How to Cope With Rising Freight Costs and Shipping Delays

Freight Cost Increases and Shipping Delays: How Importers and Exporters Can Cope

Over the past year, international shipping costs have skyrocketed, and fierce competition for freight containers has become the new standard. Now, freight rates are expected to climb even further and remain higher than pre-pandemic levels, perhaps in perpetuity.

On average, freight costs for a 40ft container from Asia to Europe increased from $2,000 to nearly $14,000 between April 2020 and April 2021, according to a recent study. Simultaneously, vessel shortages are causing shipment delays, heightening the severity of distribution challenges.

As the holiday shopping season approaches, importers and exporters are working to overcome these hurdles. Preventing late shipments and managing freight expenses will require strategic decision-making to build resiliency in this volatile trade environment. Luckily, there are still ways to decrease costs and optimize profits regardless of the current economic situation.

The Cause of Skyrocketing Freight Rates

These drastic maritime price rate increases began at the end of 2020 as global economic recovery resulted in greater demand for shipping containers. This sharp rebound had a rippling impact that ultimately led to unprecedented raw material shortages, supply chain disruptions, and production delays.

According to the World Trade Organization, after falling approximately 5% in 2020, international trade is on track to reach 8% growth in 2021. The resulting imbalances in supply and demand have significantly impacted shipping prices along major trade routes, displacing empty containers, congesting ports, and disrupting the flow of goods.

A Container Shortage and Shipping Delay Crisis

When ports in the US and Europe were enforcing lockdown measures, Asia was already on the way toward recovery and increasing its export activity. However, the lack of imports meant ships were returning empty, resulting in a one-way trade crisis. Until balance is restored, container shortages and rising prices will continue to be problematic.

Port backup issues during the pandemic persist, affecting port accommodation capacities. Now, space is in such high demand that shippers compete to get a spot at any price. At some locations, severe congestion prevents some ships from docking for days or weeks at a time. These offloading delays create container shortages that impact future freight and perpetuate the cycle.

Overall, waiting times at ports are significantly longer than they were pre-pandemic, costing everyone money along the way. The competition for docking space has led to bidding wars, forcing many importers and exporters to make difficult decisions regarding their participation in foreign markets. Some companies raise shipping costs for consumers while others explore alternative transportation arrangements through air freight or switch to local suppliers.

Future Freight Cost Predictions

Although the pandemic continues to impact trade unpredictably, price surges are likely to subside by 2023. Shipping companies are heavily investing in building new container ships to meet demand. Meanwhile, broader trends involving inflation could keep prices high in the short-term future.

Long-term, the United Nations Conference on Trade and Development is facilitating reforms that could help prevent future container shortages. In particular, the committee is striving to resolve three critical issues.

  • Trade tracking and forecasting improvements: Promote visibility and transparency throughout trade processes to monitor port activity and improve scheduling
  • Legislative reforms for trade facilitation: Policies that make trade more affordable, accessible, and straightforward by standardizing digital trade processes
  • National competitive authority enhancements: Prevent malpractice in the shipping industry by supporting investigative authorities

Resolving these more complex considerations could help prevent future container shortages and keep freight rates more consistent. Now, it's up to policymakers to establish the necessary measures to keep international trade moving.

The Top 3 Strategies to Cope With Rising Freight Costs

Mr. Soren Fosgerau Ostergaard, Head of Twill Commercial, encourages importers and exporters to maintain a positive outlook:

"The current market situation in logistics remains challenging for businesses. While we are here to support your logistics the best we can, there are also steps you can take to ensure the impacts don't devastate your business. The most important is to understand your own business requirements in the weeks and months ahead and plan and book your cargo in advance. Doing this will help you to keep your cargo flowing and avoid delays before they happen."

Until the advancement of trade reforms is complete and the global container shortage is resolved, global trade partners need to take a proactive approach. Below are the three most essential steps importers and exporters can take to cope with rising freight costs.

1. Adjust Your Procurement Approach

When freight prices are high, importers and exporters need to be aware of best practices to keep rates competitive. Calculate your benchmark freight prices and use this number to compare quotes from other carriers. By comparing rates frequently, shippers ensure that they get the lowest prices possible. Typically, it's best to avoid long-term contracts since freight costs could go back down in the future.

2. Increase Supply Chain Resilience

The pandemic revealed many companies' supply chain weaknesses, magnifying the importance of building supply chain resilience. If a disruption in production occurs at any link within the supply chain, traders need to be prepared. Maximizing cash flow is one of the best ways to free up the working capital necessary to expedite business activities. Digital trade finance offers buyers and sellers flexible payment solutions that optimize balance sheets.

3. Minimize the Financial Impacts of Late Deliveries

Shippers can minimize late deliveries by planning for holidays and peak seasons. Leveraging digital platforms to track, schedule, and view potential delivery delays give companies more time to respond to interruptions. By using digital financing from MODIFI, buyers and sellers have the option to extend payment terms, relieving the financial burden of delivery delays.

Final Thoughts

As global economic activity recovers, traders can anticipate freight prices to normalize over the coming years. Until then, simple procedural changes can help maximize profitability. Continue taking proactive steps to secure the lowest shipping prices, leverage digital trade finance tools, and repair any weaknesses in the supply chain.

There are many reasons for traders to be optimistic about the changes currently disrupting international trade. In the long run, accelerated trade digitization has the potential to make trade more profitable, accessible, and streamlined than ever before. The global trade scene is well known for its time-consuming, outdated practices, and modernization is well overdue.

If you need more information about how to improve your logistics, you can find out more on Twill's website here

To find out how digital trade finance can help your business cope with freight cost increases, contact MODIFI today.

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