Breaking the Cycle: Rethinking Freight Pricing in an Era of Volatility
Breaking the Cycle: Rethinking Freight Pricing in an Era of Volatility
Embracing dynamic pricing strategies to navigate freight market volatility, and a data-driven approach to sustain profitability in an unpredictable landscape.
The End of Historical Pricing Models As market dynamics evolve and volatility intensifies, traditional pricing models grounded in historical seasonality are no longer viable. Freight rates are now driven by a broader range of macroeconomic and geopolitical factors, compelling industry stakeholders to adopt more dynamic, data-driven strategies. The Shanghai Containerized Freight Index (SCFI) illustrates this heightened volatility, with year-over-year fluctuations magnified by post-pandemic disruptions. These widening swings between annual rate highs and lows underscore the growing complexity of carriers’ and freight forwarders’ pricing strategies and capacity planning.
Shifting Patterns in Freight Rate Fluctuations Historically, rate fluctuations marked major trade cycles—most notably a surge before the Lunar New Year, followed by a post‐holiday decline, and then another pre‐holiday surge in late Q3 (Exhibit 1). This pattern was consistent from 2017 to 2019 in both the SCFI index along with other freight indices; however, from 2020 onward, rate movements became less predictable. Judah Levine, Head of Research at Freightos, noted that once the COVID‐19 pandemic hit, “all bets were off,” with peaks in Q3/Q4 2021 carrying through the first half of 2022 and rates then plummeting during what would be the typical peak months of that year as the pandemic eased and spending shifted back to services (Exhibit 2). Excess inventories meant a short and subdued peak season in 2023, before rates climbed sharply again in 2024 due to the Red Sea crisis and East Coast port strikes.
Unprecedented Volatility in Freight Pricing The intra-year volatility has also increased from 2017 to 2024, with 2022 showing a 2,317.95 USD / FEU spread between the 25th and 75th percentiles—an unprecedented 20x fluctuation when compared to the average spread of 106.58 USD / FEU for 2017 - 2019 (Exhibit 3). This volatility is set to intensify further as countries increasingly engage in trade wars. Global supply chains face disruptions from geopolitical unrest, and labour disputes—particularly in the U.S.—lead to shutdowns of major ports. Failure to adapt will leave firms vulnerable to disruptive shifts in the market, significantly impacting key performance metrics.
The Profitability Paradox in Freight Forwarding A McKinsey analysis of freight forwarder profitability revealed that forwarders experience significant swings in both gross profit margin and absolute profit depending on carrier rate fluctuations.1 As rates rise, forwarders see a decline in gross profit margin but an increase in absolute profit. The reverse occurs when rates drop, highlighting the delicate balance in freight profitability. Carrier stock prices closely track market freight rates, surging during periods of heightened rates and declining when rates normalize.2
The Impact of Spot vs. Contract Rate Balancing Volatility also amplifies the impact of spot vs. contract rate balancing for both freight forwarders and carriers. During high demand periods, spot rates rise above contract rates. In times of excess supply, contract rates outperform spot rates. The difference between spot and contract rates expands during periods of heightened volatility, as evidenced by long-term vs. short-term rates for 40’ reefers from Feb ‘19 - Dec ‘23 (Exhibit 4).3 This dynamic means that logistics providers which allocate a smaller portion of their total volume to spot rates must be diligent in capturing as much upside as possible during periods of elevated rates, while providers that allocate more towards spot rates must work to limit downside when rates drop.
The Path Forward: Data-Driven Dynamic Pricing With volatility now a defining feature of the freight market, relying on historical patterns is no longer sufficient. Both carriers and forwarders must embrace dynamic, data-driven pricing strategies that respond in real time to shifting market conditions, from trade wars and labour disputes to sudden demand spikes or lulls. By proactively adjusting rates, industry players can maximise gains during upswings and mitigate exposure during downturns. This approach will be key to sustaining profitability and competitiveness in an increasingly unpredictable global freight environment.
References
https://container-news.com/scfi/
3https://www.xeneta.com/blog/container-rates-week49-spot-rates-far-east-december-2023-0
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