Situation poses a series of risks for manufacturers, retailers, exporters, and importers
It has been more than five years since the massive disruptions to maritime transport, the damaging port congestion, and the cost peaks of the COVID-19 era, yet one feature has persisted ever since: freight rate instability.
According to Drewry, this phenomenon has multiple causes, including geopolitical disruptions such as attacks on vessels in the Red Sea, shifts in the supply-demand balance, intermittent tariff changes (leading to anticipatory spikes or pauses in shipping volumes), and higher insurance or fuel costs when security risks rise in areas like Iran and the Gulf region.
For example, transpacific rates from Asia to the U.S. West Coast have been extremely volatile over the past six months, amid tariff announcements and sudden shifts in both capacity and demand. Spot rates from Shanghai to Los Angeles were cut in half between January and March, only to double again between March and June, Drewry highlights.
This creates risks for manufacturers, retailers, exporters, and importers that rely on short-term spot contracts, such as:
- Unexpected decreases or increases in landed costs for importers
- Negative margins on exports
- Less competitive exports in certain markets
- Logistics executives held accountable by boards for cost overruns
These risks are even more damaging for companies importing low-value goods, since an additional freight cost of US$2,000 per container can severely erode margins in these cases.
Even importers using annual contracts, typically larger companies, better shielded from cost fluctuations by suppliers, are seeing a trend of more frequent unexpected surcharges (for example, Red Sea surcharges and vessel diversion fees since late 2023).
Cost risks are particularly high for importers of goods shipped on East-West routes.
In fact, the standard deviation of Drewry’s East-West Freight Rate Index (a weighted average of spot rates on Transpacific, Asia-Europe, and Transatlantic routes, both eastbound and westbound) was about US$1,400 per FEU container in the two years since May 2023. This means a cargo owner exporting or importing under spot rates on East-West routes could see shipping costs swing by roughly US$1,400 on average, potentially without being prepared for such a large gap.
Data also shows that cargo owners paying spot rates on North-South routes (between the northern and southern hemispheres) are likewise exposed to cost volatility.
How to mitigate these risks?
In Drewry’s view, cargo owners can and should, take steps to mitigate these risks, with two main categories of techniques available.
- Established techniques:
- Shifting from spot contracts to more stable annual contracts with carriers or forwarders
- Building stronger relationships with shipping lines based on mutual commitments
- Reviewing carrier contract language to protect against unilateral surcharges
- Emerging techniques:
- Using freight futures to hedge against spot rate volatility
- Developing and preparing freight rate forecasts and scenarios for main routes (both spot and contract forecasts)
- Reassessing sourcing locations and evaluating new options with lower logistical and/or tariff risks
According to Drewry, no one can prepare for every possible scenario, but the heightened cost volatility in ocean shipping, and the long-term trend toward higher freight rates, deserve greater attention from management and a reassessment of established practices by cargo owners.
Source: Mundo Marítimo
