Why Are Shipping Rates so Volatile?
One of the biggest challenges for businesses engaging in international trade is shipping rates. While the support of a freight forwarder will ensure you get the best deal, the fees associated with international shipping are based on so many factors. And, especially now in 2021, shipping rates continue to be particularly volatile in response to the pandemic. In today’s guide, we’ll take a look at a number of reasons why shipping rates fluctuate so extremely to help you plan for your cargo movements in the future.
Supply and demand are perhaps the two biggest factors impacting shipping fees. The more desirable or essential a product is, either on the whole or during a certain period, the more in demand it becomes by people across the world. In turn, the demand for space aboard freight services, including those travelling by air, sea, rail or road, also increases. More and more companies want the space available and, therefore, the prices go up to accommodate for the rise in demand.
As we write this guide, shipping rates are predicted to continue rising as a result of the pandemic, particularly for sea and air freight. There is a correlation between the continually rising increase in global demand for certain goods (particularly dry goods) and the continued limitations on shipping capacity. Localised lockdowns also play a role too, disrupting the movement of cargo vessels, increasing delay and reducing the number of trips that can be made to a designated country.
There is also a discrepancy between the recovery of different countries. Some are able to ship products more easily now that restrictions are starting to lift, with a number of locations actually exporting more goods than pre-pandemic. But, on the flip side, others are still struggling against the impact of the pandemic. Those who are moving goods regularly experience port congestion, largely due to significant delays with earlier vessels.
Bunker Adjustment Factor
Also known as BAF, the Bunker Adjustment Factor is the surcharge placed upon shipping operators to compensate for fluctuations in fuel prices. It has become a topic of conversation since IMO 2020 was implemented and was designed to ensure relevant charges were compensated for. This adjustable surcharge compensates for the volatility of fuel prices to ensure all costs are covered. To calculate BAF, current fuel prices are divided by the average fuel consumption (known as Trade Factor). This figure is calculated using information such as the distance travelled, the journey time, the size of a container and the construction of the ship itself.
In recent years, the BAF has increased due to IMO 2020 – a regulation that aims to reduce pollution levels globally. In order to achieve a lower fee, carriers are now required to make adaptations to their vessels to reduce emissions. These include switching to lower sulphur fuels or using a more cost-effective bunker fuel.
Carrier Cost Increases
In line with adjustments to the BAF, carrier cost increases also play a role in the volatility of fuel prices. As a means to abide by changes in Union requirements, environmental factors and to deal with the port congestion in place, many carriers are adding on new surcharges as a means of covering themselves. Delays in shipment can be detrimental, specifically if they’re as significant as we’ve witnessed over the past 12-18 months, and many carriers are implementing increases to their costs in a bid to protect themselves from these actions in the future. These are largely absorbed into an all-inclusive quote provided but it may be evident to those who have used their services in the past.
Peak Season Surcharge
Every year, you can expect an increase in shipping prices around the peak holiday periods – including Christmas. Carriers will raise their fees in line with the increase in demand, particularly in recent years where online shipping has become so popular. It also pays to take into account delivery lead times from international locations. While the festive period here in the UK tends to spread from early November into December, extended processing time frames may mean these price increases begin happening during the Summer months to compensate.
It also pays to take into account shipments from China. As a global supplier of many, many goods, the Chinese New Year (between Jan 21st and Feb 20th) has a significant impact on shipping fees. It drives up demand before and after this time frame with people looking to get their goods as quickly as possible.
Here in the UK, one of the biggest political changes we’ve experienced over the past few years is our exit from the EU. Events such as these or trade agreements, strikes and wars can have an impact on shipping prices. If suppliers and manufacturers are forced to close down due to adverse activities, the demand for their goods will increase and drive up shipping prices. Additionally, changes in international agreements can see the base rate for cargo movement increase as standard which will need to be absorbed by the relevant carriers in their quotes.
Global Exchange Rates
While noted as being an indirect factor, global exchange rates can impact shipping fees. For weaker currency countries, imports and exports become more expensive, making it challenging to continue with the normal activities of a business. In contrast, stronger domestic currencies are able to increase their international shipping activities to benefit from cheaper rates.
Understanding that the volatility of shipping rates is the result of many fluctuating factors helps businesses recognise when their necessary fees increase. At Radius Warehouse and Logistic Services, we have over 25 years of experience supporting businesses in their international trade activities. If you would like to request a quote, ask a question or speak to a member of the team, please do get in contact here today.