With shipping containers growing scarce, freight rates are rising as a confluence of factors roil the world of logistics heading into the year’s busiest season.
The ripples are spreading out across the supply chain. Shipments are being delayed, and companies are grappling with a sudden spike in costs. On top of that, many are scrambling to load up on inventory ahead of a potential 10% tariff increase proposed by Donald Trump, further exacerbating the situation.
Freight demand may be more a factor of shippers anticipating future supply chain disruption rather than actual consumer spending, which is relatively flat.
In the midst of all this, shippers need to find cost-effective ways to maintain timely goods delivery.
Drivers of Rising Costs
The nine-month-old Red Sea crisis heads the list of culprits contributing to capacity shortages and rising freight rates. This comes at a time of increased demand, with aging supply chain infrastructure being pushed to the max and labor issues threatening.
Freight Demand Grows
Walmart, Target, and Shein are running early back-to-school campaigns to counteract Amazon Prime Day. Many other retailers are moving up import schedules as signals of tightening capacity increase.
Container imports were up 11.9% in May and up 10.4% in June compared to 2023, according to Descartes, a provider of supply chain software. The volume was down slightly from prior months.
The Logistics Managers Index (LMI) showed freight capacity as neutral instead of growing in June, the non-growth reading of the LMI for capacity since March 2022.
Gulf Tensions Continue to Impact Trade
Maersk CEO Vincent Clerc said the ongoing Houthi attacks have now affected the company’s entire global network. Clerc expressed concern about Maersk’s ability to plug gaps in capacity as demand surges and the effects of disruption cascade globally.
“Today, all ships that can sail and all ships that were previously not well utilized in other parts of the world have been redeployed to try to plug holes,” Clerc said. “It has alleviated part of the problem, but far from all the problems across the industry, including for Maersk.”
East Coast Labor Stalemate Fuels Stoppage Fears
The head of the union representing 45,000 East and Gulf Coast dockworkers is upping the heated rhetoric, fueling fears of a crippling strike. Talks have been stalled over union accusations that port owners are violating contract terms by implementing automation in some locations.
If a contract isn’t reached by Sept. 30, we could see the first East Coast strike since 1977. This would have an enormous impact on trade during the fall season. Many shippers have already been diverting volume west, sending it east by truck and rail.
Port Congestion in Singapore and Malaysia
Red Sea diversions have caused container traffic to back up at busy ports in Singapore and Malaysia. The Straits of Malacca, which run between them, is a vital waterway linking Europe and the Middle East to East Asia. Congestion is expected to run through August, analysts told Bloomberg.
Container traffic has also backed up in Kota Kinabalu, the capital of Malaysia’s Sabah state on Borneo, leading to surcharges on shippers. It’s an important transshipment port for traffic between the Far East and Europe.
Implications of Rising Freight Rates
Spot rates on the Drewry World Container Index are approaching $10,000 for a 40-foot container from Shanghai to New York. While below the early pandemic peak of $16,000, the CEO of freight forwarder Lalo told Reuters he expects rates to hit $20,000.
This is already leading to higher prices. Some major furniture makers are charging dealers a surcharge to cover the higher container rates. This, of course, gets passed onto consumers, sure to impact already low store traffic rates.
Coffee prices will also rise, the chairman of Italian firm Lavazza said, due to poor harvests, Suez Canal diversions, and increased raw materials costs. He said while not as bad as during the pandemic, when shipping costs rose 10x, diverting around the Red Sea has increased them 4x.
Managing Rising Freight Rates
Given all these challenges, shippers need to get creative and take new tacks in order to avoid getting swamped by rising costs and growing disruptions. Here are a few suggestions:
- Consolidate shipments: combine multiple smaller shipments into a single larger shipment, reducing the number of containers required, creating economies of scale, and lowering the per-unit cost. Also, consider full container loads when possible, which can be more economical with heavier shipments.
- Diversify modes: create a mix that includes rail transloading and air freight, providing greater flexibility and helping mitigate risks associated with an over-reliance on ocean and trucking.
- Build strong carrier relationships: This can lead to more favorable contract terms and greater service reliability at crunch time.
- Invest in technology: AI-powered route optimization can improve freight efficiency and lower costs. Load planning software and packaging automation help you make more effective use of the container’s cube, and real-time visibility tools help you better track shipments in transit.
There’s a Bumpy Road Ahead; How Will You Manage?
The surge in freight rates, with a multiplicity of drivers, presents significant challenges for shippers. Delays and increased costs are affecting businesses and consumers. As companies brace for potential tariff hikes and labor stoppages, they need to seek innovative ways to hedge against disruption. This includes tactics such as consolidating shipments, diversifying transport modes, building strong carrier partnerships, and investing in technology.
Wicker Park Logistics, a woman-owned logistics company and WBENC-Certified Business, is also keeping a sharp eye on these developments. Our veteran team is well-positioned to provide shippers with solutions tailored to address market challenges. Whatever your business needs across trucking, intermodal and supply chain services, Wicker Park can help you optimize your transportation spend and hit your critical SLAs. Get in touch today for a quick quote.
