Factors that influence the variation of international sea freight

International sea freight (ocean freight) should undergo, in 2020, a process of reformulation, in which an increase in rates and general cost is expected. This is because the  law that limits the sulfur content (IMO 2020) in ship fuels came into force. Thus, until the market adapts to the new reality, there will certainly be a considerable increase.

In any case, the price of fuel is not the only factor to be considered. There are a number of elements that, combined or separately, contribute to increase or reduce the amount charged by charterers in general. 

Gilberto Santos, Vice President of Marketing and Sales in Latin America at Ocean Network Express, is our guest to discuss this most relevant topic. Find out, in the next topics, a little more from the point of view of this specialist.

What factors cause international ocean freight to increase?

In general, everything that makes it difficult to cross the sea influences the price of freight. The climate, for example, is one of the factors that can induce an increase, since, according to Gilberto, in this case, what indirectly makes freight more expensive is the increase in fuel consumption and transit time.

Emergency situations such as the emergence of Covid-19 (which is already generating several changes in the scales) have the power to create a gigantic impact on the balance of operations as well as an impact on freight values.

Therefore, based on these examples, other reasons as relevant as these can be listed so the value of freight is increased or not. We highlight five of them.

Supply and demand for space

“Supply and demand can be understood in two directions: for cargo and for space”, says Gilberto Santos on the relationship that most influences the value of freight.

 In this case, the relationship has a logic simple to be understood. If the ship has a lot of space and little demand for transportation, the price of freight tends to decrease. Otherwise, when many charterers compete for the same space, then it becomes the opposite, that is, freight becomes more expensive.

The vice president of Ocean Network Express in Latin America adds: “The ship is one, but it is marketed by different companies, that have different pricing policies and strategies. Therefore, when there is more cargo than space, the tendency is for prices to increase”.

Armed conflicts

Recent conflicts in the Middle East — the area responsible for a large part of the oil consumed worldwide — add to the existing ones and put pressure on the cost of the bunker, which, in turn, has a direct impact on freight.

After all, according to Gilberto Santos, there is an extra fee charged by charterers in case it is necessary to transit through regions at war. Thus, if there is any conflict region of the vessel’s route, there will certainly be an impact on the cost of transportation.

Trade wars

Another type of war that influences the amount charged by international ocean freight and by a maritime agency is the commercial one. In this sense, the divergences between the United States and China today are the main obstacle to reducing rates.

To illustrate, Gilberto cites a real case: “The trade war has increased the demand for meat in China. With that, Brazil, which is a major supplier, started selling more meat to them. In this scenario, China has unbalanced our domestic market, causing the price of meat here to be increased. If the Chinese demand returns to what it was before, then the price of this commodity should follow, returning to previous levels”.

This logic applies to the freight price. In other words: when two very important countries increase the value of the products they sell to each other, the whole market feels the effects.

Seasonalities

Another factor of great relevance, according to Gilberto, is the sum of seasonalities worldwide. About this, he is adamant: “There is much more demand in the second half of the year than in the first”, because “the occupancy rate of big ships in the low season is lower, but even so, it has to sail”.

Considering these seasonalities, there are direct effects on price formation. As Gilberto Santos pointed out, the cargo capacity of the ships does not change, nor does the travel time. Therefore, in times of less demand, each day of operation will cost more than in high seasons.

What are the expectations for international trade in 2020?

Gilberto ends by stating his own expectations regarding international trade in 2020: “I hope that the market will become more consumer and make the economy turn more”.

He also highlights the importance of stability in the economic context as a factor that influences the formation of prices: “Stability increases purchasing and consumption power. It makes people plan better and buy more, encouraging investors to invest their resources”.

Thus, even though the price of international ocean freight might increase at the beginning of 2020, over time, the expectation is for stabilization and even reduction. Always, of course, taking into account the nuances and factors listed here.

Expand your knowledge on the subject by learning the best negotiation techniques in ocean freight!