Companies that participate in trade on the global scale use two primary forms of shipping: ocean freight and air freight. The freight market is very important because the cost of shipping affects profit margins for businesses that absorb shipping costs or consumers who purchase imported products.
Freight rates depend on supply and demand. This year, unusual events have caused trends to vary from the typical annual cycles that shipping companies, suppliers and retailers are accustomed to.
In this post, we’re going to take a look at rate trends in both ocean and air freight over the past year. We will analyze the impact of both COVID-19 and digitalization. To wrap things up, we will touch upon what can be expected for 2021 and how to plan accordingly.
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2020 trends in ocean freight have been impacted by several factors, with COVID-19 and regulations on trade between the United States and China being the biggest influences.
At the beginning of the year, there was a decrease in demand for shipping services since retailers were wary to restock their shelves as the pandemic spread and the world was veiled with uncertainty.
Globally, freight companies reduced ocean shipping capacity to match these dwindling demands to keep rates as consistent as possible.
However, demands skyrocketed towards the end of the year and have kept rates up since then. This surge is typical for peak season, but this year it started early in September.
One main reason that it has extended this far is that retailers have strategically spread out the holiday rush by starting earlier in the year. They did this to reduce the possibility of crowding in stores right around the holidays so that it would still be possible to maintain social distance and keep shoppers safe from COVID-19.
Peak season in ocean freight is generally over by November, but it is still going strong at the end of December. Some forecasts predict that this will carry on into February, but there is no way to know for sure. This extended peak season is a result of a heightened demand.
Another reason is that spending has shifted from purchasing services and experiences to purchasing goods. For example, people cannot go out to restaurants, bars, movie theaters and other venues or travel like they typically do. They’ve used that money to buy goods, especially things for their homes.
The demand surge has also been affected by the rapid restock of inventories of businesses that had previously let dwindle due to the uncertainty that came with COVID-19.
It is also important to point out that freight from Asia to the United States saw some unusual activity at the beginning of the year before COVID-19 became a global issue. Negotiations about trade restrictions between China and the United States caused freight rates to fall.
Reference: Freightos Baltic Container Index: https://fbx.freightos.com/
The demand trends for air freight are consistent with those of ocean freight, but the availability of air freight has seen a sharp decrease this year.
90% of air cargo normally travels by passenger jet. The rapid decrease in passenger travel and the increase in the demand for goods, especially personal protective equipment (PPE), led to spikes in air freight rates early in the year.
These rates stabilized through the middle of the year, but once peak season rolled around, rates spiked again.
Although there have been some delays, things have continued to move pretty well. This is certainly something to be grateful for because halts in shipping services could throw off many industries even more.
Air cargo is currently more expensive than it usually is.
COVID-19 has affected freight in a number of ways, both directly and indirectly. The looming fear of the virus has affected how businesses make decisions, and restrictions and regulations have affected how people are spending their money.
Again, rates in shipping are directly impacted by supply and demand.
At the beginning of the year, COVID caused a brief decrease in demand before it rose consistently in the second half of the year. Air freight has had a decreased availability (i.e. a decreased supply) since travel restrictions cut the number of passenger flights. Ocean freight supply has stayed pretty consistent, but there is a finite number of ships, which means that the supply cannot stretch to meet the growing demand.
Generally, freight rates took a dip at the beginning of the year before experiencing a consistent increase. Once the demand began to increase, it has caused an overall shift of the equilibrium in a way that raises the cost of shipping.
According to the US Census Bureau, the United States has seen a large emergence of small businesses over the past year. Many people were left without jobs or saw how easily others lost their jobs and decided to start businesses of their own.
The global digitalization and push towards eCommerce have made it possible for retailers to connect with both customers and suppliers online.
Although easy access to the internet wasn’t the spark of this rise, it definitely made it possible. Online B2B marketplaces, like Alibaba.com, make it simple for retailers to source products from around the world. The B2C eCommerce model is pretty straightforward and easy to replicate, so many new entrepreneurs are jumping on that train.
It is common for American business owners to source products from suppliers in countries where the costs of production are lower. With more businesses sourcing products overseas, the demand for freight grows.
For the better part of the year, freight companies have done very well. High demand paired with relatively high rates has favored shipping companies.
When the cost of freight fluctuates, somebody must absorb those costs. It could be suppliers, retailers or even consumers, but the money must come from somewhere.
Sometimes, it is worth it for suppliers or retailers to absorb those costs for the sake of maintaining loyalty among their customers. However, some smaller businesses cannot afford to take that hit.
Businesses can decide what makes the most sense for their brand and business model.
2020 has been an abnormal year in freight because of COVID-19, and at this rate, 2021 is equally as unpredictable.
What happens with freight in 2021 will depend on when demands fall back into the regular annual cycle. Unfortunately, it is difficult to predict what will happen since COVID-19 cases are on the rise again and many places are locking down again. The introduction of a vaccine for the virus may bring back some sense of normalcy to seasonal trends, but it is still too early to tell.
Additionally, the inauguration of a new United States President could have some impact on Asia to United State freight trends and rates. Some of the regulations that caused a decrease in freight rates at the beginning of 2020 had to do with the “Trump Tariffs.”
Planning for next year is going to be difficult, but our best advice is to prepare for flexibility as much as you can. Have a plan A, but also have a plan B and C. In a perfect world, the COVID-19 vaccine would bring us back to life as we once knew it, but nobody can say for sure if that will be the case.
The past year has been a rollercoaster for businesses and consumers alike. Quick adaptation and flexibility have been two saving graces as we all try to navigate through these uncertain waters. COVID-19 has caused irregular shifts in trends and cycles for most industries, freight included.
Although rates were high during an extended peak season, shipments have continued to move with somewhat of a regular flow. Delays have been common, but the freight industry has not experienced any major halts.
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