The Relentless Rise: Adapting to Increasing Transport Costs

Adapting to the new reality of high transport costs requires a holistic strategy that combines awareness of global trends, but with an even keener focus on internal improvements.

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If you're involved in international trade, you've likely noticed a troubling trend over the past 18 months: steadily climbing shipping costs. What started as a post-pandemic recovery has turned into a relentless upward trajectory, leaving many businesses grappling with unprecedented expenses. As we navigate this challenge, it's crucial to understand the factors driving these increases and how to manage their impact on your organization’s bottom line.

The shipping industry has witnessed a dramatic and consistent increase in costs since early 2023. According to Statista, rates hit a low point of $1,342 for a 40-foot container in October 2023 but have since skyrocketed to over $5,900 by July 2024 - the highest on record. This staggering 340% increase in less than a year is putting immense pressure on businesses of all sizes.

But what's driving this latest price hike, and more importantly, how can businesses adapt?

The root causes of these challenges are multifaceted. Attacks on container vessels in the Red Sea by Houthi rebels have led to shipping delays and rising freight costs. Simultaneously, the ongoing crisis in the Red Sea and restrictions in the Panama Canal have put global trade under immense strain.

While geopolitical tensions and global crises play a significant role in driving up transport costs, it's important for businesses to recognize that external factors are only part of the equation. To mitigate the impact of rising costs, companies must look inward and optimize their own processes. By focusing on factors within their control – such as supply chain visibility, shipping volume optimization, and strategic planning – businesses can reduce their vulnerability to market fluctuations. Adapting to the new reality of high transport costs requires a holistic strategy that combines awareness of global trends, but with an even keener focus on internal improvements.

Unpredictability: The Hidden Cost Driver

One of the biggest mistakes organisations make in managing transport costs is underestimating the impact of supply chain unpredictability. The cost of shipping is directly related to capacity and availability. Without contract pricing, companies are at the mercy of market fluctuations. Even with contracts in place, unpredictability can still lead to higher costs if spot rates fall below contract rates.

This volatility is exacerbated by the lack of tools that effectively compare contract rates to spot rates in real-time. It's a gap in the market that needs addressing. However, the problem goes beyond just a lack of tools – it's rooted in the very structure of the shipping industry and the profitability of the service providers in that ecosystem.

While costs of operating container fleets have increased, the surge in freight rates has not just served to cover rising expenses. Container ship operators have been reporting record-high operating profit margins since the beginning of the pandemic. In the second quarter of 2023, major container shipping companies had an average profit margin of 8.9%. This represents a decrease of almost 50% compared to the peak EBIT in the first quarter of 2022.

This is partly due to the pricing policies in the shipping industry and partly due to legacy market practices, which lack clear guidelines and create significant barriers to optimization. Carriers set their pricing influenced by competitive pressures, while freight forwarders add their margins when selling to shippers. This multi-layered pricing structure leads to wide variations in pricing for everybody.  Differentiator services are forgotten and devalued.

Further complicating matters is the wide variations in pricing practices based on volume, weight, space, etc. Lower volume shippers often cannot access contract rates and hence must shop around every time to book shipments, adding an unnecessary layer of complexity and unplanned cost to the shipping process. This reliance on market fluctuating prices makes it challenging for businesses, especially smaller ones, to truly optimize their shipping costs.

Historically, the lack of transparency in this system resulted in a race to the bottom on prices as service providers competed for business. However, the pandemic flipped this dynamic on its head, creating a race to the top as unreliability in the supply chain drove prices skyward. This rapid shift demonstrates the inherent volatility in the current system and the need for better tools and practices to manage shipping costs effectively.

Strategies for Resilience: Adapting the New Reality of Rising Costs

In the face of rising transport costs, businesses need to adopt a multi-faceted approach to manage their expenses effectively. One important strategy is to embrace transparency in the supply chain. By seeking out tools and platforms that provide real-time visibility into both contract and spot rates, organizations can make more informed decisions about when to use each option. This level of insight can lead to significant cost savings and help navigate the volatile shipping market more effectively.

Diversifying your carrier portfolio is another key tactic. Relying on a single carrier or route leaves you vulnerable to disruptions and price hikes. By cultivating relationships with multiple carriers and exploring various routes, you create flexibility in your shipping strategy.

In light of current geopolitical tensions, it's worth considering alternative routes for your shipments. While the Suez Canal route is typically faster, the ongoing situation in the Red Sea may make it more cost-effective to route shipments around the Cape of Good Hope. It's essential to analyze the trade-offs between time and cost for your specific needs, as the optimal choice can vary depending on your particular circumstances. 

Investing in predictive analytics can give you a significant advantage in managing shipping costs. Tools that can forecast market trends and potential disruptions allow you to plan ahead and potentially lock in better rates before prices spike. This proactive approach can lead to substantial savings and help you avoid the worst impacts of sudden cost increases.

Optimizing your shipping volumes is another effective strategy for managing costs. Where possible, consider consolidating shipments to take advantage of better rates for larger volumes. This may require coordination across different departments or even partnering with other businesses, but the potential cost savings can be substantial.

On the other side, service providers can work with customers to ship more balanced loads across longer periods. We’ve seen retailers provide discounts to customers to ship with longer delivery times to better manage fulfilment peaks.  In turn, service providers can incentivize customers to do the same and allow flexibility, more balanced capacity and better asset utilization. 

Looking to the future, it's crucial to start planning for emissions costs now. As governments implement Scope 3 emissions regulations, carbon costs will become an integral part of shipping expenses. By factoring these into your cost calculations early, you'll be better prepared for this inevitable shift in the industry.

While the current shipping landscape presents significant challenges, it also offers opportunities for innovation and optimization. By embracing transparency, leveraging data analytics, collaboration with service partners and preparing for future regulatory changes, companies can navigate these turbulent waters and emerge stronger on the other side. The key is to stay informed, be flexible, and utilize the right tools to make data-driven decisions in this volatile market.

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