Graham Parker
October 1, 2024
As we approach the halfway point of the decade, it already feels like we’ve experienced a century of supply chain events—from pandemics to wars, the Red Sea crisis, tariffs, new alliances, and so much more—all of which mean the need for agile supply chains to mitigate what seem to be continuous threats impacting supply chains worldwide.
In addition, a major result of all of these events has been an explosion in the complexity of ocean freight shipping rates. This decade has witnessed some of the most dramatic rate increases on record. For businesses, these skyrocketing costs have strained budgets, raised consumer prices, and reshaped supply chain strategies.
The COVID-19 pandemic disrupted global supply chains, leading to port congestion, container shortages, and spot rates jumping to over $10,000 per TEU on some trade lanes. The Suez Canal blockage in 2021 further highlighted vulnerabilities in the shipping industry, with delays and additional transportation costs for many shippers. The Red Sea Crisis and the Panama Canal drought situation in 2023 resulted in longer transit times for some shippers and higher spot rates and surcharges.
Real and potential US tariff threats are also impacting supply chains as some shippers are pulling orders forward causing higher inventory levels and increased transportation costs.
Not only are rates rising but new surcharges are being introduced to cover specific operational costs or risks, and some surcharges are being implemented with little notice. In addition, the calculation methods and application of these surcharges differ widely among carriers.
Among the new surcharges introduced in just the past five years include:
- Emissions Trading System (ETS) Surcharge: Implemented by European shipping companies starting January 1, 2024, to comply with the EU's ETS regulations aimed at reducing CO₂ emissions.
- War Risk Surcharge: Applied in response to geopolitical tensions and conflicts, such as those in the Red Sea regions to cover increased insurance and security costs.
- Peak Season Surcharge (PSS): Introduced during periods of high demand to manage capacity constraints and increased operational expenses.
- Panama Canal Adjustment Factor: To address increased costs associated with transiting the Panama Canal.
- Surcharges related to a potential strike at US East and Gulf Coast ports: While a potential strike is no longer applicable due to a January 8 tentative agreement reached between the two sides, various carriers announced as early as October surcharges for destinations to US East and Gulf Coast ports.
The level of rate and surcharge increases over the past few years alone have been so severe that they have dramatically impacted the bottom line. For example, a 10,000 TEU importer would have paid about $25 million in ocean freight shipping in 2019 and, for the same shipment volume, would have spent close to $50 million last year.
There is no standard for rates and surcharges. Each shipping line operates independently, setting rates based on its cost structures, market conditions, and strategic goals, leading to significant variability.
Also, there is no global regulatory body with the authority to enforce uniform pricing structures. While organizations like the International Maritime Organization (IMO) set safety and environmental standards, they do not regulate pricing. This variability allows carriers to remain competitive and adapt to regional and global market fluctuations. However, challenges are created for shippers, who must navigate complex, unpredictable costs, making budgeting and planning difficult.
New Alliances Impact on Rates
This year we will see significant changes in ocean freight alliances. The formation of new alliances among major ocean freight carriers has historically impacted shipping rates will the latest changes impact rates? Most likely, yes.
One of the primary effects of these alliances is the consolidation of market power. By coordinating operations, alliance members can control a substantial share of the global shipping capacity on key trade lanes. This concentration reduces competition, enabling carriers to exert greater influence over pricing. During periods of high demand, alliances have been able to maintain elevated freight rates by managing capacity more effectively, even introducing blank sailings to tighten supply.
Overall, while ocean freight alliances have transformed the market by fostering collaboration among carriers, their influence on rates underscores the need for shippers to adapt strategies to mitigate costs in an increasingly consolidated market.
Indeed, among the strategies that shippers have adopted includes a number of supply chain software solutions and while we can perhaps debate the effectiveness of the number of supply chain software solutions, including the tailwinds of AI, it is clear that the humble ocean freight rate has entered a new era of deep complexity and rapid evolvement requiring an ability to manage them instantly and ceaselessly.
About Ship Angel
Ship Angel is a cutting-edge rate management platform for BCO shippers, offering innovative solutions in rate management, amendment guard, invoice auditing, and sustainability reporting. Powered by AI, Ship Angel helps shippers manage rates efficiently, ensure contract accuracy, and optimize cost savings. With a commitment to transparency, Ship Angel works across industries to help companies avoid costly disruptions and stay ahead in a rapidly evolving global trade environment.
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