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Why freight rates are high right now and how shippers can adapt

Why freight rates are high right now and how can shippers adapt?

Over the last six to eight months, freight rates through nearly all transportation channels across the globe have spiked. Quite naturally, these spikes can have a domino effect on other functions and industries, such as production and even marketing. A steep price rise in one sector can cause acute inflation across industries and economies, and inevitably affect your business in multiple ways. To prevent (and mitigate) such a snowballing of problems, it helps to know the reasons behind the absurd rise in freight prices globally. Some of the most prominent reasons are:

The COVID-19 pandemic

One of the most significant sectors affected by the ongoing health crisis is the shipping industry. The pandemic has caused a sharp increase in freight rates in multiple ways. Firstly, rising fuel prices (due to lower production by major oil-producing nations) are some of the main contributors to the inflation. A prominent reason for the price rise is fluctuations in global demand and supply for crude oil. Until recently, crude oil prices were hovering around US$ 35 per barrel. Currently, the prices are more than US$ 55 per barrel.

Moreover, a surge in consumer demand for goods is causing the freight prices to increase. It is known that COVID-19 had caused a dip in production during the first half of 2020. As a result, companies need to increase their manufacturing output to meet the sky-high demands. Also, a reduction in the number of commercial flights due to pandemic-related restrictions has put pressure on ocean shipping for the delivery of goods. The turnaround time for containers has increased as a knock-on effect.

Continued reliance on split shipments

For years now, e-commerce retailers have been extensively using split shipments to deliver goods. There are a few reasons for this: firstly, the goods may be picked up from inventories in different locations. Secondly, the speed of delivery can be enhanced if a single order is broken down into sub-orders (especially if the goods belong to different categories). Thirdly, there may not be enough room on a single truck or plane for an entire large shipment or order, and individual boxes may be transported and arrive separately. This condition is aggravated during cross-country or international shipment of goods. Two further reasons for split deliveries are customer requirements of sending goods to more than one location and all the deliverables not fitting into a single shipment. Split shipments are not only expensive but also harmful to the environment.

Brexit increases freight rates for goods to and from the UK

The UK’s withdrawal from the European Union (EU) has caused freight rates for goods to and from the country to skyrocket. This directly results from the UK effectively ceasing to receive beneficial freight subsidies availed by countries under the EU umbrella. Apart from some exceptions, the transfer of goods to and from the UK can be treated as intercontinental shipments. The coronavirus crisis further complicates the supply chain. Post-December 2020, the shipment costs for goods to and from the UK have already quadrupled. Naturally, the global freight rates are pushed upwards due to this development.

Other factors in the current scenario

Apart from the aforementioned points, there are a few lesser-known contributors to the high freight rates. Communication issues stemming from last-minute diversions or cancellations in the current scenario are one of the reasons for booming freight prices. Also, the transportation sector, like other industries, tends to have ripple effects when corporations take major actions. So, when the market leaders (the largest carriers) decide to increase their costs to recuperate losses, the overall market rates are inflated too.

There are more than a few ways with which jumping freight prices can be controlled or even reduced (over the long term), including:

Freight transportation during ‘calmer’ days

Altering the day or time for shipment of goods can have a massive impact on freight prices. There are days when the frequency of shipments across multiple regions at the same time is relatively lower. Thursdays are generally earmarked as the busiest days of any given week with regards to the shipment of goods. Therefore, transporting the shipments on ‘calmer’ days, such as Mondays or Fridays, can be attempted by shippers. However, companies will have to be careful about the shipment of perishable goods such as certain FMCG goods. Also, freight providers can operate during fixed windows such as 6 pm to 12 am, when most of the shipping docks are closed. Such practices can reduce freight costs by 15–20% annually.

Cutting down on packaging costs

As you probably know, most goods are over-packaged while being transported for long-distance delivery. While the goods’ safety is of paramount importance to shippers and end consumers, packaging companies tend to go overboard with the amount of material used for the purpose. Not only does over-packaging jack up the overall shipment costs, but it is also detrimental for the environment. Moreover, once the deliveries are made, most non-recyclable packing materials (plastic, foam) go to waste.

Transporting larger shipments of goods

This can be described as the anti-split shipment method. In this way, the cargo ships can be filled to their maximum capacity. Moreover, it is cheaper and convenient for companies to plan ahead and ship five deliverables at once than to send one of them every other day. Companies can get discounts and other incentives from shipping companies by making bulk shipments.

Involving external service providers

Another idea for smaller companies is to seek the services of integrated transportation partners for getting shipments done. The outsourcing of tasks can help such companies to focus on their core operations. Moreover, such companies can sign contracts to pay a fixed amount to the transportation companies for their services to minimize wild variations in expenditure.

We at Freightwalla can provide the perfect solutions for your freight transportation requirements with our advanced data-driven digital platform. Apart from our world-class freight forwarding services, our digital platform gives you access to carrier price forecasts based on historical market trends. It can help you find the right carrier and zero in on the optimal shipping routes at the right price to help you reign in your supply chain costs despite rising freight rates. You can contact us to know more about our services.

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