Shipping Disruption and Freight Rates
The COVID 19 pandemic has brought about a sea of changes in our lives and lifestyles.
It brought to a halt all that we had, until then, considered normal. Countries across the world called for a complete shutdown on local, intra, and international travel and movement of goods, impacting not just our work but ceasing all manufacturing and economic activities.
It is nearly two years since these restrictions started and we have still not been able to find our new normal way of life. The ceasing of all services and manufacturing created a shortage of goods and services across the globe.This has seen the surging demand of all commodities and services now that the world is opening up and goods, as well as people, can move freely ag.ain
However, the price of everything has been impacted by the rise in shipping costs worldwide. To give you a fair idea of the rise in shipping costs, the rates for Capesize vessels – that are the largest ships and are
used to carry dry goods – have increased ten times in the past few months from $3000 in February 2020 to almost $32000 now. Most experts agree that the rates have not even peaked yet and are likely to increase even more before they settle down to a reasonable level that can match the pre COVID 19 pandemic shipping costs.
Now the question we are faced with is – what is causing this huge surge in shipping costs. In this article, we will take a look at the causes of the substantial increase in the shipping cost.
What is Causing the Shipping Rates to Increase Since 2019
Since the world started opening up to travel and trade again there has been an increase in demand for goods and raw materials as the world tries to catch up with nearly two years of pent-up demand and supply. This means there is more pressure on the transportation and logistics for movement of materials from one place to another. This imbalance in demand and supply is one of the major reasons why the shipping costs have soared in the past few months. Let us examine all the causes that have contributed
to this increased freight rate.
Forces of Demand and Supply
The most important contributor to the increase in freight rates is the demand and supply of available containers and transport vehicles to carry the goods across the oceans and lands. With a bulk of the goods and materials being moved via the seaways, the demand for containers has increased several times. However, the supply of containers and the capability of ports to handle the traffic has not increased. This has caused a shortage of containers for shipping. The intense competition for the available freight capacity, as the countries open up to trade again, is thus pushing up the freight rates.
Congestion At Ports Caused By Covid Related Restrictions and Quarantine Rules
While on the one hand there is competition for the available containers, on the other hand, there is also reduced capacity for ports to handle the containers coming in. This is mainly due to the COVID related restrictions and quarantines that have been imposed by countries not only for crew and vessels coming into the port but also for the workers working at the port. Most ports across the globe are working at reduced capacity. This has caused congestions at the ports. Over the past months, there have been many delays caused by port closures causing delays in attending to the vessels.
Increased Blank Sailing
Increase in the number of canceled port calls by shipping companies has added to the woes of the shipping industry and further reduced the number of available containers and vessels. The increase in port cancellations has been mainly due to port closures and delays. Once this problem has been addressed, it will result in a decrease in the blank sailing rates.
Reduced Number of Sailing Vessels
Most shipping companies reduced the number of ships they were sailing during the pandemic. A large number of these ships still remain out of action causing a shortage of vessels for transportation. Coupled with that is another factor: the location of the containers. Major manufacturing hubs have seen a rise in the number of outgoing containers while the number of containers that return remains smaller. This has caused a trade surplus and increased the cost of transportation of each container. This shortage of containers at the right place has impacted the movement of low-cost and bulky goods the most and has forced importers to increase prices or to look for local alternatives to imported goods.
Seasonal Demands on Ocean Shipping
With the festival season approaching, there is an increased demand for goods across the globe. This peaking of demand for stocking the inventories for the festive season has been another contributor to the increase in shipping rates.
Looking at the near future and to quote what the experts in the field are prophesying, we are not likely to see a reduction in the soaring transportation rates. Since there are no viable alternatives to ocean transport that can ease the situation, we are likely to see the prices of the shipping rates continue to be high.However, not all is lost. There is hope with large manufacturing companies locking the freight rates by signing contracts. This could mean that the large companies will get a favorable rate while the smaller manufacturers and traders will have to continue to rely on retail and spot prices. It is also highly likely that at some point the governments will also step in to control the pricing and hopefully we will see more rational rates.
While the near future prediction may not look very promising, as the world returns to normalcy, we can still hope to see the freight rates become cheaper in the next 16 to 18 months.