Reasons For The Increase In Freight Rates

- Mar 04, 2021-

A shortage of shipping containers and essential equipment at Chinese ports, exacerbated by fluctuating international trading environments in the Covid pandemic, has meant inflation in international shipping rates.


Previously, the cost of shipping a 40-foot-long container by rail from China to Europe was between USD 3,800 and 6,000, and the estimated time of transit was 12 to 18 days. The transportation of the same type of container by sea used to cost USD 800-2,500, and the cargo reached Europe within 32-40 days. When it comes to the volume of 1 CBM (1m3), the costs were as follows:

rail freight – USD 100-140 (transit time 12-18 days)

sea freight – USD 35-70 (32-40 days)

air freight – 1 kg USD 5-12 (3-5 days).


It is how it was in the past. However, the situation has changed dramatically.

sea-freight-rates-2019-2020-1200x582

The graph shows the changes in sea freight rates in 2019 and 2020. It can easily be spotted that the rates in 2020 soared compared to the previous year.


Here are some examples of freight rates between China and the USA/Europe as of December 2020:

LCL sea freight, Shanghai – Hamburg, 9.6CBM/1900kg, transit time 41 days, USD 1,890

FCL sea freight, Tianjin – Antwerp, 40’HC, transit time 42 days, USD 4,800

LCL rail freight, Foshan – Warsaw, 21.29CBM/5008kg, transit time 18 days, USD 3,560

FCL rail freight, Yiwu – Hamburg, 40’HC, transit time 22 days, USD 8,390

air freight, Yiwu – New Jersey, 0.3CBM/60 kg, transit time 11 days, USD 1,190

road freight, Yantai – Warsaw, 40’DV, transit time 16-18 days, USD 25,000.

The rates are exorbitant, sometimes more than 200% higher than usual.


The reasons for the increase in freight rates

We showed how freight prices have skyrocketed at the end of 2020. Below are some of the factors that caused the changes.


Trade surplus furthers container imbalance

There are a few factors stemming from the pandemic driving this phenomenon.


First, China is sending out a lot more exports to the U.S. and Europe than the other way round. Its economy bounced back faster as the virus situation within its borders was basically under control by the second quarter of last year. As a result, containers are stuck in the West when they are really needed in Asia.

There are about 180 million containers worldwide, but “they’re in the wrong place,” said Yeager of Redwood Logistics.


“So what’s happening is what was already a trade surplus in China has turned dramatically more severe and the reality is, there’s three containers going out for every container that’s coming in,” he said.


Making matters worse, orders for new containers were largely canceled during the first half of last year as most of the world went into lockdown, according to Alan Ng, PWC’s mainland China and Hong Kong transportation and logistics leader.


“The magnitude and pace of the recovery have caught everyone by surprise,” he said. “The sudden recovery in trade volume has seen virtually all of the major shipping lines needing to add significant container capacity to address the container shortage issue.”


Limited alternative


The shortage is further exacerbated by limited air freight capacity. Some high-value items that would normally be delivered by air, such as iPhones, now have to use containers via sea instead, according to Yeager.


International flight volumes have plunged due to virus and travel restrictions.


“Air freight companies typically use that extra capacity at the belly of a passenger plane. Well, there’s just not very many passenger flights, so not as much air service,” he said. “The lack of options, combined with this crazy amount of demand, has produced this crisis.”


The container crisis affects all companies that need to ship goods. But analysts say the situation has a pronounced effect on e-commerce retailers that primarily offer consumer goods, many of which are made in China.


Ikea’s Singapore operations called it a “global transport crisis” in a mid-January Facebook post:

“The surge in demand worldwide for logistical services at this time has resulted in a global shortage of shipping containers, congested seaports, capacity constraints on vessels, and even lockdown in certain markets, amongst other challenges.”


The furniture giant estimated that about 850 of its 8,500 products sold in Singapore are affected by shipment delays, which Ikea said affects availability and planned promotions.


Redwood Logistics’ Yeager said retailers have to decide: “Do I pay a significant premium, or do I push back delivery substantially and (disappoint) customers?” The related costs are either being absorbed by retailers or passed on to customers, he said.


Race to build new containers


While some new containers have been ordered, PWC’s Ng said they will not be ready right away. He pointed to a report by the Shanghai International Shipping Research Centre released in the fourth quarter last year, which said that the shortage issue is likely to last for another three months or more.


Chinese tech giant Alibaba’s logistic arm Cainiao launched a container booking service last week, citing the global shortage. It said its service would span over 200 ports in 50 countries, and port-to-port shipping fees would be 30% to 40% cheaper, according to Reuters.


But even the race to build more containers could be hobbled by delays, according to Yeager. He said the pandemic has also hit the supply of steel and lumber needed to build containers.