The cost of shipping for transportation and logistics companies isn’t going to come down in 2022 as the challenges to deliver shipments are still persisting amid the pandemic. Regardless of the mode of transportation, the rates are going to rise. Moreover, the labour shortages around the world are further complicating the situation which is why soaring inflation and tight cargo capacity will continue to trouble the logistics managers.
According to Chris Varvares, from IHS Markit, the near-term price and cost pressures could push inflation to 3.7% in 2022. In today’s blog, we will take a look at the high freight cost that could pose a major threat to our sector in 2022.
An overview of the present situation
Freight forwarders are facing price hikes for new contracts. This indicates that high demand, inflation, and low capacity will continue in 2022. Every part of the transportation and logistics industry including parcel delivery, road freight, sea freight, and warehousing could see a rise in costs. According to a report by Cass Information Systems a provider of integrated information and payment management solutions, there has been a 23% hike in rail and road transportation prices in the US.
One important factor that has prompted the hike in prices is the ongoing labour shortage. Moreover, according to Xeneta– a firm specializing in transportation and data procurement, last month the spot rates for shipping an FEU from Shanghai to Los Angeles were 75% higher as compared to 2020.
A look at the rate forecast in the trucking sector
The high demand for goods is forcing the importers to restock their inventory. This is leading to a capacity crunch and price hike in the trucking sector. Moreover, market analysts are warning that the surge in Omicron cases could once again lead to the implementation of quarantine rules for returning drivers. This is one important factor that would result in delays and cost hikes. Many retailers and manufacturers are presently rolling over their current contracts with carriers for 2022 in return for nominal rate hikes.
To quote Derek Leathers, the CEO of a truckload carrier based in Nebraska, USA, “As long as we have underlying inflation across the economy, you’re going to see that inflation reflected in the cost of goods and services to include trucking.” According to the CEO of SJ Consulting– leading strategist and advisor to the transportation and logistics sector, “in spite of the disruptions caused by the pandemic and high demand level, the major LTL shipping companies are gaining price increases because of the limited capacity. He said that close collaboration with warehouse managers and carriers along with tactical planning are the two way outs of this crisis”.
Parcel delivery sector
As suggested by the Wall Street Journal, multinationals like UPS and FedEx have stated a 6% hike in their transportation costs in 2022. This is the first time in eight years that industry stalwarts are forecasting a yearly price hike above 5%. E-commerce shipping prices are rising at the quickest pace for the first time in ten years. This is because of the increasing online shopping trends that started with the pandemic. The change in demand for goods has shifted the pricing power in favour of the carriers who make the deliveries.
The situation of the container shipping industry
According to a report by Xeneta, the cost of container shipping will reach a record high in 2022. Peter Sand, the Chief Analyst of Xeneta stated that the carriers who are getting into contract negotiations at the moment are holding the lion’s share of the aces. The rate of an FEU from the West Coast to Asia could rise to $6,500 and $7,000. Before the pandemic, the rate for the same was $1500. Simply put, the carriers are in control of the entire situation while the shipping companies are having a hard time.
The situation is China and the US
The Chinese manufacturing sector is being considerably sluggish during the Chinese New Year holidays which started yesterday. Moreover, shipping costs are expected to rise before this peak season. Additionally, the strict pandemic measures are affecting the normal operations at the Ningbo port. The containment zones in the area are redistricting the access of trucks to the port. Additionally, there is news of the closures of a few warehouses. If the cases continue to rise wider travel restrictions could be in place.
In the USA, the ports of Los Angeles and Long Beach are also combating port congestion and price hikes. The spike in the number of Coronavirus cases among port workers in LA is slowing down the port operations. Simply put, before the advent of the Chinese New Year, we can see a hike in freight rates. Industry experts are expecting the problems of backlogs, labour shortage, congestion and price hike to continue in the months ahead.
The Freightos Baltic Index report suggests the following shipping rates in the first week of January: The international freight rates lowered by 5% to $8,917. However, this figure is 140% higher than the last year. The shipping rates from Asia to US West Coast went down by 14% to $12,525. Even this figure is 218% higher than the previous tear. The rates from Asia to US East Coast are presently at $16,492 which is 231% higher than the same time in 2021. Shipping cost from Asia to Northern Europe has decreased by 2%. But it is still double the rate of the previous year. Lastly, the rate from Northern Europe to US West Coast has gone down by 10% to $6,230. This figure is also 240 times higher than the last year’s rate.
Rising rates in the air cargo sector
Air freight is possibly the only transportation and logistics sector that is recuperating from the effects of the pandemic. Air freight rates from Asia have gone down after the massive hike during the peak season. As per the Freightos Air Index, the air freight rates from China to Europe have dropped by 30%. Moreover, we can also see a decline in rates in the Asia to West Coast routes. However, the reduced passenger flights because of the Omicron could push the rates higher. Additionally, the strict Covid restrictions in cities like Hong Kong are jeopardizing the operations of several air freight carriers.
Niall van de Wouw, managing director of CLIVE Data Services aptly sums up the present situation. In this words, “The air cargo market remains very demanding and constantly changing due to the regulatory pandemic landscape, outbreaks of new variants, and escalated vaccine distribution needs…And that means higher rates across the board. Matching capacity to need is going to be the key concern for shippers in 2022, almost regardless of price.”