Question

1. In his book Introduction to Marine Cargo Management, Mark Rowbotham states that the supply of marine transport is influenced by freight rates. This regime (freight rates) are the ultimate regulator that the market uses to motivate decision-makers to adjust short-term shipping capacity (i.e. the total number of ships available in a market)? Why are freight rates so influential?

Answer 1

A freight rate is a price at which a certain cargo is delivered from one point to another. The price depends on the form of the cargo, the mode of transport (truck, ship, train, aircraft), the weight of the cargo, and the distance to the delivery destination. Many shipping services, especially air carriers, use dimensional weight for calculating the price, which takes into account both weight and volume of the cargo.

Freight charges are one of the key costs of doing business. Transportation costs are often highly uncertain; a merchant may not know the freight cost for a shipment until the carrier sends an invoice weeks later.

Freight rates influential because of the below factors:

1. Fuel costs- The cost of maritime and land transport is, of course, related to the price of fuel. As fuel prices fall, container ships and cargo trucks become cheaper to operate and the price of transport goes down. Savings (or losses) are passed on to consumers – either indirectly or through a fuel cost component built into a carrier’s pricing model. And of course, if fuel prices increase, carriers will pass the additional expense on to merchants.

2. The labor market for commercial drivers- Increasing wages and competition among carriers for truck drivers can have an upward impact on transportation costs. As older drivers retire, carriers may struggle to find operators for their vehicles. Recruiting new drivers is difficult; the job can be tough and typically requires a different class of driver licence (courses to certify new commercial drivers can take weeks or even months to complete). Moreover, many logistics companies struggle to compete with ‘in-house’ truck driving positions that tend to pay better and may offer less stress.

3. Demand for freight- Pricing depends on the volume of product being shipped by operators just as much as it depends on the actual, underlying costs. If capacity is limited, operators may be inclined to sell limited space at a premium. On the other hand, if business is slow, a carrier may be talked into offering a more competitive rate, at least in the short term.

4. Government regulation- Regulation may directly impact the freight industry and its bottom line; for example, governments often set maximum driving hours for commercial operators. Other government regulation may also impact freight costs; for example, New Zealand’s Emissions Trading Scheme has been estimated to increase freight costs by several dollars for every thousand kilometers travelled.

The main surcharge that does constantly change is the Basic Freight (BAS). There can be many charges applied to a single freight, but the one that makes it volatile is the BAS. This is why it’s so important to have a good system to manage the BAS frequent changes in order to be efficient.

As the global economy has grown at a slower pace, carriers have been building much bigger ships in order to get profit from the economy of scale. Nevertheless, this only intensified the gap between supply and demand. Because of it, freight rates have had record low values over the last years.

In fact, there are other factors that impact on rates, like fuel price, but they aren’t as much significant as supply and demand issues. The shipping industry is the first to be affected by variations in political, environmental, and economic matters. As soon as there is a change in any of those subjects, there is an immediate impact on maritime shipping service’s demand. Let’s take, for instance, the War Risk Surcharge, which applies to shipments on war zones and affects the freight rate.

On the other hand, the supply of maritime logistics service tends to be affected by the overcapacity in the market. There are no restrictions on the number of ships that carriers can build, plus we have to consider the time it takes to put one in actual service. It accentuates the supply fluctuation, which has a major impact on the freight rates. So, if shipping lines want to prevent rates to keep on sliding, they’d need to idle more ships.

Although it seems very necessary with all of these variations, automated and dynamic pricing doesn’t exist in this industry. It is still a very manual process, which slows down the market. Furthermore, it’s impossible or inviable for most freight forwarders to analyze rates fluctuations, because it takes a lot of manual effort.

Since the supply and demand are almost impossible to control at this point, the maritime shipping industry needs, therefore, more solutions to help reduce the impact of freight rates constant changing. There’s a significant need to automate and optimize pricing processes in the business.