International shipping freight rates are always volatile.
There are many factors that contribute the volatile nature of freight rates causing them to rise and fall like a cargo container roller coaster. Of course, the most basic of factors that have the greatest impact on ocean freight rates are supply and demand.
International shipping is not such a different industry than all other businesses that it defies the basic business principles of supply and demand. However, in 2012, it seems like that is exactly what’s happening.
Associate Editor Bill Mongelluzzo of the Journal of Commerce (JOC) recently wrote an article titledOcean Carriers Flex Their Pricing Power. The article opens with, “Trade growth is dragging and capacity is increasing. So why are shippers paying so much more?”
2012 has seen freight rate increase after freight rate increase.
Universal Cargo Management, as a friend to your business, utilizes this blog to keep you informed on developments in the freight rate market. Because this year has seen so many freight rate increases, we’ve had several blogs about 2012 freight rate increases. They include:
- Peak-Season Freight Surcharges Hit NVOCCs as BCOs Sail Smoothly
- Holy Freight Rates, Batman–Trans-Pacific Spot Rates Jump 20%!
- Carriers Impose Freight Rate Increases From China to United States
- Carriers to Reverse Falling Ocean Freight Rates with New Year
But why have freight rates so thoroughly been rising in 2012 when as the JOC article says, “Trade growth is dragging and capacity is increasing”? Wouldn’t the laws of supply and demand be causing the opposite?
In 2011, we saw a fairly similar type of supply and demand market, but Universal Cargo Management blogs were informing our readers about decreasing freight rates with articles like:
- Maersk to Outlast Competitors in Face of Lower Freight Rates?
- Breathe in the Fresh Falling Freight Rates of Shipping from China
- Pressure on Container Rates in Freight Rate Roller Coaster
How could 2011 and 2012 look so different when there are such similar supply and demand factors?
Maybe freight rates simply alternate between rising and falling each year and that’s why 2012 sees freight rate increases while 2011 saw freight rate decreases during similar types of years when it comes to supply and demand. 2010 was a year that saw freight rate increases from China to the U.S. after all.
No. That would be a short-sighted, shallow, and incorrect conclusion to draw.
Falling freight rates of 2011 were great for shippers, but disastrous for carriers. Carriers lost billions and had to make a move to avoid another year of impossible losses to handle.
Enter the Transpacific Stabilization Agreement. The big carriers in the international shipping game got together and agreed on a series of General Rate Increases (GRI’s).
What has been impressive is the carriers’ ability to stick to rate increases. It takes a level of discipline that the carriers have seen unable to maintain in years past. Often, they’ve undercut each other, competing for bigger slices of the international shipping market pie and trying to push their less stable competitors out of business.
At the same time, the carriers have had to manage their capacity more carefully than last year. The JOC article says, “Carriers… are attempting to prop up freight rates through short-term measures that manage capacity, or at least create a perception in the market that space will tighten as the autumn peak shipping season approaches. This includes canceling selected voyages.”
Overcapacity in 2011 was the big thing that really pushed ocean freight prices so low. While more megaships keep hitting the water, carriers have been keeping their shipping lanes from getting too overloaded with cargo container space. This, like initiating and sticking to GRI’s, has taken a level of discipline from the carriers that they often do not manage to pull off.
Helping carriers maintain GRI’s is that their big customers don’t have to pay the rate increases.
This is where most shippers really feel the freight rate increases. BCO’s that have contracts directly with the carriers have clauses in their contracts that protect them from rate increases. NVO’s, who work as go-betweens for importers/exporters and carriers, have to take the increasing rates from the carriers to the shippers.
So in August, as the carriers say they will be bringing yet another freight rate increase, the gap between what the big companies like Walmart pay for their imports from Asia and what the small to mid-sized shippers pay for their imports from Asia will get wider. Again.
August’s increases from the carriers are targeting $500 per 40-foot container to the West Coast, $700 to all other U.S. destinations, and $1,000+ for refrigerated imports.
As a shipper, this all may sound like bad news. Will freight rates just climb and climb and climb? Remember, the level of discipline the carriers have maintained this year has been uncharacteristic. Sooner or later, it is likely one or two will break. On top of that, most of their measures to maintain increased rates are inherently short-term. And the laws of supply and demand can only be circumvented for so long.
Once something gives, the dominoes could easily start falling for big decreases in freight rates. The international shipping market has not lost its volatility and those freight rate changes do go both ways.
In the meantime, business must carry on. You can
