Why are freight rates soaring?

COVID-19 update: Why are freight rates soaring?

Spiraling freight rates have left businesses around the world scrambling to stay afloat during the coronavirus pandemic, piling yet more pressure on already stretched global supply chains. 

At the core of this problem: shrinking cargo space.  

Here’s what has led to a decrease in cargo capacity and how it is impacting freight rates.

Airplanes grounded, but rates flying high

Air freight rates are reaching abnormal highs as 90% of the airlines have grounded their planes amid lockdowns in various parts of the world. There are limited spots available on cargo planes and as manufacturing units in China are slowly recovering, shippers are striving to book them. 

Generally, over half of the world’s air freight moves in the belly of passenger planes. The present situation, however, has forced shippers to turn to cargo planes. A recent report by Business Standard stated that China’s air cargo capacity has gone down by 39% relative to last year because of the cuts to passenger flights.  

Blank sailings have opened the door to low supply

Shipping lines are cutting down on the number of sailings in response to the COVID-19 pandemic. Due to an increase in blank sailing where scheduled voyages are suspended or canceled, containers are piling up at ports and freight rates are increasing despite a drop in crude oil prices. A further reason is that local markets have started facing the brunt of the crisis: as the spending capacity of consumers is compromised, orders are being canceled which in turn leads to yet more blank sailings.

Moreover, cargo is beginning to accumulate across several ports as shipping lines skip calls to avoid sailing without full loads. To fetch better margins, operators are trying to reduce the number of ships to make sure that the carriers that actually sail are completely filled. 

According to the World Container Index, combined average freight rates on the major East-West container trades decreased by 1.7% in the third week of April to an average of $1,504 per 40ft container but is still 13.1% up when compared with the same period of 2019.

These developments are working against those who can – and want – to ship their goods: cargo space has hit a record low just as rates hit a record high. 

Also check out GoComet Freight Index – a shipping index relfecting the fluctuation of the spot rates (port pair wise) in international shipping.

Increased turnaround time for containers

As per the guidelines and directives in place due to the impact of the coronavirus, cargo arriving from high-risk countries is quarantined at ports for 14 days. Both crew and cargo are screened thoroughly, drastically increasing turnaround time.  This has been the case at ports across the world, resulting in the piling up of containers in some places and a major shortage of empty containers elsewhere. 

The way forward

Whilst too early to give any accurate predictions, history has shown us that organizations that are better equipped for an economic rebound will emerge stronger. Ensuring a resilient supply chain that deploys agile, digital technology to generate cost-efficiencies, shipment visibility, and insight will allow your company to gain a lasting competitive advantage.

To learn how GoComet can help you drive cost savings, improve process efficiency, and proactively address the challenges of today and tomorrow through automation, contact us here