With shipping representing 90% of world trade, it’s safe to say that the ocean freight industry is key to sustaining the modern economy. And the biggest contributors are the thousands and millions of companies that import and export merchandise in shipping containers to and from every corner of the world.
With shipping so closely tied to the economy, even the slightest changes in the markets can have profound impacts international trade relations, demand, and supply. In general, shipping rates depend on volume, route, and port and carrier charges. But there are other external factors that shippers have no control over that greatly affect container shipping rates.
The General Rate Increase, or GRI, is the adjustment of ocean freight prices by shipping lines. This is usually implemented to help carriers recover from low market movements as part of the seasonal cycle. Given a relatively stable year, a GRI is usually applied once. But there have been times where the GRI was applied several times per year.
In theory, the GRI can be applied to any ocean freight rate. But in recent years, we’ve seen it affecting most imports, especially those from the far east.
The decision to implement the GRI, which routes it’ll affect and by how much, lies fully with the carriers. Under the Federal Maritime Commission regulations in the US, shipping lines must file rate increases with them 30 days before they’re set to take effect. In other countries, this may be as little as one week. This means that if your booking isn’t locked in before the day the GRI kicks in, you may end up having to pay for the new increased price, which may sometimes be double as much.
Like all other industries, shipping too has its own high season, when the demand for ocean freight services peaks. This not only affects vessel capacities and the global supply chain, but also freight prices.
This high season runs from July to November/December as companies around the world begin preparing their merchandise for the holiday season. Shipping lines raise freight rates at the beginning of the high season in response to the increase in demand for their services. In certain cases, a peak season surcharge may also be applied to cater to the extra logistical work needed to cater to the surge in demand.
Other high seasons in ocean freight to take note of are specific to China, the world’s second-largest exporter. The weeks in which the Chinese New Year (anytime in January/February) and National Day Golden Week (first week of October) fall are particularly troublesome as all sales and production activities in the country come to a complete standstill. This has profound impact on supply chains around the world every year.
That said, the weeks leading up to these two Chinese holiday seasons are when importers are rushing to get their merchandise shipped, causing a rise in demand and as a result, freight prices. Given the logistical congestion during these festive seasons, even trying to get a container may prove a difficult task.
Shipping lines have various surcharges at their disposal that they can implement when they deem necessary to do so. One such surcharge is the Emergency Bunker Surcharge, or EBS, which tackles the rise in fuel costs.
Do not confuse the EBS with the Bunker Adjustment Factor (BAF), the latter of which is used to cover the fluctuating fuel costs due to natural market movements. The BAF is also usually made known in advance. This is unlike the EBS, which can be implemented as an emergency measure at the last minute, causing sudden cost imbalances in shippers’ logistics budgets.
Over the past couple of months, carriers have been implementing the Emergency Bunker Surcharge in response to what they claim to be unanticipated rising fuel costs. This has been met with much backlash from shippers, who are not only angered by being charged for something they have no control over, but also for what they claim are unfair practices. Many say the recent EBS is to cover shipping lines’ operating losses under the guise of rising fuel costs.
The shortage of truckers is not an uncommon logistical problem for shippers, to put it lightly. And one that’s beyond their control. In the US, the trucking shortage problem has escalated ever since the implementation of the ELD mandate last December, causing trucking availability to go scarce and causing supply chains to go into near-paralysis as a result.
When trucking shortages occur, ocean freight prices increase as a natural market reaction. Capacity decreases and demand increases in relation to that, causing rates to rise. As a shipper, you’ll either end up having to pay a high price to secure a trucker or face disruptions in your supply chain. Redirecting cargo via alternative routes and/or ports, planning your shipment much earlier than you normally do and having a contingency plan are some ways to avoid the delays in the face of trucking shortages.
There is simply no way to anticipate delay costs such as demurrage and detention, and fees from customs inspections. Such fees are never included in your container shipping rates, but yet can greatly affect your overall shipping costs.
Even though these charges are mostly beyond the shipper’s control, there are certain things the shipper can do to mitigate the chances of incurring them. These include getting all documentation right and submitted on time. The smallest discrepancies in your paperwork may raise alarms, causing customs to decide to check your shipment. And this may happen at origin and at destination. Making sure you have all your ‘i’s dotted and ‘t’s crossed will significantly reduce the likelihood of your shipment getting detained for inspection and running into delay fees.
Planning your shipment in advance is another way to avoid running into these extra fees as it gives you sufficient time to properly prepare your merchandise. Plus, you get enough cushion time to be flexible with your shipping dates, which helps with avoiding some of the other aforementioned factors such as high season and trucking shortage problems.
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"Don't underestimate the value of Incoterms and their impact on international trade."
Aliona Yurlova, Business Development Manager at iContainersDOWNLOAD THE FREE GUIDE