The Impact of Rising Ocean Freight

One of the greatest challenges for international supply chains in 2021 has been the unprecedented rise in ocean freight costs. Ocean freight costs are currently up 345% from the same time they were a year ago and are currently one of the most inflated commodities, as reported by Sector3 Appraisals.

Various market forces impact ocean freight costs, such as raw material shortages or natural disasters, but today’s situation has been shaped by starkly unique factors.

To help keep our customers informed, we wanted to share some insights in this article on what is causing ocean freight costs to rise, and how these high rates could impact international commodity sourcing in the near term.

The COVID-19 pandemic is the overarching reason for many barge shipping disruptions, but we will focus specifically on how these disruptions are placing upward pressure on ocean freight costs.

Ocean Container Shortage

As factory production and demand slowed across the globe in 2020, international supply chains halted, and shipping activity dropped. This slowdown meant that fewer ocean shipping containers were in use and, therefore, left sitting unused at ports. The lack of barge freight movement also meant that some ports had far fewer containers than normal.

Chinese ports, for example, had fewer inbound shipments than outbound shipments, causing a severe shipping container shortage. As demand for raw materials produced in China increased – such as steel and metal materials – manufacturers began competing for a small number of available containers, which drove freight prices up.

Rising Demand

Demand for raw materials used in industrial production is on the rise as manufacturers replenish their supply stocks and increase production, causing ocean freight costs to rise as well.

Rising demand for dry goods – such as soybeans and steel – have caused the cost of transporting these goods in barges to increase by more than 50% since the start of 2021. Higher demand for dry goods imports from North America and South America – led by China, whose economy sharply recovered from the pandemic – has caused freight rates for Panamax class ships to rise to their highest level in over a decade as well.

Crowded Ports

At the peak of the COVID-19 pandemic, ports across the globe reduced their ship capacity to match slow shipping demand. After manufacturing recovered faster than anticipated and demand for barge freight increased, ports were not equipped to keep up with busier shipping schedules, as it is difficult for ports to quickly shift capacity to meet short-term demand.

The Port of Los Angeles, for example, is facing major congestion as U.S. companies increase production and source more raw materials from Asia. These shipping delays are impacting shipping across the Americas and are contributing to the container shortage in Asia, as containers are not being returned fast enough to meet outgoing demand.

As a result, barge prices are elevated as ports struggle to keep up with growing demand and busy shipping schedules.

Rising ocean freight rates are making international trading and commodity sourcing more expensive for manufacturers. According to analysts, ocean freight rates to ship unpacked commodities – such as grain and iron ore – are expected to remain elevated throughout 2021 and could even remain elevated through early 2022. These higher freight costs could, in turn, make production more expensive for manufacturers.

Manufacturers that lock into contracts for international commodity sourcing could see high ocean freight costs over the long term as well, since many ocean freight providers increased contract rates to match the current market. Experts say that larger businesses may be able to negotiate lower rates due to their shipping volume and order sizes, but businesses with less-frequent needs or smaller orders will have a more challenging time negotiating lower rates in the current market.

It can be challenging for manufacturers to navigate the current ocean freight market, between high shipping costs and shipping delays. These factors make it difficult to source raw material commodities, especially when trying to find quality materials while controlling production costs.

Partnering with a trusted international trading business, like Leeco Trading, can help alleviate the stress of international procurement. Leeco Trading’s team has decades of experience in international commodity sourcing and handles all the logistics of your raw material transportation, from finding a transporter to customs paperwork. Leeco Trading also has extensive connections with metals and fine chemicals suppliers and freight providers across the globe, enabling us to negotiate fair rates for your commodity order.

Contact us today to request a quote or learn more about our services.