What Makes Ocean Freight Expensive?
We often ask ourselves this question when dealing with International Trade. Global trade relies heavily on ocean freight to transport goods across the world’s waterways, connecting manufacturers, suppliers, and customers from different continents. However, the cost of ocean freight can often be unpredictable and expensive, influenced by a wide variety of factors. Understanding these factors is essential for businesses involved in international shipping, as fluctuating costs can have a direct impact on profit margins and supply chain reliability.
Let's dive in.
Ocean freight is the process of transporting goods by sea, typically using large container ships that carry everything from raw materials to finished products. It is the backbone of global trade, moving around 90% of the world’s goods. Whether it’s electronics from Asia, clothing from Europe, or food products from South America, most international goods travel via ocean freight.
The process involves loading cargo into containers at a port of origin, transporting them across the ocean, and then unloading them at the destination port. From there, the goods are distributed by road, rail, or air to their final destinations. The cost of ocean freight is often calculated based on the weight and volume of the cargo, the shipping route, and the type of goods being transported.
But ocean freight isn’t just about moving goods. It’s a complex logistical operation that involves coordination between shipping lines, port authorities, customs agents, and other service providers. As a result, ocean freight comes with multiple cost factors that businesses must account for. Understanding what goes into these costs is the first step in navigating the often high and fluctuating prices of global shipping.
When calculating the cost of ocean freight, it’s important to remember that it’s not a one-size-fits-all scenario. A variety of factors contribute to the final price, each playing a significant role in the overall cost of shipping goods across the world. Here are the main components that drive ocean freight costs:
At the core of ocean freight pricing are the rates set by shipping lines. These rates vary depending on the carrier, the shipping route, and the type of cargo being transported. Typically, carriers offer spot rates for short-term needs or contract rates for long-term agreements, with the latter being more stable but still subject to fluctuations.
You might want to read: Understanding the different types of Ocean Freight Contracts
Fuel, or "bunker fuel," is a critical factor in shipping costs. When fuel prices rise, so do the costs of ocean freight. Shipping lines often add a Bunker Adjustment Factor (BAF) to the base shipping rate to compensate for the volatility of fuel prices. The BAF fluctuates alongside global oil prices, which can be affected by geopolitical tensions, production cuts, or natural disasters.
Once a ship reaches a port, additional costs come into play. Ports charge for the use of their facilities, including loading and unloading containers, storage, and customs inspections. These fees differ from port to port, and in certain high-traffic locations, the charges can be particularly steep.
Shipping goods over long distances involves risk, and cargo insurance helps mitigate potential financial losses. Whether it's protection against damage, loss, or theft, the cost of insurance is usually included in ocean freight pricing. The nature of the cargo can also influence insurance costs; for instance, fragile or high-value items may require more expensive coverage.
You might want to read: How can Cargo Insurance safeguard your business
With the rise of international security concerns, including piracy and terrorism, there are additional costs associated with security measures. Ports and carriers must comply with global security regulations, such as the International Ship and Port Facility Security (ISPS) code, which involves physical security checks and paperwork, adding another layer to overall freight costs.
A General Rate Increase (GRI) refers to the practice where shipping lines raise prices across the board on certain routes. This often happens during periods of high demand or when carriers anticipate future market pressures. GRIs are typically announced in advance and can significantly impact shipping costs, especially on popular trade routes. While they are common, they can be a source of frustration for businesses trying to keep logistics costs under control.
You might want to read: How GRI Impacts pricing and service in Ocean Freight
Each of these elements contributes to the base price of ocean freight, but it’s important to remember that this is just the start. In addition to these core cost components, external factors like global supply and demand, seasonal trends, and unforeseen events can push prices even higher.
Ocean freight costs are notoriously volatile, and businesses that rely on global shipping often find themselves facing unexpected price changes. But what drives these fluctuations? Several key factors—ranging from supply and demand imbalances to strategic actions by carriers—are at play.
One of the most fundamental principles affecting ocean freight costs is the law of supply and demand. When the demand for container space increases—due to a surge in global trade or seasonal peaks—prices rise. Conversely, when demand is low, rates tend to drop.
However, the relationship between supply and demand in ocean freight is more complicated than it may first appear. Ocean carriers operate within an oligopoly, where a small number of large shipping alliances dominate the market. These alliances (such as the 2M Alliance, THE Alliance, and Ocean Alliance) control a significant portion of the world’s shipping capacity. Because of this, they have a strong influence over pricing and can manipulate supply by reducing the number of vessels or blank sailing routes, intentionally limiting the availability of space to drive prices higher.
One of the most common issues affecting the price of ocean freight is a shortage of available space. Limited capacity on ships can occur for several reasons, including increased demand during peak seasons or disruptions at major ports. When there isn’t enough space to meet demand, prices skyrocket as businesses compete to secure available spots on container ships.
In some cases, carriers enter into long-term contracts with large shippers, allocating a fixed amount of space at pre-agreed rates. This can further limit the availability of space for smaller shippers, driving up costs for those who don’t have the security of such agreements. If a business relies on spot rates instead of contracts (and don't use freight forwarders), they are at the mercy of market fluctuations and can end up paying much higher rates during periods of tight capacity.
As mentioned earlier, the global shipping industry is dominated by a few major alliances. These alliances allow carriers to share vessels, optimize routes, and control capacity across various trade lanes. While this cooperation can create efficiencies, it also reduces competition and gives carriers the power to manipulate prices.
For example, when shipping lines collectively decide to remove capacity by reducing the number of ships on a route or implementing blank sailings (canceling scheduled voyages), they effectively tighten supply and increase freight rates. These strategic moves are particularly common during periods of low demand, allowing carriers to keep rates from falling too low by restricting available space.
Certain types of cargo, such as perishables (e.g., fresh produce, seafood, and pharmaceuticals), are more sensitive to time and temperature, and this adds pressure to secure shipping space promptly. Perishable goods often require refrigerated containers (also known as reefers), which are in higher demand during specific times of the year. As a result, shipping costs for these goods can be particularly high during peak harvest seasons or when demand for reefer containers outstrips supply. Also, since they use specialised containers and have an increased sense of urgency, freight prices for these types of cargo are higher thus carriers tend to give them preference and priority.
Seasonality plays a significant role in the cost of ocean freight, with prices often fluctuating in response to changing demand patterns throughout the year. Different industries have peak seasons when demand for shipping increases, and carriers adjust their prices accordingly. Understanding these seasonal trends can help businesses anticipate when ocean freight might be more expensive.
Ocean freight costs often surge during peak seasons when demand for shipping space is at its highest. A key example is the lead-up to major holidays such as Christmas, where retailers scramble to stock up on goods in anticipation of increased consumer demand. During this period, space on container ships becomes scarce, driving prices higher.
Similarly, the back-to-school season can also trigger a spike in freight demand as businesses ship school supplies, electronics, and apparel to meet seasonal retail cycles. Other peak seasons occur around Chinese New Year, when factories in Asia rush to ship goods before closing for the holiday.
In contrast, slack seasons refer to periods of lower demand for shipping services. These typically occur during times when retailers and manufacturers are not preparing for major sales events, such as early in the year after the holiday rush. During slack seasons, freight rates tend to decrease as more space becomes available on vessels.
You might want to read: Freight Forwarder's Guide to Peak and Slack Seasons
Perishable goods, such as fresh produce, seafood, and flowers, have specific shipping windows that align with their harvest or production cycles. These time-sensitive items often require refrigerated containers, or reefers, which are in limited supply. During harvest seasons, the demand for reefer containers spikes, driving up the cost of shipping perishables.
For example, tropical fruit exports from Latin America to North America and Europe see a surge during certain times of the year, pushing up freight costs due to the limited availability of temperature-controlled containers. This seasonality in perishables can have a ripple effect on general freight costs as well, as carriers prioritize space for time-sensitive goods.
Many industries experience cyclical demand patterns that align with retail and consumer trends. For instance, fashion and lifestyle brands often face higher ocean freight costs as they prepare to ship new collections for specific seasons (e.g., spring/summer or fall/winter). The fashion industry, in particular, requires precise timing, as delays in shipment can result in stock arriving too late to hit the shelves at the right time.
Likewise, electronics manufacturers face peak shipping demand when launching new products, especially around key events like Black Friday, Cyber Monday, and the holiday season. When these industries ramp up their shipping volumes, space becomes more limited, and carriers increase their rates to meet the heightened demand.
During peak seasons, businesses that have signed long-term contracts with shipping carriers benefit from having allocated space at fixed rates. These contracts provide some insulation from price spikes, as shippers are guaranteed space even when demand is high. However, businesses relying on spot rates (i.e., ad-hoc shipping rates based on current market conditions) may find themselves paying much higher prices for space during peak periods, especially if they are not working with Freight Forwarders.
Carrier contracts can help mitigate the impact of peak season price surges, but only to a point. If demand far exceeds supply, even contract holders may face limited space or delays. It’s important for businesses to work closely with their freight forwarders and carriers to secure the necessary space during peak seasons and avoid costly disruptions.
While seasonal fluctuations and market dynamics are somewhat predictable, Black Swan events and natural disasters introduce a level of unpredictability that can drastically impact ocean freight costs. These rare, unforeseen occurrences can disrupt global supply chains, cause bottlenecks, and spike prices, making them an important consideration for any business reliant on shipping.
Black Swan events are unexpected, highly impactful occurrences that have wide-ranging effects on industries and markets. In the context of ocean freight, these events often involve global crises, such as the COVID-19 pandemic, political instability, or major infrastructure failures. Their rarity and the speed at which they unfold make them difficult to predict, but they can cause sudden, significant increases in freight costs.
For example, the COVID-19 pandemic created one of the largest disruptions in modern supply chain history. With ports closed, manufacturing slowed, and container shortages, ocean freight rates surged to record highs. In many cases, shipping costs multiplied as businesses rushed to secure space on vessels that were still operating. This demonstrated how quickly and severely a Black Swan event could inflate shipping costs, with businesses having little warning or time to adjust.
In 2023, the Houthi rebel attacks also caused a major incident, known as the Red Sea Crisis, that has required the shifting of major shipping routes and disrupting supply chains globally. As an ongoing issue, this has causes major price readjustments for the affected trade lanes and has had a rippling effect in prices worldwide.
You might want to read our critical briefing on the Red Sea Crisis
Natural disasters such as hurricanes, typhoons, earthquakes, and tsunamis can have a direct impact on ocean freight operations. Ports may close, ships may be delayed, and infrastructure damage can result in bottlenecks that drive up prices. Even if a disaster occurs in a region far from the trade route in question, it can still cause ripple effects throughout the global supply chain.
For instance, hurricanes in the Gulf of Mexico can halt port operations, causing delays and rerouting of ships. Similarly, typhoons in Asia often lead to port closures, pushing up freight rates as carriers try to make up for lost time by either re-routing vessels or by increasing the frequency of blank sailings to stabilize capacity.
Port congestion—whether caused by natural disasters, labor strikes, or even just inefficient operations—also leads to significant price increases. When ports are backed up, ships are forced to wait for extended periods to unload their cargo, which results in additional costs for the carrier, including docking fees and lost time. These costs are often passed on to shippers, pushing freight rates higher.
Port congestion can also create a ripple effect, delaying shipments across multiple trade routes as vessels fall behind schedule. Businesses dependent on just-in-time (JIT) logistics are especially vulnerable, as delays can cause stock shortages and increased reliance on air freight, which is far more expensive than ocean freight.
You might want to read our latest KerryConnect issue highlighting this issue.
In response to major disruptions, carriers sometimes implement blank sailings, where scheduled voyages are canceled to reduce capacity and avoid unprofitable routes. While blank sailings help carriers manage their operations, they also reduce the available shipping space, causing a supply crunch that drives up prices. This is especially common after a significant event, such as a natural disaster or infrastructure failure, when the global supply chain is already strained.
Aside from natural disasters and health crises, other unpredictable events—such as geopolitical instability or trade disputes—can also disrupt ocean freight. For example, political instability in a key shipping region can lead to port closures or sanctions that halt trade flows. Similarly, trade wars (such as the US-China tariff dispute) can alter shipping patterns, leading to increased costs and uncertainty.
Ocean freight rates for Australia and New Zealand are influenced by several unique factors. Here are the key contributors:
Vessel Size Limitations
While newer vessels often exceed 10,000 TEU capacity, most ports in Australia and New Zealand lack the infrastructure to accommodate them. New Zealand ports typically handle ships of up to 6,000 TEUs, and only a few Australian ports can manage vessels near 10,000 TEUs. As a result, smaller vessels are the norm, limiting capacity and raising costs. These ports also need extensive coverage for export commodities, which adds logistical complexity.
Strict Vessel Compliance
Both Australia and New Zealand have stringent regulations governing the condition and compliance of vessels. Ships that do not meet these high standards can be arrested or turned away, leading to significant costs. Older vessels, averaging 8-10 years in service, require frequent maintenance, contributing to blank sailings and further capacity disruptions.
Supply Constraints
Service reductions, port congestion, and equipment shortages are common issues in Oceania. Ports in Singapore and throughout Australia and New Zealand experience delays, leading to schedule disruptions. Low-rate levels in the region discourage carriers from investing in additional capacity or deploying new vessels, funneling resources to more profitable markets.
Imbalance in Trade Flows
Australia's exports remain relatively flat, meaning vessels often return with empty containers, increasing operational costs. In contrast, New Zealand sees a strong demand for exports, especially reefer cargo. This disparity in trade flows affects shipping dynamics, influencing freight costs.
Increasing Demand
Demand for shipping from China and Southeast Asia has risen significantly in recent years. This, coupled with blank sailings and supply challenges, further drives up pricing for Oceania. Here are some graphs that showcase the current trend:
Anticipating fluctuations in ocean freight costs can be challenging due to the many variables at play. However, with careful monitoring of industry trends and market indicators, businesses can get a better sense of when prices might rise or fall. Here are some strategies to help you stay ahead of freight rate changes:
As discussed earlier, peak seasons (such as the lead-up to the holiday season or back-to-school periods) can drive up demand for ocean freight, leading to higher costs. By understanding the seasonal cycles that affect your industry, you can plan ahead and avoid last-minute rate hikes.
For example, if you know that demand for shipping spikes in the fourth quarter due to holiday shopping, you can secure shipping contracts or make advance bookings in the off-season when rates are lower. Having a clear understanding of your industry’s seasonal shipping needs will allow you to better prepare for potential cost increases.
General Rate Increases (GRIs) are announcements by carriers about upcoming price hikes on specific trade routes. These rate adjustments are usually implemented in response to rising demand, increased operational costs, or changes in market conditions. GRIs are often scheduled ahead of peak seasons or when carriers anticipate capacity shortages.
Keeping an eye on industry news for GRI announcements will allow you to lock in space and rates before the increases take effect. This can be especially beneficial if you are relying on spot rates, which tend to be more volatile. Freight forwarders can also help you stay informed about GRI schedules and negotiate more favorable rates before the increases are enforced.
As discussed, ocean carriers often work within alliances to manage their capacity and adjust prices. These alliances may implement blank sailings, canceling certain routes to restrict supply and maintain higher rates. By staying aware of the moves that major carrier alliances are making, you can anticipate periods when space might be limited, and rates could increase.
Blank sailings are often announced in advance, so by monitoring these announcements, you can adjust your shipping plans accordingly. If you know that a blank sailing is scheduled on your regular route, you might want to explore alternative shipping options or routes to avoid price spikes.
Freight forwarders can play a vital role in helping you anticipate price changes. Because they are constantly monitoring market conditions, they can provide insight into rate fluctuations and help you secure the best shipping deals. Many forwarders have access to tools and data that track rate trends and carrier movements, allowing them to give you a clearer picture of what to expect in the months ahead.
In addition to helping you stay ahead of price increases, forwarders can also assist in negotiating long-term contracts with carriers. These contracts can protect you from sudden price jumps during peak seasons or Black Swan events by locking in rates over a specified period.
At Kerry Logistics Oceania, we excel in helping you with these issues. We make it our mission to keep your business succeed and help you every step of the way to circumvent the issues in international trade transportation. Besides this, we make it a point on keeping you informed on any events that could impact your operations, so you have time to plan and react.
If you need a reliable partner that is an expert on their field and can help you leverage the odds in your favor, feel free to reach out.