Why Freight Rates May Rise Further

Why Freight Rates May Rise Further

Aerial view of shipping containers stacked at port

Key takeaways

Ocean and air freight rates have risen rapidly in the past year, and are likely to maintain current levels or increase further.

Industry consolidation and blank shippings, combined with changing demand patterns in Asia, have put pressure on capacity along many routes.

Businesses should not be afraid to pass on rate rises to consumers: the strength of demand gives them the latitude to do so without high rates of attrition.

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Don’t expect freight rates to fall anytime soon. Here’s why.

The cost of air freight and sea freight has risen sharply over the past year, and DHL believes freight charges will increase further as global trade recovers and capacity is reduced amid the continuation of mergers and acquisitions in the once-overcrowded container shipping industry.

The growing demand for space on board freight carriers is reflected by the sharp jump in exports from Europe and Asia since June 2016, following a torrid 2015 and 2016 when major countries like the United States and China reported a drop in the value of their imports and exports.

Exporters are already experiencing long wait periods on certain maritime routes, and such constraints are likely to worsen in late-August and September, which is the peak season for shipments as retailers stock up ahead of the year-end holidays.

According to Drewry’s, a maritime research and consulting firm, global freight rates were on average 37% higher in the first five months of 2017 compared to the corresponding period in 2016.

The ascent was even more rapid on specific routes, with spot rates from North Europe to China climbing around 45% in the space of a week in March when ocean freight firms dropped a few scheduled services and increased blank shipping in industry parlance due to the Chinese New Year.

Conditions in the air cargo industry are just as unfavourable, with carriers reducing capacity and strategically important airports such as Hong Kong cutting the number of slots for air freight transport.

The situation in the aviation sector has been further complicated by tensions in the Middle East where Saudi Arabia, Egypt, the United Arab Emirates and Bahrain have banned most freight logistics movement with Qatar, contributing to a supply squeeze that has prompted carriers to hike rates.

“Looking at the current situation in air freight, it is absolutely possible that carriers further increase freight rates and surcharges. This can sooner or later result in freight forwarding companies and logistics providers needing to adapt their rates too,” says Li Wenjun, Head of Air Freight at DHL Global Forwarding Asia Pacific.

Consolidation in container shipping

One factor behind the rise in freight shipping rates is the recovery in the global economy, which the International Monetary Fund predicts will expand by 3.5% this year from 3.2% in 2016, lifted by better performances in China, Japan and the Eurozone. The IMF expects next year’s growth to be even stronger at 3.6%.

A bigger factor, however, is the consolidation in the container shipping after years of losses or sharply reduced profits, giving the survivors greater pricing power while reducing capacity across the industry. The current wave of mergers and acquisitions started in 2015 when France’s CMA CGM, currently the world’s number three, agreed to buy Singapore’s Neptune Orient Lines and China announced plans to merge its two shipping groups to form Cosco Shipping Holdings, now Asia’s biggest container line.

In August last year, South Korea’s Hanjin Shipping, then the world’s seventh largest freight shipping company, filed for bankruptcy protection, leaving billions of dollars of cargo stranded at sea for months. Hanjin was wound up earlier this year.

Other global names are in the process of combining their operations. For example, Nippon Yusen KK, Mitsui O.S.K. Lines and Kawasaki Kisen Kaisha, Japan’s biggest shipping companies, have agreed to combine their freight carrier operations and are targeting an April 2018 start. Most recently, Cosco said it will buy Orient Overseas International Ltd, or OOIL, in a deal that will allow it to leapfrog CMA CGN to become the world’s third largest shipping line.

Ocean freight has become a “seller’s market”, says Karsten Michaelis, Head, Ocean Freight, DHL Global Forwarding Asia Pacific, as many carriers try to recoup losses incurred over the past six years by paring back less profitable sailings and routes wherever possible.

“While many businesses are loath to (raise prices) spuriously, they should also remember that much of the upward pressure on ocean freight rates comes from growth in Asia’s consumer demand.”

Changing trade patterns

Up until recently, companies in Europe had no difficulty finding ships or planes to carry their goods to Asia. Rates were also attractive as China sold a lot more than it bought, meaning a ship laden with goods on its way from Shanghai to Hamburg would often return half empty.

This is no longer the case. Rising consumer purchasing power across Asia has driven demand for European products like meat, milk powder and alcohol. For example, Chinese imports of beverages and tobacco alone grew more than 50% between 2013 and 2016.

European companies are also selling more industrial goods to China and other Asian countries to support the region’s fast-growing economy.

As a result, eastbound ocean freight between Europe and Asia has been growing faster than westbound shipments, with the disparity widest in the Mediterranean where shipments to Asia have soared even as imports decline.

Further complicating matters are changing weather patterns that have resulted in lower water levels at key European ports such as Hamburg, which mean ships entering or leaving European ports cannot be loaded to the maximum capacity.

Michaelis says staff have been helping customers avoid delays by leveraging longstanding relationship with shipping lines, offering flexible routings and relying more on rail shipments between Europe and Asia in both directions.

“For certain customers we were able to offer dedicated block trains to and from Asia,” he adds.

While more expensive than ocean shipping, trains can transport cargo from China to Europe in about 15 days compared to about 40 days by sea.

The cost of rail transport is roughly a quarter to a third of air freight, which has become more expensive amid a shortage of capacity and higher jet fuel prices.

Given the rising cost of freight which is likely to climb further in coming months, businesses should not rule out passing on increase to customers.

“While many businesses are loath to do this spuriously – and rightly so – they should also remember that much of the upward pressure on ocean freight rates comes from growth in Asia’s consumer demand – and higher demand, more often than not, allows for greater latitude in pricing,” says Michaelis.

This will enable companies to reduce the pressure on their own margins without compromising sales in any major way, he adds.

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