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Shipping and Logistics Costs

Are Expected to Keep Rising in 2022

Executives say the tight capacity and high demand

that have sent prices surging this year

will extend into next year


Companies are bracing for more steep increases in shipping and logistics prices next year after supply-chain costs soared in the scramble to move goods during the Covid-19 pandemic.

Transportation and logistics providers are seeking big boosts in prices for contracts for the coming year, signaling that the inflationary pressure driven by strong demand and tight capacity in freight markets is likely to persist.

With high shipping demand still far outweighing tight capacity across the freight sector, industry experts say transport operators have leverage to raise prices when negotiating new contracts. Ocean-shipping executives say they expect the rates set in many annual contracts will double compared with agreements struck earlier this year, before supply-chain bottlenecks squeezed capacity. Some trucking companies project double-digit growth in contract rates for 2022.

Prices have been rising across the freight sector, including in parcel delivery, trucking, ocean shipping and warehousing. Most freight-transportation contracts are negotiated annually, although many large shippers may have multiyear agreements with a variety of carriers.

“I think folks are a little shell-shocked at the moment,” said Todd Bulmash, a logistics executive and board member at the Council of Supply Chain Management Professionals. “They’re preparing for the worst.”

Pricing in most freight transport and logistics markets generally slides between largely stable long-term contract rates and spot-market pricing that is more sensitive to shifts in demand and the availability of capacity. Prices in spot markets for ocean shipping, trucking and other logistics services have escalated sharply this year.

To avoid competing for scarce trucking capacity on the open market, some retailers and manufacturers are rolling over existing contracts with carriers for 2022 in exchange for moderate price increases, said Chris Caplice, chief scientist at DAT and executive director of the Massachusetts Institute of Technology’s Center for Transportation and Logistics. “If you go out to bid, you can expect your rates will be 10% to 15% higher, on average,” Dr. Caplice said.

The cost of storing goods is also set to rise more quickly as warehouse labor costs are increasing and facility owners seek price increases to replace expiring leases that had allowed companies to sidestep sharply rising rents during 2021.

Prices to lease industrial properties have jumped 25% on average nationwide over rates tenants paid at the end of five-year leases that expired in the third quarter, real-estate firm CBRE Group Inc. said in early December.

Landlords are even reluctant to agree to new long-term leases that bake in the current market rates, reasoning that tight capacity will lead to rising prices in the coming years, said Carolyn Salzer, head of industrial and logistics research in the Americas at real-estate firm Cushman & Wakefield. “Five years down the road rents are going to be higher,” she said. “So it’s in the better interest of the investor owners to do a short-term lease right now.”

Shippers are trying various ways to keep the transportation inflation at bay, such as consolidating more loads to minimize truck trips and renting truck trailers for storage rather than paying rising warehousing rents.

But experts say companies have little choice other than absorbing the cost or passing it along to their customers.

Overall, transportation rarely exceeds more than 7% of the cost of goods being shipped, said Satish Jindel, president of SJ Consulting Group Inc. For most companies, “the value of the product you’re selling and the importance of that sale is much greater than a slight increase in transportation costs,” Mr. Jindel said. “You don’t want to say you lost a sale because you were trying to find a cheaper way of getting it there.”


Source : The Wall Street Journal