Shipping and Logistics Costs Expected to Continue Rising in 2022

Companies are bracing for significant increases in shipping and logistics costs in 2022, following a year of supply-chain disruptions that sent transportation prices soaring. With the scramble to move goods during the Covid-19 pandemic driving up costs, logistics providers are signaling that inflationary pressures are likely to persist in the coming year.

Rising Prices Across the Freight Sector

Transportation and logistics providers are seeking higher rates for the next round of contracts, as demand continues to far outpace capacity across the freight sector. Industry experts predict that shipping rates will continue to climb, with ocean-shipping executives expecting the rates in many annual contracts to double compared to agreements made earlier in the year. Trucking companies are also projecting double-digit growth in contract rates for 2022.

Price Increases in Various Sectors

Prices have been rising across multiple sectors of the freight industry, including parcel delivery, trucking, ocean shipping, and warehousing. While freight contracts are typically negotiated on an annual basis, some large shippers maintain multiyear agreements with carriers. The escalating costs have left many companies reeling.

“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.”

Spot vs. Contract Rates in the Freight Market

Pricing in the freight market generally fluctuates between stable long-term contract rates and more volatile spot-market pricing, which is sensitive to shifts in demand and capacity. Over the past year, prices in spot markets for ocean shipping, trucking, and other logistics services have surged, reflecting the challenges posed by the global supply-chain crisis.

Domestic shipping rates for moving goods by road and rail in the U.S. have increased by about 23% from 2020, according to Cass Information Systems Inc., which handles freight payments for companies. The Logistics Managers’ Index, which tracks overall logistics prices, including transportation, warehousing, and inventory, reached a record in November, with a 14% increase year-over-year.

Factors Driving Rising Costs

Several factors are contributing to the rise in logistics costs, including higher wages for workers in a tight labor market and rising warehousing rents.

Derek Leathers, CEO of Werner Enterprises Inc., a truckload carrier, noted that inflationary pressures across the economy are being reflected in transportation costs. Leathers said contract rates for trucking could rise by high single-digit to mid-double-digit percentages in 2022, but he expects price increases to moderate once transportation demand eases and companies finish replenishing their inventories. However, he added that this relief may not come until 2023.

Parcel-Shipping Prices on the Rise

The cost of parcel shipping, which is closest to consumers, is increasing at its fastest pace in nearly a decade. Both FedEx and UPS have announced that they will raise their rates by an average of 5.9% in 2022, marking the first time in eight years that either company’s annual rate increase has exceeded 4.9%.

Ocean Shipping Rates Expected to Set Records

Shipping sea container prices are likely to reach new records in 2022. Xeneta, a Norway-based transportation data and procurement specialist, reported that the spot price to ship a 40-foot container from Shanghai to Los Angeles rose by 75% in early December compared to the same time last year. Negotiated rates in early-year contracts for the peak shipping season will likely reflect these inflated prices.

Seko Logistics, a freight forwarder, reported that its contracted rate to ship a 40-foot container from Asia to the U.S. West Coast could double to between $6,500 and $7,000, compared to $1,500 in 2019.

“The carriers are fully in control, and the rest of us are sitting on our hands waiting for the carriers to tell us what to do,” said Craig Grossgart, senior vice president of global ocean freight for Seko.

Higher Trucking Rates and Contract Negotiations

The outlook for higher trucking rates in 2022 follows a sharp increase in contract prices. In November, the average contract rate for trucking reached a record $2.51 per mile, excluding fuel surcharges, according to DAT Solutions LLC.

To avoid competing for limited trucking capacity, some retailers and manufacturers are rolling over existing contracts with carriers in exchange for moderate price increases.

“If you go out to bid, you can expect your rates will be 10% to 15% higher on average,” said Chris Caplice, chief scientist at DAT and executive director at the Massachusetts Institute of Technology’s Center for Transportation and Logistics.

Warehousing Costs and Leasing Trends

Storing goods will also become more expensive in 2022, as warehouse labor costs rise and facility owners aim to replace expiring leases with higher rates. Real-estate firm CBRE Group Inc. reported a 25% increase in nationwide lease prices for industrial properties in the third quarter compared to leases signed five years earlier.

Landlords are reluctant to sign long-term leases at current rates, anticipating that rents will continue to rise in the coming years, said Carolyn Salzer, head of industrial and logistics research in the Americas at Cushman & Wakefield.

Strategies to Mitigate Rising Logistics Costs

To combat rising transportation costs, companies are exploring strategies like consolidating more loads to reduce the number of truck trips and renting trailers for storage instead of paying high warehousing rents. However, many companies have little choice but to absorb the higher costs or pass them on to their customers. According to Satish Jindel, president of SJ Consulting Group Inc., transportation costs for most companies rarely exceed 7% of the total cost of goods. Jindel said, “You don’t want to lose a sale because you were trying to find a cheaper way of delivering it.”