Fluctuating Ocean Freight Rates and How to Manage Them
6 minutes to read
The ocean freight rate is the fee payable to a shipping company for getting freight from A to B. It is usually paid in US dollars. If you import or export goods, understanding ocean freight rates is essential as they affect your final shipping costs, and by extension, your profitability..
How are freight rates calculated?
Ocean freight rates are determined by the freight charges set by a carrier (shipping company) and the costs of handling and clearing goods at the ports of loading and discharge.
The freight rate can also be affected by whether the goods require a full container load (FCL) shipment or can be loaded with goods from multiple sellers into the same container – known as a less than container load shipment (LCL).
Ocean freight rates are usually provided as a freight quotation, with the format varying between freight forwarders and shipping companies. The final price is typically made up of the following items:
- Inland haulage
- Terminal handling charge
- Shipping documentation
- Customs clearance
- Ocean freight base rate
- Bunker adjustment factor (fuel surcharge)
- Currency adjustment factor
What causes freight rates to fluctuate?
Ocean freight rates fluctuate for a variety of reasons, although the main one is arguably supply and demand.
The volume of cargo and the demand for maritime services is subject to a number of external pressures, including those of a political, economic and environmental nature. Trade sanctions, conflict, bad weather and more can affect demand, and that in turn affects cost.
Other factors that influence ocean freight rates include:
Cargo type – the types of goods that are likely to attract higher fees include those that are dangerous, heavy, perishable or out of gauge (OOG).
Destination/distance – the more popular the destination and the shorter the journey, the lower the ocean freight rate. Less common destinations, including those with a reduced capacity to handle freight, are more costly and the further goods have to travel, the greater the ocean freight rate will be.
Currency – as ocean freight rate is charged in US dollars, the exchange rate has an impact on cost.
Bunker fuel – that’s the name for fuel used to power a ship’s engines. The cost can fluctuate, meaning the ocean freight rate charged will also fluctuate. Bunker fuel has a big impact on the cost of ocean freight.
Seasons – certain goods are in demand, or in higher demand, during certain seasons; for example, in the run up to Christmas or the Chinese New Year. When demand is high, prices often rise, whereas when demand is low, they fall.
Vessel size – as the biggest single cost in ocean freight is bunker fuel, the size and capacity of the vessel is important. Bigger vessels might use more fuel, but there are also more containers on board for that cost to be shared between.
Environment – 1 January 2020 saw the implementation of IMO 2020, new legislation introduced by the International Maritime Organisation. The aim is to reduce sulphur oxide gas emissions by using marine fuels with a maximum sulphur content of 0.5%, a hefty reduction compared to the previous limit of 3.5%. The expectation is an increase in cost, although the waters have been muddied by such things as the confrontation between the US and Iran.
Managing freight rate fluctuations
While it’s true that some elements affecting ocean freight rates are beyond your control, there are steps you can take to mitigate the cost.
It might sound obvious, but you need to know your business, and to understand the peaks and troughs in the market(s). It’s a good idea to take a look at your competitors and what they do, to see if they know anything you don’t. The better you know your business, the better equipped you are when it comes to negotiating freight contracts.
Another tip is to ship at off-peak times, so you are shipping goods when carriers are looking for freight. Even a day either way can bring savings, but it will depend on your cargo and its market.
Economies of scale can also bring dividends, so if you are able to despatch bigger shipments, less often, you can benefit. You might be able to come to an arrangement with the retailer you are shipping to so that you both benefit.
Agree contracted rates with your carrier to fix costs for a period of time. The more trade you can give them, the better the deal you are likely to get. On a similar note, make sure you understand any charges and surcharges that may be applied – ensuring they are visible in any arrangement – and keep an eye out for the free time allowed at the destination port.
There are several other factors that can help companies manage the cost of ocean freight and improve their supply chain efficiency.
By maximising the amount of product and filling as much of a container as possible, it will bring the shipping cost per unit down while reducing the number of shipments.
If you have multiple shippers in close proximity whose orders wouldn’t usually require a full container per shipper, it is good practice to consolidate these shipments into one or more full containers to maximise efficiency. At HGL, we have a lot of experience in shipment consolidation and regularly identify opportunities to use it for the benefit of clients.
By forecasting the volume of goods you’re likely to purchase in the foreseeable future, you can schedule shipments in advance and plan for the right amount of goods to arrive when your clients require them, reducing the amount of storage time and stock holding, while improving cash flow. Working closely with a logistics partner can make this a seamless process, ensuring you never have to worry about missing orders due to a shortage of stock.
In most cases, it’s not as simple as just finding the cheapest ocean freight rate. It is important to look at the whole picture, from origin to delivery point. Quite often, you will find that haulage costs and other destination charges can have a big impact.
You’ll also need to consider the reliability of the service: the rate may be cheap, but can you get space on the vessels at that rate during peak periods, when you may need your product the most?
The key is to plan as far ahead as possible, taking a big picture view of your supply chain, including all cost factors and operational criteria that need to be met in order to have stock ready for your clients when they need it.
How HGL can help
Working with HGL gives you access to years of industry knowledge, advice, connections and experience. We work with clients to understand their supply chains and business needs in order to implement a cost-effective but service-driven logistics strategy. Contact us today to discuss your requirements.