Why Are Shipping Costs So High in 2024?
In recent times, individuals and businesses alike have expressed concerns regarding the rising shipping costs in 2024. The confluence of various factors is leading to an unprecedented escalation in shipping costs, which merits a comprehensive examination.
The rise in shipping costs usually stems from a combination of multiple factors, including:
Mismatch between Supply and Demand
The global economic recovery and trade growth have increased shipping demand, but long shipbuilding cycles, high investment costs, and strict environmental regulations have constrained supply, creating an imbalance. As of May 2024, major global shipping companies can meet only about 80% of demand, leading to higher container shipping costs. Additionally, factors like extreme weather, political instability, and labour shortages giant shipping companies to raise freight rates to balance the market. Key shipping routes, such as the Suez Canal, Panama Canal, and Red Sea, are often affected by geopolitical issues and climate change, directly impacting freight rates and journey times for major ports in the Red Sea region, including Jeddah, Djibouti, Sokhna, as well as Mediterranean ports in Europe and those in Central America.
Surge in Fuel Costs
As a core expense in shipping, rising oil prices directly increase shipping costs. Data shows that the price of IFO380 in Singapore has reached $449.62, while in Rotterdam it is $419.61. Particularly, in the context of increasingly stringent environmental policies, the price of low-sulphur fuel (such as VLSFO with 0.5% sulphur) has reached $583. Therefore, shipping companies need to reassess their cost structure in terms of fuel selection and optimizing operational strategies to maintain competitiveness.
Seasonal Effects
During peak seasons, demand from retailers and importers increases, causing freight rates to rise. Key events like China's National Day, Thanksgiving, Christmas, New Year, and Chinese New Year—occurring from October to January—create significant shipment peaks.
Market Situation
Shipping companies and large clients exploit shipping space to create market tightness and drive-up transportation costs. In response, shipowners have begun to unite to navigate fluctuations and uncertainties in the shipping market. By collaborating on operations and sharing shipping spaces, they reduce costs and improve efficiency. However, these efforts have also increased monopoly power in the shipping market, allowing shipowners to more easily control freight rates. Prior to the pandemic, shipping companies generally operated at a loss; ultimately, their goal remains profitability and higher profits.
Market dominance: Shipowners hold significant power in the shipping market, particularly on popular routes, allowing them to adjust freight rates based on demand and supply. Freight forwarders and cargo owners often must accept these changes passively. The top five shipping companies control about 60% of the global container transport market, enhancing their pricing power.
Contract flexibility: Shipping contracts often allow for flexibility, enabling shipowners to modify freight rates under certain conditions. This adaptability helps shipowners respond quickly to market shifts; approximately 30% of contracts permit rate adjustments during significant fluctuations, giving shipowners operational leeway but also raising the risk of arbitrary price increases.
Lack of regulation: The global shipping market currently lacks a comprehensive regulatory framework, leading to inadequate oversight of "arbitrary price increases" by shipping companies. Survey data indicate that only about 20% of the market is subject to relatively strict regulation, which may encourage shipowners to raise prices recklessly.
