The influence of route selection and distance on shipping costs, with references to geopolitics, correlations with other cost factors
The Role of Route Factors in Freight Rates
Among the foremost determinants of pricing in cargo shipping is the selection of trade routes and the distances entailed. Transit distances directly impact fuel costs which constitute a major expense for carriers. Meanwhile, evaluating routing options involves analysis of geopolitical conditions, alternate path accessibility, toll or passage fees and safety & security considerations.
In long-range voyages like Asia to Europe traffic, even marginal mileage differences between routing options through e.g. the Suez or Panama Canals versus alternate passages via Cape Horn or around Africa can present fuel cost differentials amounting to hundreds of thousands in savings or added expenditures. Shipping enterprises factor such variables into balancing cost controls with timely delivery.
Geopolitics further complicates routing
As conflicts, piracy, sanctions or demands from countries controlling chokepoints can block or restrict vessel flows. For example, should turmoil in Egypt or demands by the country result in denied or limited access through Suez Canal —a critical East-West juncture—ships would face heavy additional costs from rerouting around Africa’s Cape of Good Hope, if permitted passage.
Among influential interrelated cost drivers, fuel prices and voyage length impact expenses exponentially, while fees for accessing canals or resolution of regional disputes expanding route flexibility convey exponential savings —all weigh heavily in rate decisions.
Specifically, three of the most interdependent elements around routing costs include:
Fuel Cost Volatility –
Prices for vessel propulsion fuels like diesel or fuel oil fluctuate dramatically, constituting up to 60% of operating budgets. Over long distances extra mileage compounds fuel costs, becoming a prime factor in shipping rate formulas.
Canal & Port Expenditures –
With above-average ships each paying up to $500K+ for single Suez or Panama Canal crossings plus port docking/service charges, these junction points’ abilities to minimize longer alternate routes saves in fuel outlays determining pricing strategies. Read more about the influence of canals and ports on international and domestic shipping.
Geopolitical & Weather Factors –
Regional instability or piracy blocking safer passageways, and adverse weather patterns hampering shipping lane accessibility can force vessel detours adding navigation days impacting operating costs & timed delivery, weighing heavily on rate decisions.
Breaking (Dec 19th – 2023)
The recent escalation of the crisis in the Red Sea (as described in an article by JOC published on December 19, 2023) demonstrates how geopolitical events profoundly affect shipping route decisions and associated costs.
Major carriers like Ocean Network Express (ONE) are choosing to redirect their ships around the Cape of Good Hope or relocate them to waters leading to changes in operational strategies within the industry.
Increased security risks
This shift is a response to the increased security risks posed by rebel attacks in the Red Sea highlighting the relationship between geopolitics and shipping logistics. While there is a solution in the form of a naval force established by the US with the goal of restoring security in the region carriers remain cautious.
The fact that Maersk, CMA CGM, and Hapag Lloyd have decided to divert their routes from the Red Sea despite enhanced protection reflects their prioritization of safety and certainty over cost considerations.
This development aligns with trends discussed in the mentioned article where instability such as conflicts or piracy necessitates rerouting that results in increased fuel expenses and extended voyage durations.
Additional fuel costs incurred due to rerouting via the Cape of Good Hope
The additional fuel costs incurred due to rerouting via the Cape of Good Hope are estimated to reach up to $1 million, for Asia-Europe loops emphasizing how such geopolitical crises have an impact.
This situation highlights the importance of choosing the route when determining freight rates.
Various factors such, as fluctuating fuel costs expenses related to canals and ports and geopolitical and weather conditions all play roles in this decision making process. As carriers navigate through these challenges the financial implications go beyond the shipping industry with impacts on global supply chains and consumer prices.
Fuel, canal/port and geopolitics elements impose both limitations as well as opportunities around optimizing routing efficiency from cost perspectives, directly translating into freight pricing considerations.