indication of consumer behavior, and when it drops, it can indicate the beginning of a turn in the freight rate cycle.
Since less freight is coming into the country via ports, truck, intermodal, and air shipping are likely to see a drop in volume, as well. As freight volumes drop, rates drop as the supply of available capacity increases and demand for that capacity decreases.
There’s Still a Big Gap Between Spot Rates and Contract Rates
The last contract season is a few quarters behind us at this point, and spot rates were significantly higher than they are now. Consumer demand was still high, keeping the demand for shipping in all modes high.
Spot rates are naturally more volatile than contract rates simply due to the timeframe. Spot rates change daily, sometimes even hourly, based on the market at that specific moment. The freight market has taken a significant downward turn, causing spot rates to also take a significant downward turn. Contract rates, on the other hand, have been slower to drop.
The difference between contract and spot rates is as high as it has ever been. However, as contract season rolls around, we’ll likely see that gap narrow. We may also see companies adopting different strategies for negotiations and contracts during the 2023 contract season.
Falling Fuel Prices Will Also Play into the Continued Drop in Rates
When it costs carriers of whatever mode less to ship products, shippers and 3PLs can pay less. Diesel fuel prices are down significantly as the demand for transportation has dropped off, with diesel prices dropping in the US for the 5th week in a row.
Outlooks show that fuel costs will continue to drop, as well. The petroleum market has stabilized as demand has let up. The continued decline will play into freight rates continuing to drop, helping carriers get by with lower rates since their cost of doing business will drop, as well.
The Freight Industry is In for a Reset
Perspective is key as we’re looking out on a freight market that seems, well, a little bleak. While we can expect to see a drop in retail sales over 2023, the drop that’s being projected isn’t incredibly steep. In turn, we can expect to see a steep drop off in the freight market, but it’s occurring after two solid years of record highs for the logistics industry, both volume and profit-wise. Those highs may make these lows seem devastatingly low, but projections for the industry indicate we’ll see a market that’s just below the norm.
Think of the current and coming freight market conditions as a reset.
A 3PL Can Help You Navigate These Rocky Shoals
3PLs oftentimes combine vast industry knowledge with resources the average shipper doesn’t have access to like the power of scale and leading-edge technology to help their customers save money and provide better service, regardless of market conditions.
What do falling shipping rates mean for your company? If you’re not sure what you should be paying now or in the future as contract negotiations begin to roll around, reach out to the NEWL team for help. We can design custom shipping solutions to meet your business needs and budget, helping you get the best rates available.