What an Unpredictable Year Means for Freight Costs in 2021

Date: Tuesday, December 22, 2020
Source: Supply Chain Brain

To safeguard against this year's volatile market and maintain profits, the container shipping industry adopted certain capacity management measures like restricted services, blank sailings and re-routed vessels — leading to severe disruption in the normal repositioning of empty containers. And although projections indicate that maritime trade will recover and expand by 4.8% in 2021, it's becoming clear that disruptions caused by the COVID-19 pandemic will have a lasting impact on the industry.

A large number of empty containers are still detained at ports where they shouldn't be, but are unable to get repositioned at an acceptable rate to ports where actual demand exists. From the perspective of shippers, these shortages of empty containers at required locations and capacity management measures are causing severe constraints to transport goods and delays in deliveries.

The cascading effect has led to congestion at major ports and escalated freight levels — up 18-20% year-over-year for some of the trade lanes, according to the Shanghai Freight Index. Additional surcharges for peak season, congestion or empty returns are further increasing total transportation costs.

Shippers next year will be demanding guarantees for availability of containers, space on demand, regular schedules and free time at ports to avoid detention charges. On the other side, shipping lines will look to push up the freight levels depending on the profitability of each trade lane.

For 2021 rate contracts with shipping lines and third-party logistics providers (3PLs), shippers would prefer shorter agreements of a few weeks due to unpredictable demand, though rates in shorter agreements have always been higher as compared to longer contracts. However, this would save them from any penalty in case of not meeting Minimum Contractual Quantities (MCQ) volumes. Shipping lines or 3PLs would look for longer term contracts of 10-12 months to plan their capacity for trade lanes well in advance and accordingly schedule the vessels and plan positioning containers accordingly to avoid situations as experienced in year 2020. In return, shippers can insist on technology support from shipping lines/3PLs, which can help them to analyze their operations and reduce overall transportation costs. As an alternative, with better planning and scheduling measures, shippers can look at options to utilize regular break-bulk vessels or roll-on, roll-off vessels for the movement of cargo in large quantities and attain economies of scale.

Internally, shippers need to assess their logistics process and add flexibility to avoid pilferage, track cargo, optimize inventory, reduce human errors and scale up and down as per demand to reduce transportation costs. Shippers need to collaborate with shipping lines/3PLs for blocking space with committed volumes and to achieve this, they must be able to perform more accurate transportation forecasting. Shippers need to adopt digital technologies such as transportation forecasting that would have the capability to convert customer demand patterns into shipment plans that are lane-wise, location-wise, mode-wise and product-wise. To achieve more accurate transportation forecasting, it is necessary to increase demand planning accuracy in the first place. The traditional demand planning methods with human interactions and historical sales volumes results in higher percentages of errors, which have further led to poor forecasting accuracy and have become cause for major other issues in the supply chain. Shippers can look toward technology solutions to improve demand accuracy, for example, Demand sensing technologies. Demand sensing technologies collect and apply real time demand signals, automated algorithms and artificial intelligence to process data to create more accurate forecasts.

With a COVID-19 vaccine ramping up for mass production and distribution, shippers must be aware that the air cargo capacity will be consumed by vaccine movements and the movement of any urgent cargo by air next year resulting in more costly and unpredictable. At the other end, the container shipping line industry will take into account the disruptions in supply chain caused in 2020 and will rework capacity management by ascertaining the global demand for each trade lane early in order to support the trade including shippers and ports with optimal freight pricing.


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