‘Freight rate’ (also sometimes referred to as simply ‘freight’) is a term that is frequently used in logistics, including the shipping industry. It refers to the price of transporting a specific cargo from one point to another. In this article, we will take an in-depth look at freight rates, including how they are determined and what trends may affect them in the future.
What are freight rates?
Let’s go into more detail about what exactly freight rates are in the context of the maritime industry: freight rates are a charge made by a carrier to ship cargo from one location to another. The person/organisation wanting to ship the goods will pay the freight charges. While at first this may seem a simple concept, freight rates can actually become quite a complex issue. This is because freight rates are not fixed, but can vary according to a range of factors. In the next step, we will identify some of the specific influences on the cost of freight.
How are freight rates determined?
Freight can be a substantial cost for businesses with operations in any way related to the import/export of goods or raw materials. The freight rates they pay can have a huge impact on their bottom line and whether or not the company is profitable. Given their importance, you may be wondering how freight rates are determined, so let’s find out.
The main factors determining freight rates are related to the goods themselves which are being transported, for example the:
- Chosen form of transport for freight forwarding (i.e. truck, ship, train, or aircraft)
- Weight, size, and volume of the cargo
- Distance to the delivery destination
- Freight classification (i.e. the nature of the goods being shipped)
- Required delivery time (i.e. a request for expedited delivery)
There are also a range of other more general factors which influence freight rates, such as:
- Availability of suitable vessels to charter
- Price of fuel
- Global trade dynamics (i.e. supply and demand)
- Economic trends
- Geopolitical events
- Likelihood of terrorism or piracy
- Availability and cost of shipping insurance
- Seasonal trends (e.g. popular shipping times in the run up to Christmas)
The factors listed above can impact freight rates individually, as well as in connection to one another. For example, a geopolitical event may lead to an increased risk of piracy. This, in turn, could cause insurance costs to go up, and prompt the decision to transport the freight via a longer route, resulting in higher fuel costs. The change in ammonia freight rates is a good example of how multiple different factors can combine to affect prices.
What future trends may impact freight rates?
In many ways, freight rates are a reflection of the current state of the world. If there is a news story or major technological development that makes global headlines, there is a good chance its impact will be seen via freight rate fluctuations. While it is impossible to predict exactly what future trends will impact freight rates going forward, nor how they will be affected, here are some key themes which are likely to have an influence:
- Climate change and its resultant weather patterns, such as El Niño
- Changes in environmental regulation related to the green transition, such as EEXI and CII, including fines for emissions
- Port congestion levels, particularly in China, South-East Asia, and South Africa
- Geopolitical tensions, such as the Russia-Ukraine war and ongoing conflict in Gaza
- The availability of ‘green’ vessels, which will depend upon newbuilding rates and the number of ships being retrofitted with modifications to make them more eco-friendly