Shippers constantly export goods globally and are highly affected by the rise in shipping rates. Any fluctuation in the shipping rates has a ripple effect on all the other industries connected to shipping. A significant asset of the shipping industry is the shipping containers, so when the shipping rates affect the container industry, the price of goods gets involved too. Let us learn more about the effect of shipping rates on the container industry.
Factors that determine freight rates
Goods are shipped transcontinentally and internationally from one point to another to facilitate trade business and maintain a consistent flow in the supply chain. Global shipping enables the import and export of manufactured products and raw materials, uplifting the nation’s economy. To ship the goods, shippers can opt for any means of transport, i.e., air, sea, road and rails, based on their shipping needs and cargo requirements. For this, shippers go through a list of shipping companies to find the one that suits their budget. Shipping companies give tentative quotations to shippers to explain their shipping rates. These freight rates can differ based on the-
- Mode of transport– If the goods are up for intermodal transportation, it requires a change in modes of transportation, leading to increased shipping prices. The fuel charges differ based on different means of transport. For international shipping, air transportation is more expensive than maritime shipping. Trucks and rails are utilised for intermodal purposes here.
- Type of cargo– Depending on the type of cargo, shippers can choose among a range of container types to pack and load their goods for shipping. Hazardous and perishable cargo require extra safety measures and specific container types and, therefore, are expensive to ship.
- Weight of cargo– LCL and FCL determine the cargo volume being shipped. The rate of less than container load (LCL) is less as many shippers share a single container to ship goods to a common destination. Cargo consolidation significantly reduces shipping charges.
- Distance– Prices increase with the increase in distance. In contrast, transcontinental shipping would cost less, and international or overseas shipping would cost more. The fuel used is the primary determinant of shipping cost.
- Documentations– Some cargoes require extra clearances and documentation due to restrictions on them by the importing country or due to safety concerns of the hazardous and fragile cargo.
What are the variables used for calculating shipping costs?
Since shipping rates affect the container industry, knowing how shipping rates are calculated is essential. The shipping cost of the goods is calculated based on three elemental factors-
- Packaging cost– Depending on the goods for transportation, the packaging material is decided. Fragile items require extra packing layers. The dunnage also adds to the packaging cost.
- Shipping cost– The shipping cost is calculated by considering the above-mentioned factors regarding mode of transport, documentation, cargo type, cargo weight, and distance.
- Handling cost– Every good requires a different method of handling that incorporates various equipment and vehicles. Hazardous, fragile and perishable goods require special care during handling and are therefore charged additional handling costs.
The formula yields the shipping rates shippers pay to export goods by summing up all these three elements. Different shipping companies offer other quotations based on offers and discounts. Therefore, shippers must look for reliable, credible and stellar shipping companies.
Causes of increase in shipping rates in the container industry
Through a study of factors that affect shipping rates, it can be concluded that shipping prices increase due to any changes, natural or man-made in the environment leading to extreme fluctuations in the container industry
- Geopolitical events– Under circumstances where two or more countries are involved in a political conflict due to tensions developing from trade wars, terrorism, military attacks, pandemic, or global recession, the trade business gets significantly affected. The shipping rates increase automatically if the involved countries are significant exporters.
- Shortage of containers– Due to a sudden increase in demand, such as the one created during the pandemic, companies work tirelessly to ship the goods. It is a significant cause of traffic and port congestion, making containers stuck in transit. During such times, container shortage is bound to occur, leading to an increase in shipping costs to control the demand.
- Emergencies– Uncertainties are always a possibility in the shipping industry. A significant example is the incident of the Suez Canal blockage in 2021 that went on for days and led to a major and unpredicted disruption in the supply chain. The delay in delivering goods led to the piling up of many pending shipping activities. Shipping prices were increased to control more shipping orders.
- Port congestion– The maritime industry is a significant mode of international goods shipping. Due to the inefficiencies of the port management system, bottlenecks may occur, leading to delays in the timely deliveries of goods. Therefore, leading to a surge in shipping rates. Demurrage and detention charges can also increase the shipping price.
- Peak season– The peak shipping season generally ranges between August and December when festivities are on the verge. The demand for goods increases, and so does the shipping cost. Therefore it is advised that retailers and distributors stock their inventories beforehand.
- GRI– The general rate increase is generally applied by maritime carriers and implemented once a year to recover from low market demands. The competition to offer the best prices leads the carriers to lower their costs to do better than their competitors. When the price reaches an all-time low, carriers decide to raise it again. It is when the shipping rates increase.
How do fluctuations in shipping rates affect the container industry?
- Demand dynamics– High shipping rates due to a rise in fuel prices or labour shortage leads to low shipping activities as shippers refrain from trading at such times. The container industry witnesses a surplus of shipping containers, and ports are full of empty containers waiting for the next trip. At such times, the container industries suffer a loss.
- Trade patterns– It may occur when major importing and exporting countries are at a trade war, and the most common and significant trade routes are declared inaccessible for trade purposes. Shipping container companies near that area are rendered useless as shipping demands drop due to shippers’ changes in shipping routes.
- Industrial consolidation– When shipping rates are low for a subsequent period, small container companies may struggle to survive and risk getting bankrupt. Under such situations, container industries are pushed to merge to face the highly competitive market.
- Global economic growth– Profits in the container industry also contribute towards the global economy. An increase in shipping rates leads to decreased consumer demand, slowing economic growth. Lower shipping rates boost shipping activities and accelerate the global economy. The container manufacturers either receive an influx of demands or are rendered valueless in such circumstances.
These are a few ways shipping rates affect the container industry and cause significant changes in profitability and productivity.
LOTUS Containers is a prominent shipping container service provider with many branches across the U.S. We sell and lease shipping containers of different types and sizes according to the requirements of our clients.