Reasons for the increase in freight rates

The “new normal” has also impacted transportation. At the end of 2020, freight rates skyrocketed, which has never happened before to such an extent. What caused the unprecedented increase in freight rates?

Reasons for the increase in freight rates: how has it changed?

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 in 2019 and 2020

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. They are expected to return to normal levels after the Chinese New Year in March 2021.

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.

The outbreak of the COVID-19 pandemic

Since the spring of 2020, the cases of coronavirus have risen rapidly. Due to the pandemic, many importers withheld their plans, which caused a decline in orders from suppliers in China during the summer. It further resulted in a 5-15% decrease in transshipments in European ports in the second and third quarter of 2020.

Importers started catching up, so order volumes and transshipments shoot up in the fourth quarter of 2020. The consequences are delivery delays and congestions, especially in the China-Europe supply chain.

Reduced supply and demand

Due to the decreased interest in transportation services, the supply of maritime owners has also decreased. The ships were docked for the time being.

There is also another aspect to the situation. Reduced demand for imported goods in China has resulted in a shortage of empty containers between China and Europe, and the United States.

Upcoming global economic recovery

The fourth quarter of 2020 and the first quarter of 2021 are a period of reviving economies and increased international trade volumes. Greater demand for transportation services led to the increase in freight rates.

Christmas holidays

The period around Christmas is invariably the peak season in the transportation of goods every year. Consumers want to give gifts to their loved ones, so the demand is increasing, especially just before Christmas. This situation always results in congestions and increases in freight rates, but never to the same extent as in 2020.

Chinese New Year

Chinese New Year is a special holiday season in Southeast Asia. This period is usually difficult for entrepreneurs working with Chinese partners. The production in China is halted; therefore, there are no new products shipped. Importers accumulate goods ahead before the Chinese New Year.

In 2021, the Chinese New Year falls on February 12 and will begin the Year of the Ox. Since Lantern Festival is celebrated close to Chinese New Year, for that reason, the downtime could last up to three weeks.

Read about the impact of Chinese holidays on transport from China.

Brexit and its consequences

It is a race against the clock to make it before the unfavorable legislation that comes into force regarding the withdrawal of Great Britain from the European Union. If no conclusion is reached, the exchange of goods from the EU to Great Britain will be classified as import/export, which means implementing customs procedures.

What will 2021 be like?

It is likely that in 2021:

  • There will still be a problem of lack of space for containers onboard ships and other means of transportation, as well as the shortage of empty boxes.
  • The rates will rise until the first weeks of February, after which rates will decrease, but they will still be higher than usual.
  • There will be a pile-up of cargo to be shipped before the Chinese New Year.
  • Some importers will decide to suspend or delay import operations until the rates stabilize.
  • There will be a change in transportation preferences; road freight from China to Europe will gain popularity.
  • The demurrage fee will be increased.
  • An increase in air freight rates will be observed, whereas sea and rail freight rates will be almost the same.

The gradual introduction of vaccines gives hope for the return to the “old normality” in 2021. It would mean economies’ recovery, an increase in both demand and supply, associated with an increase in imports.

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