High Transportation Costs Affecting Businesses and Consumers: Rizwan Sajan
Freight rates have quadrupled since the COVID-19 pandemic triggered a global lockdown in March 2020, pushing retail prices higher, affecting consumers around the world trying to recover from a loss income and activities.
The World Dry Baltic Index has risen from – 50% in May 2020 to over 400% in May 2021 – an unprecedented increase in one year. The China Container Freight Rate index jumped 170% in April this year from what it was in July 2020, while the Harpex World Charter Rate index jumped 350% in one year from July 2020 to July 2021.
The rate hike was caused by the COVID-19 pandemic, which caused a massive drop in trade, leading to a drop in shipments around the world, said Rizwan Sajan, founder and chairman of the Danube Group.
Many shipping companies were forced to moor ships and send sailors on long vacations. Thus, when economic activities resumed after containment, there was a shortage of sailors and other professionals in the fall of 2020.
A combination of factors, including surging demand, a shortage of containers, saturated ports, too few ships and dockworkers, have contributed to the situation on almost all trade routes. The recent outbreak of COVID-19 in Asian countries – particularly India and China in particular – is cause for concern.
Shipping a 40-foot container by sea from Shanghai to Rotterdam, according to Drewry Shipping, costs a record 10,522 USD, 547% more than the seasonal average of the past five years.
With over 85% of merchandise trade carried by sea, rising freight rates threaten to push up the price of everything from toys, building materials, furniture, auto parts and components to everything. types of goods to tea and coffee – which aggravates concerns. on rising inflation.
Although this is still a relatively minor part of the overall cost of goods, a study by HSBC Holdings estimates that a 205% increase in shipping costs over the past year could raise prices to production in the euro zone up to 2%.
At the retail level, traders are faced with three choices: absorb the cost, pass it on to consumers, or stop trading! Most active traders would pass half of it to their customers and absorb the other half, ultimately achieving the bottom line.
What was initially seen as a temporary spike, the high freight rate appears to have become the new normal, according to industry sources. While things may change in the future, however, the high rate environment could continue for a year or two, before reverting to the pre-COVID-19 situation.
The high shipping costs are factored into contracts for the next 12 months, forcing companies to pass the extra costs on to consumers.
There are hardly any signs of any near-term relief, and rates are therefore expected to continue to rise in the second half of this year as growing global demand will continue to be met by limited increases in shipping capacity and the disruptive effects of local blockages. , according to a report by ING economists.
Even when new capacity arrives, containers can continue to be more active in their management, keeping freight rates higher than before the pandemic, they say.
Container ships delivered exceptional financial results during the pandemic, and in the first five months of 2021 new container ship orders reached a record 229 ships with a total cargo capacity of 2.2 million. of EVP.
When the new capacity is ready for use in 2023, it will represent an increase of 6% after years of poor deliveries, which the demolition of old ships is not expected to compensate, ”the report said.
Along with global growth moving beyond the catching-up phase of its recovery, the upcoming increase in ocean freight capacity will put downward pressure on shipping costs, but will not necessarily bring freight rates back to their levels. before the pandemic, because the liners seem to have learned to better manage capacities in their alliances.
In the near term, freight rates could reach new highs again thanks to the combination of further increases in demand and the constraints of a congested system. And even when capacity constraints are relaxed, freight rates may remain at higher levels than before the pandemic.
What’s the exit? Lower port handling charges, tariffs and VAT relief by governments could help ease the situation. Shipowners, shipping agencies, freight forwarders could intervene. However, this requires a rapid and coordinated response – as soon as possible.