Does your supply chain depend on container freight shipping? And are you struggling with cost and forecasting challenges? At Logistics Bureau, we have supply chain consultants available to help you improve volume forecasting and attain the most favourable container freight rates possible, even during this period of pandemic-induced turmoil.
However, even with a consulting team on your side, it is crucial to ensure your managers responsible for procuring shipping services understand the current container freight landscape and issues at hand. This article might help you cultivate that understanding, as it offers a brief overview of the factors influencing high container freight costs—and the challenges of volume forecasting.
What is Freight Rating?
Think of freight rating as the art and science of determining how much it is going to cost to move your goods from point A to point B. Though it is not as simple as just pulling a number out of thin air — there is actually a whole methodology behind it that considers multiple factors that influence the final price.
You know how when you are booking a flight, the price depends on things like distance, time of year, and how full the plane is? Freight rating works in a similar way, but with even more moving parts to consider. The key elements that typically go into calculating a freight rate are:
- Distance and Geography: The physical journey your shipment needs to take is usually the starting point. But it is not just about raw miles — we are also looking at things like whether it is going through major shipping lanes or remote areas, and whether there are any geographical challenges like mountains or restricted zones to navigate.
- Weight and Dimensions: This is where things get interesting. We look at both the actual weight (what we call the gross weight) and something called dimensional weight or volumetric weight. Sometimes you will hear carriers talk about “whichever is greater” — they are comparing these two weights to determine which one they will use for rating purposes.
- Freight Classification: In North America, we use something called the National Motor Freight Classification (NMFC) system, which categorises freight into 18 different classes based on: density, handling requirements, stowability, and liability (potential for damage or theft).
- Additional Services: Think about all the extra things that might need to happen with your shipment: liftgate service for locations without a loading dock, inside delivery, limited access locations, residential delivery, fuel surcharges, and special handling requirements.
Something many people do not realise is that freight rating is not just about coming up with a price — it is actually a strategic tool when it comes to logistics. The way you structure your freight rates can significantly impact your overall logistics costs and service levels.
What is particularly exciting is how technology is transforming freight rating. We are seeing sophisticated Transportation Management Systems (TMS) that can instantly compare rates across multiple carriers, consider all the variables we have discussed, and even factor in historical performance data to help you make better shipping decisions.
The key to successful freight rating is not just about getting the lowest rate — it is about finding the right balance between cost and service that aligns with your business needs. Let us look at how you can ensure you pick the right freight rate for your company.
Freight Rate Forecasting: Background to the Current Situation
The real problems with container freight capacity and rates started with the COVID-driven shutdown of manufacturing in China in 2020, and the subsequent reopening, coupled with a massive spike in e-commerce growth and stimulus initiatives in the West, which resulted in phenomenal demand for container capacity against a background of misplaced containers. The outcome was a severe global container shortage.
The situation was—and continues to be—exacerbated by a reduction in turnaround speed in ports and terminals due to the need for compliance with social distancing and movement restrictions.
As container demand continues to grow, supply capacity is not increasing fast enough to keep up. In short, a perfect storm of complicating factors has led to:
- Increased port congestion
- Lengthier delays in container loading, unloading, and shipping
- Reduced shipment visibility
- Sky-high shipping fees
- Increased shipping surcharges
- A higher frequency of blank sailings
The market has become carrier-centric, magnifying the challenging nature of forecasting — not least because traditional mitigation practices for forecast inaccuracy, such as overbooking and phantom booking, are no longer tolerated. That means forecasts must be more accurate than ever before, at a time when volatility is making a mockery of the typical patterns of seasonal demand.
Analysing and forecasting freight rate fluctuations, especially those impacted by significant events like the COVID-19 pandemic, is crucial to effectively manage market volatilities and reduce risks associated with unpredictable changes in shipping costs.
Increase Forecast Accuracy to Attain Lower Rates
When negotiating long-term container freight rates, your company’s freight rate forecast will be one of the most critical factors any carrier will consider. Liner companies need this vital intelligence to match the supply of container and vessel capacity to the demand on specific routes.
Since the onset of the pandemic, though, a marked squeeze on the market has defied the forecasting skills of logistics professionals and the algorithmic models that typically assist them so ably.
Still, at Logistics Bureau, we are great believers that anything you can do to improve forecast accuracy, you should do — and that tenet applies at any time, but perhaps more so during periods of crisis and instability.
Adjust to a Carrier-Centric Freight Market Amid Market Volatility
By working hard and smart to generate more accurate forecasts of future freight rates, you can still improve your chances of managing costs and securing favourable container freight rates. There is probably no better time to do so than when they are hitting record highs.
Whilst historically your enterprise might well have enjoyed some privileges in the practice of securing container capacity — such as overbooking without any penalties — carriers have tightened requirements substantially over the last 12 months. Many now apply fees for booking cancellations and no-shows, leaving shippers with little option but to focus on generating forecasts that are as precise as possible.
Freight Market Dynamics
The freight market is a complex interplay of dynamics — supply and demand imbalances, port congestion, fuel costs, driver availability. All of these impact freight rates and the overall supply chain. For example, port congestion can cause delays and result in higher shipping costs, whilst fuel price fluctuations can impact operating costs significantly too.
Understanding these dynamics is key for shippers and carriers if they want to navigate the market effectively. Freight rate forecasting is a big part of that, helping stakeholders anticipate and make informed decisions. By using accurate forecasts, shippers and carriers can optimise their operations, reduce costs, and improve overall cost efficiency — which is critical to staying competitive in a volatile market.
Other Steps to Minimise Container Freight Costs
Of course, it is all very well to focus on increased forecast accuracy, but the opportunities of this approach are finite. So what can you do if you cannot better your current forecasting?
There are a few steps you can take.
Understanding the key factors influencing freight rates — such as capacity shifts, fuel costs, regulatory changes, and geopolitical events — is crucial for effective rate planning and strategic decision-making.
The first step should be to focus on building solid relationships with your freight forwarders and carriers. That means sharing your volume data with them and avoiding the exploitative practices of phantom bookings and overbooking.
It also means regular, meaningful communication with your contractual carriers, setting their expectations for realistic — rather than overstated — volumes.
On the other side of the equation, it means letting them know in good time if your volumes look likely to fall below expectations, although in the current climate, hopefully, that will be an unlikely scenario.
Other measures that could potentially help you include the following:
- Right-size your containers (if you are shipping full container loads) by using 20-foot units for goods with a high weight and 40-foot for lightweight, high-volume shipments.
- Look for opportunities to triangulate containers by bringing back imports in the same container you use for your exports. Carriers will often offer discounted rates to customers who can do this.
- Tighten up management efficiencies, especially those which concern shipping and customs documentation, to avoid unnecessary additional costs such as demurrage or detention charges at ports and terminals.
- Actively seek to optimise the shipping routes used for your freight. Are you confident that your carrier is using the most cost-efficient routing? It always pays to analyse the different routing options available.
- Seek options to improve freight consolidation and reduce shipment frequency.
Are Carriers Exploiting the Situation?
Whilst shippers have often been guilty of exploiting dubious practices like overbooking to secure container capacity, the tables have turned since the pandemic levelled massive constraints on freight resources.
Truck transportation faces similar challenges, with stagnant growth due to market volatility and the need for accurate forecasting methods to navigate uncertainties in the trucking market — emphasising its importance for effective decision-making in shipping companies.
With exponentially less air freight capacity available, more shippers have been using ocean freight, drawing even further on capacity already depleted by container shortages.
Now, observers are beginning to question whether carriers are being exploitative by continuing to raise container freight rates, to the point where competition regulators are taking a keen interest in the goings-on.
In Australia, the Australian Competition and Consumer Commission is currently seeking to determine if ocean carriers have breached competition laws in their container administration and pricing practices, whilst the Federal Maritime Commission is conducting a similar investigation in the United States.
This regulatory interest should probably come as no surprise, given how liberally carriers have been applying price hikes and additional surcharges, with rates on sought-after routes increasing by more than 500% over the last year.
Rates May Not Ease Anytime Soon
Experts suggest that the situation will not improve significantly, perhaps for several years to come. Notably, a few of the largest carriers have announced intentions to cap spot rates and refrain from introducing further surcharges. Nevertheless, there are no guarantees that all competitors will follow suit.
So where does this leave you, the shipper? Unfortunately, there will be no early reversal in the direction of container freight rates, meaning you must continue to absorb the costs or pass them on to your customers.
Are you in the practice of tendering for long-term rates? If so, you might try leaning on some of the advice offered earlier in this article. However, if you typically rely on spot rates, now is as good a time as any to consider building relationships with carriers, sharing your forecasts, and looking for favourable long-term carrier agreements for your import and export trade lanes.
Need Some Help with Global Container Freight Rates and Forecasting?
Container volume forecasting challenges and astronomical shipping costs look set to continue for the foreseeable future, so you might want to consider your longer-term options. At Logistics Bureau, we can work with you to optimise forecasting processes and utilise the data to negotiate favourable FCL and LCL rates.
To learn more about how we can help with container freight rate reduction and forecasting, why not book a one-to-one discovery call with a Logistics Bureau consultant? It is FREE and only takes a moment to schedule online.
Alternatively, contact us by phone or email to enquire about our supply chain and logistics consulting services and discuss your needs.
