The recent upheaval on international freight rates has left shippers extremely frustrated. Understandably so. The latest rate surge in May 2024 means there have now been significant 4 rate surges in the last 4 years.
Covid-19 caused an initial spike in late 2020, before an even more dramatic one throughout 2021. Then the Red Sea diversion sent freight rates sky high again in January and as mentioned in May 2024. All of which have made budgeting impossible. Supply chain managers have been dragged into boardrooms to explain such crippling costs, whilst being powerless to prevent them.
When we will get to a stable rate market is a question continually coming back to us at meetings with clients and prospects. So that is the question we will analyse here.
Containerised Freight Index (Jan 2020-July 2024)
The containerised freight index averages freight rates for trade lanes from major Chinese export trade lanes. Source: Trading Economics
Why it's hard to see a time when freight rates will ever be stable
Unfortunately, due to a culmination of factors, it’s hard to see a scenario where we will ever get a stable rate market.
With geopolitical tensions amplifying, war, piracy, economic instability, emission regulation and extreme weather events, international supply chains are vulnerable. Then you can add to that any number of unforeseen shocks.
All this vulnerability combined makes it unlikely we will ever see a stable rate market.
Added to that is the threat of severe overcapacity in the sea freight market. With the global container fleet now above 30 million teu, and a growing atmosphere of protectionism. Even in the event of no disruptive event, ultra-low rates could return, which themselves are bad for stability.
Whilst ultra-low rates would be a welcome development for shippers, after some eye-watering levels in recent years, long-term they are unsustainable.
Shippers could be faced with general rate increases as the carriers attempt to resurrect rates to profitable levels. Which again, creates instability. In extreme circumstances we could see carriers going bust. Again, a disaster for reliability and rate stability. Seems a ludicrous suggestion right now, but you only have to go back as far as 2017 to find a recent high profile container shipping line collapse.
“International supply chains feel more vulnerable than ever, as the last 4 years shows. In an increasingly unstable world, recent events have understandably created a lot of nervousness in the market. Consequently, smaller supply chain shocks can have a disproportionately big impact on rates.
What I mean is, as business leaders fear a repeat of the rates seen during Covid-19, a minor supply chain shock can cause an exponentially bigger demand increase, driving rates up further.”
Jade Blackburn, Head of Sales, WTA
So, in times of market volatility, what steps can business leaders take to secure more sustainability in their freight rates?
Ways to secure more stability in your freight rates
Leverage visibility technology and data analytics
Visibility technology, combined with robust data analytics, is a key part of ensuring freight rate stability. Real-time visibility platforms offer businesses insight into every aspect of their supply chain. From tracking shipments to monitoring port congestion, fuel costs, and geopolitical factors, all factors that might influence freight rates can be analysed.
With access to this data, companies can make informed decisions about when and where to ship goods, avoiding congested or high-rate routes. With these insights, companies can also negotiate better terms with logistics service providers, backed by data that demonstrates their efficiency and reliability.
WTA’s own visibility tool is called the WTA Platform. It provides vital cost and timing information on all your shipments, which can help you stabilise rates. Alongside that you get real-time tracking, a single location for document storage, CO2 monitoring and far more. All complementary for WTA customers. Reach out to learn more.
Secure long-term contracts
Signing long-term contracts with logistics service providers is one of the most effective ways to stabilise freight rates, particularly in volatile markets. These contracts allow you to lock in rates over an extended period, shielding your business from the unpredictable nature of spot rates.
For example, businesses shipping majority contract rated cargo in 2024 have been left much better off than those on spot paying cargo, as a result of the Red Sea diversion driving rates up unexpectedly.
However, shippers must be aware that carriers will likely shift preference to higher-paying spot market shipments in times of extremely high freight rates. Therefore, contract payers may face a battle to get some of their cargo on vessels. But overall, long-term contracts allow for better budget forecasting, reducing uncertainty and providing stability.
However, it's crucial to balance this with clauses which allow for periodic adjustments based on movements in the rate market. That will mean both parties can adapt to significant market shifts without completely renegotiating the contract. It also keeps the agreement sustainable and ensures more fairness, partially mitigating the risk of overpayment during freight rate downturns.
Diversify shipping routes and services
Diversifying your shipping routes can mitigate the risk of rate volatility by reducing dependence on any single trade lane. This strategy means your business is less exposed to rate rises on trade between certain locations.
“We’re seeing increased adoption of the China plus one supply chain strategy in our clients. Where businesses source goods from China and another location, meaning exposure to tariffs, geopolitical relationship breakdown and freight rates on China export trade lanes is minimised.”
John Sommer, Co-CEO, WTA
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Diversification can significantly reduce the risk of being impacted by bottlenecks or rate surges from a particular region or country.
Furthermore, expanding service offerings, such as warehousing or last-mile delivery, can also create additional revenue streams that are less vulnerable to the market forces which affect shipping rates.
These additional services provide a buffer, ensuring more consistent overall revenue even when freight rates fluctuate.
Deepen relationships with logistics service providers
Building strong, long-term relationships with logistics providers can result in better-negotiated terms and more consistent service.
We mean building more than just transactional relationships with any freight forwarder or logistics provider. Lean on their experience in freight to your advantage. Have consultation meetings with them to strategise.
By fostering trust and collaboration, your business could even secure priority access to capacity, which helps avoid surges in spot rates. Freight forwarders are more likely to offer competitive rates and flexibility to reliable shippers which they have established partnerships with, reducing the likelihood of being caught off guard by rate spikes.
We would advise shippers move away from logistics providers who resist this kind of relationship.
Unfortunately, in these turbulent times for global politics, a time of stability in freight rates feels like it will never be achieved. Any number of supply chain shocks could be just around the corner. But shippers can take solace in the steps they can take to improve stability in the freight rates they pay.
Whilst no solution will offer complete protection from the sorts of fluctuations we have seen in recent years, they will go some way to improving the accuracy of supply chain budgeting. Reach out to WTA today who will be able to consult on any of these strategies for minimising the damage caused by rate fluctuations.
