One of the major challenges faced by supply chains across several industries has been the fast increasing freight rates and shortage of containers. In fact over the last 7 to 8 months, the pace at which ocean freight rates have gone up has been alarming – consequently impacting every industry including apparels and textiles. As per some media reports, sea freights have notoriously jumped by 300 per cent. That’s a huge spike.
And how’s it impacting the world! Increasing freight cost is not only impacting the developed nations, but also impacting the third world countries – and impacting big. For the developed nations, the materials not only end up being expensive but also do not arrive on time. The scenario becomes worse for a developing or a third world nation that is largely dependent on countries for importing input materials like cotton, cotton yarn and other supplies. Here it is important to mention that along with freight costs, cotton prices too have been increasing thereby making it difficult for exporters to continue their business.
In addition to input materials becoming costlier for developing nations, delayed shipping too doesn’t help either. Any delay, almost always, leads to rejection and with buyers not ready to pay any extra cost, it can’t get tougher.
Substantiating on the same, Simon Heaney, who is a senior manager of container research at the independent maritime research consultancy in the US, avers that the disruption caused by the COVID-19 pandemic still continues to eat the market. He says that the ongoing bottleneck at the Port of Los Angeles, where the average delays for container ships processing through the docks have been stuck at more than a week since March, has hit every industry badly. Though, things are improving slowly at the port and the delay has shortened to 6 days, it is still worrying.
Southern California container terminals have responded by opening more truck gates and increasing operation hours, while ocean carriers have increased freight rates to ration spare capacity, but this has not dissuaded the importers who are desperate to meet demand.
Earlier this year, a giant container ship remained stuck across Egypt’s Suez Canal that held up billions of dollars every day in world trade. That actually triggered surge in freight rates. However, much before that, one was paying more in sea freight to ship goods out of China into the Amazon FBA.
Drewry, an independent maritime research consultancy, says that the average composite index for year-to-date was US $ 5,110 per 40-foot container if equivalent (FEU), which was US $ 3,272 higher than the five-year average of US $ 1,838 per FEU. The jump in container prices has led to long delays for e-tailers trying to import high-demand goods from China. What’s more worrying is that around 60 per cent of all global goods are shipped by container.
Shippers are all set to increase rates again in June 2021 across multiple trades, as ocean carriers beef up profits ahead of the peak season. But one first needs to understand the reasons for such an absurd rise in ocean freight rates not just in the US but globally.
Factors causing abnormal ocean freight rates
The pandemic onslaught
Like many other industries, the shipping sector too has been one of the worst-hit sectors – all thanks to the deadly pandemic, which stimulated slump in production thereby increasing fuel price, which led to proportionately higher transport costs. Notably, crude oil prices were somewhere around US $ 35 per barrel not long time ago, but now they have exceeded US $ 55 per barrel.
Also, one has to consider that during the pandemic the demand for goods was erratic and lopsided, leading to scarcity of containers at one port and abundance of containers at another. It couldn’t get worse than getting stranded at ports with no consignments to deliver. Consequently, the distribution got hit severely causing ocean freight rates to rise.
According to a McKinsey survey, as lockdowns have eased up in many countries, the savings incurred are getting translated to pent-up demand. Consequently, categories like apparels, footwear and beauty are eating up a huge chunk of that post-pandemic discretionary spending. Notably, increased demand for certain goods comes with a price, and that price leads to huge sea freight costs.
China’s trade surplus too impacts rise in freight rates
Chinese exports globally rose by 60.6 per cent over the first two months of 2021, at a time when many Western economies were slowly recovering from the pandemic and demand for Chinese goods was skyrocketing. In fact, China’s global trade surplus reached 103.25 billion early in 2021, whereas it recorded a deficit of US $ 7.21 the past year
The rising demand for Chinese exports meant that shipping companies were finding it much profitable to simply send empty containers back to China than have them go through the entire trip inland to pick up imports. While generally Chinese exports are usually high-value products, US exports are in comparison of low value. The competition over containers was enough to shoot up the prices.
The ongoing trade war with China isn’t helping either…
The trade war between the two economic giants has also been an important factor. It’s been there for some time now and with the change of Government in the US, the unpredictability regarding tariffs has caused many Chinese exporters rush the goods to the US. China understands new tariffs could come into force any time and so the goods keep rushing into the country from China. This too has been instrumental in rapidly increasing the sea freight rates especially in last one year. There are also reports that many big private companies in China are also stockpiling containers and making them available only to highest bidders – that’s enough to increase the freight rates.
Growing use of split shipments
The dependence on split shipments, especially of fashion e-tailers, has been on the rise for some reasons. Besides, picking fashion goods from inventories across different locations, split shipment is also preferred when there is not enough space on a truck or a plane as a result of which, the complete shipment is split into separate boxes and shipped separately.
Additionally, customers who require to ship apparels, or any product for that matter, to different locations may also encourage split shipments. As the shipments increase, costs too surge thereby not only increasing the freight rates but also disturbing the entire ecological balance. Notably, split shipments occur on a large scale during cross-country or international shipment of goods.
Brexit too has played its part…..
The role played by Brexit in increasing freight prices is no less than the menace caused by the pandemic or split shipments. Owing to the cross-border friction – thanks to Brexit – the cost of goods shipped to and from the country has also risen by good numbers. Reportedly, the transfer of goods to and from the UK, amidst the pandemic-induced challenges, has increased the freight rates for goods to and from the UK by as much as 4 times.
These conflict of interests have increased cross-border friction and made many shipping companies cancel all contracts signed or agreed upon earlier. Consequently, many companies trying to transport goods were compelled to pay increased spot rates. Gradually, rates surged in many other parts of the globe too.
Countermeasures to combat the rising freight rates
Better planning of shipments
Planning of shipments in advance can not only help companies save time and money, but also help them avoid delay. For better planning, companies can also use digital platforms to leverage historic data on the freight costs so as to foresee rates and understand the trends that impact the rates.
More visibility is the key…
Lack of visibility is one of the major handicaps impacting the players of the ecosystem today, and so what’s required is re-discovery of processes. Rediscovering processes, digitising shared operations and, importantly, implementing the best of technologies are the ways to enhance not only efficiency but also bring down trading costs. In addition to building resilience for supply chains, this will enable the industry to bank on data-led insights – thereby helping players make correct decisions.
Companies can also plan in advance and try to ship several deliveries together instead of shipping them individually. Doing so can also help the companies in availing discounts and other incentives from shipping companies.
Slow decline in freight rates expected by 2021 end…
Experts believe that supply-chain fix that balances supply and demand is expected until the fourth quarter at the earliest. Conforming to thoughts of some experts, Simon says that a rush of new container ship orders could pose a risk of over-capacity in 2022 and beyond.
Simon adds, “A strange paradox exists where the worse the supply chain [disruption], the more profitable carriers become.” That says it all! He added global container carrier freight rate will rise by 23 per cent in 2021, before falling back to 9 per cent by the end of 2021. The container carriers are surely moving into a significant position of strength.
It is still not clear what the scenario will be in next 6 months, but it is distinct that stubbornly high shipping expenses for businesses are getting sealed into contracts for the next 12 months, forcing companies to pass the extra costs on to consumers and burden them more. There aren’t going to be any drastic changes and it seems the exorbitant freight rates are here to stay – at least for some time now.