Trying to pin down exactly what your freight costs will be for every shipment can be an illusive goal. It seems like prices fluctuate on the daily for different carriers, modes of shipping, and lanes – not to mention the unpredictability that delays and Customs exams can have on your overall freight bill.
One thing that confuses shippers is the difference in pricing between various shipping lanes. Importing to one port within the U.S. may have an entirely different pricing than another port nearby (even with the same ocean carrier). So why is it? How do all trade lane costs vary so significantly? Here are a few insights:
Relationship Between Supply and Demand
You’re probably sick of hearing how “supply and demand” affect the cost of goods and services. But the truth is, it’s almost always the answer – or at least a piece of the puzzle – for why the cost of something may fluctuate. Trade lanes are no different.
Specific trade lanes have greater demand than others, and as a result it can greatly impact the pricing on a shipment. For example, Los Angeles and Long Beach tend to be among the most popular of ports for ocean imports, and as a result, prices will vary greatly between those ports and others. However, they vary in a different way than you may expect.
Rather than high-traffic ports increasing costs, they actually decrease freight rates. The reason is competition. The competition among various ocean carriers importing to a high-traffic port forces them all to drive down their rates to remain competitive and continue getting business. As a shipper, this leaves you deciding between saving money on an import and potentially experiencing significant delays, or paying a bit extra to expedite it to another port.
This competitive factor’s effect on pricing leads to the next point…
General Rate Increases (GRI)
General Rate Increases are rate increases imposed by ocean carriers to account for the loss due to competition in high-traffic ports. Essentially, the battle of rates could continue downwards infinitely. Ocean carriers know the more they drop their rates, the more business they’ll get. However, that battle is gruesome and ultimately results in an overall loss for everyone if rates get too low.
As a result, ocean carriers will impose General Rate Increases, which are a percentage increase in the shipping rate on specific trade lanes. This allows ocean carriers to remain competitive in specific ports without sacrificing too much of their margins on high-demand lanes.
Seasonal Circumstances & Market Conditions
As anyone knows who works in shipping, the season drastically affects freight pricing. When specific lanes go in high-demand during peak seasons, ocean carriers may institute Peak Season Surcharges, which are rate increases placed on specific trade lanes for a temporary season. These are quite common around Chinese New Year.
Even without Peak Season Surcharges, carriers will frequently increase their rates when ridiculously high-demand along a specific lane occurs. It’s an opportunity for them to make extra money on a lane they know shippers will be chasing after.
And of course, there are always conditions such as weather, worker strikes, or in the case of 2020, COVID-19 which affect everything at a port. Worker shortages result in delays, and in order for to account for the losses due to specific conditions, carriers may raise their rates on specific trade lanes.
If you’re experiencing rate increases on specific trade lanes, we understand how frustrating it can be! We are working with ocean freight moving along various different lanes every day and are always aware of how specific market or port conditions are affecting freight rates. If you have any questions about your ocean freight, recent changes in your pricing, or anything else related, we would love the chance to help you out. Don’t be afraid to pick up the phone and give one of our team members a call! We’d be happy to answer any and all of your questions!