Why Do Global Shipping Costs Continue to Skyrocket?
Global shipping costs are reaching rarely seen levels, putting strain on logistics teams and product purchasers alike. Here’s a closer look at some of the reasons for this phenomenon.
Worsening Container Delays Create Bidding Wars
Port backups were among the issues of the early days of the COVID-19 pandemic. Unfortunately, they persist now, limiting the number of containers each port can efficiently accommodate. Relatedly, the shipping customers outpace the available space in each container. That problem makes prices rise so high that some entities lose out because they cannot afford to pay them.
Port Backups Cause Headaches
Some port backups are so severe that ships arrive unable to dock. That’s an ongoing situation at Washington State ports in Tacoma and Seattle. U.S. Coast Guard representatives helped redirect some vessels as they waited days or weeks to unload. Some ended up in unusual locations, such as off the Puget Sound. The offloading delays also cause a container shortage that affects new freight.
HMM, South Korea’s top national container carrier, recently reported severe vessel berthing congestion at most of its port calls, as well as related yard and gate issues. Other providers reported similar disruptions. However, the affected parties disagree about what’s to blame. The carriers often assert that ports are not sufficiently well-managed, which causes the delays. But port managers respond that carriers have not met their berthing window requirements.
Bids Can Reach the Tens of Thousands of Dollars
In any case, these slowdowns have made it exceptionally challenging to keep goods moving. Desperation makes some parties engage in bidding wars.
Philip Damas, head of the supply chain advisors practice at Drewry, a maritime research consultancy, explained, “Everyone is spending much longer on round trips. Containers are sitting on the water for much longer periods of time, containers are waiting at ports for much longer. Productivity in container shipping is deteriorating. Every failure is effectively creating ripple effects. It’s a vicious cycle.”
He continued by clarifying that freight indexes that track the changes in shipping costs usually gather the associated spot booking prices that get offered about a week before a ship departs. However, some ocean carriers offer available slots in shorter timeframes once the vessels are already at terminals. By then, there are plenty of customers eager to get goods on board at the last minute.
“Now everything is overbooked,” Damas said. “Shippers are desperate to book tomorrow. It’s more a bidding war than it is a traditional tariff, and this bidding war is accelerating. Some of these $23,000, $24,000 prices include the inland distribution cost, and that can easily add far more to the final cost.”
A combination of factors means many shippers decide there’s no choice but to pay those high prices. One longstanding issue is that carriers have cut capacity on major routes. Plus, the container shortage caused by backups escalates the problem. Shippers often realize they have to pay higher prices or leave the overseas markets.
Increased Demand From Customers Exacerbates the Issue
Company leaders usually appreciate when their products are in high demand, but the matter becomes more complicated when shipping costs are so high. In such cases, it’s necessary to either invest massive amounts of money to alleviate the shipping struggles or face lengthy delays that could upset customers.
For example, Amazon manages its own logistics system with extraordinary efficiency. However, that decision means building huge distribution centers as close as possible to the people who place orders. The company even began purchasing jets in early 2021 to exert more control over its air shipping options. However, most other brands don’t have such gigantic resources. Plus, the strategy may not pay off forever.
In the second quarter of 2020, Amazon showed a 68% increase in money spent on shipping. The e-commerce giant has yet to raise shipping costs for consumers, but other brands have already taken that approach. The rise in global shipping costs could even cause long-term stock shortages.
A Luggage Brand Goes to Great Lengths to Receive Goods
In one case, a global luggage company usually receives 11 container deliveries annually by August. That scheduling gets the goods to the merchant in time for the holidays. But, this year, it has only received three of the 11 so far, and not without significant expense.
The company normally pays $2,500 per 40-foot container. But representatives got an offer from an entity promising to get the container onto a ship in Thailand for $15,000. However, people at the company had to first get the goods to the vessel from Myanmar — a challenge in itself due to a trucking shortage affecting Asia. The brand eventually secured the necessary trucking assistance for $3,000.
In the end, the brand paid $18,000 to have its goods shipped. This example shows how much the global shipping crisis can quickly eat into profits. Another downside is that the container’s goods had a $30,000 value, so sending them cost more than half that amount.
The company reported that consumer demand was up, which is usually a positive thing. It’s probably in large part because of how people are starting to travel for pleasure more with the air travel industry beginning to recover and offer more routes.
Fewer Overall Affordable and Available Transport Options
A lack of choices to move goods also contributes to soaring global shipping costs. Some parties may get their products shipped by train and air when possible, but capacity limits exist there, too. The rush to get goods shipped causes a crunch that requires scrambling for any available slots offered via any kind of transit. Plus, air shipments are much costlier than those sent by sea, with some estimates saying that method is at least five times more expensive.
Severe weather can wreak havoc, too. In July 2021, a typhoon hit China and closed the country’s air, sea, and rail hubs. Earlier in the year, snowstorms forced some rail freight operators to temporarily cease running some routes. These challenges mean some customers decide they must cope with the tremendous shipping costs because there aren’t many other viable options.
Some brands are also trying to cope with delays within the supply chain by making up time at other points. One way to do that is with drones. Supermarket chain Tesco carried out a trial where some customers in Ireland received grocery orders only 200 seconds after the goods departed the store property.
In another instance, DHL partnered with a cargo drone company. The agreement involves using and managing several thousand drones to give customers same-day deliveries. Drone deliveries are not yet widespread options. However, they could become more popular, particularly as shipping professionals look for feasible ways to cut costs while keeping customers happy.
No Short-Term Price Easing
Analysts believe the global shipping costs will not return to more manageable levels during 2021. There are certainly not any quick fixes to the problem. Thus, the parties affected by it must decide on the most appropriate ways to deal with it, even if that means accepting astronomical prices or restructuring supply chains to avoid long-distance shipments as much as possible.
Emily Newton is an industrial journalist. As Editor-in-Chief of Revolutionized, she regularly covers how technology is changing the industry.