The shipping industry has yet to recover from the cost volatility that emerged during the disruptions of the Covid period, and this trend continues to pose a significant risk for shippers. The volatility in freight rates can be attributed to various factors, including geopolitical tensions like attacks on ships in the Red Sea, fluctuations in supply and demand, and unexpected changes in tariffs.
Additionally, increased vessel insurance and fuel costs due to security concerns in regions like Iran and the Gulf also contribute to this instability. Transpacific shipping rates have experienced marked fluctuations recently, particularly between Asia and the US West Coast.
For instance, rates from Shanghai to Los Angeles halved in early 2023, only to double again by mid-year. Shippers using short, spot agreements face substantial risks as they contend with sudden changes in landed costs, which can lead to negative profit margins on exports and diminished competitiveness in certain markets.
Logistics executives are often held accountable for these cost overruns, escalating pressure on them. The impact of cost volatility is particularly detrimental for companies dealing with low-value products, where even a modest increase in freight costs can be devastating.
While larger enterprises with annual contracts generally have better protection against cost fluctuations, frequent unexpected surcharges are increasingly common. Companies shipping products on East-West routes are especially vulnerable, as the standard deviation for freight rates can mean cost variations of around $1,400 per container.
In contrast, intra-Asia shipping tends to be more stable and lower in cost, which may explain its growing popularity. Despite these differences, there remains substantial cost risk in both East-West and North-South shipping routes.
Drewry advocates for shippers to proactively manage these risks through established methods like securing annual contracts with carriers and fostering strong relationships, alongside emerging strategies such as utilizing freight futures to hedge against volatility. With intensifying cost volatility and a long-term shift towards rising freight rates, shippers must reassess their risk management strategies to navigate these challenges effectively.