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Shipping costs have never been a small expense for manufacturers, but over the past 18 months, prices exploded to unprecedented levels as the global freight crisis spiraled out of control. The relentless rise in prices started in the autumn of 2020, but the first half of 2021 has seen another major price hike across different freight rates, such as dry bulk and containers, all along major trade routes.
Up until this point, there’s no sign of relief for the shipping crisis, and consequently, rates are expected to continue spiking in the second half of this year, as the growing global demand will continue to be met with strained shipping capacity and congested ports. Just over the past 6 months, ocean freight from China to the US West Coast has surged three-fold, and the overall cost of freight from China soared by a shocking 200 percent.
Most ships are exposed to the spot market, only a small share of the fleet is on fixed-rate contracts. For that reason, contracts keep getting repriced every week, and shippers can never forecast with precision when a new increase will occur and how much more it will cost. As a result, companies often need to pass along those increases to consumers, which adds pressure to inflation crises erupting all over the globe. However, higher prices for goods aren’t pushing the global demand down. Consumers are willing to pay more to get what they want. But on the other hand, according to Maersk chief executive Morten Engelstoft, port congestion, freight rate increases and consumer good inflation won’t go away until demand falls.
As supply chain bottlenecks aggravate and maritime transportation costs go through the roof, with the Baltic Dry Index reaching an 11-year high, companies are complaining that the top 10 international shipping companies have created cartels to keep pushing prices up all across the board.
Mike Garratt, chairman of MDS Transmodal, explained that “this high level of consolidation has the benefit of enabling lines to adjust capacity allocation in line with changing demand, but, combined with the resulting very high levels of utilization, have allowed freight rates to remain at historically unprecedented levels and imply that some potential freight may be being suppressed”. Many shipping companies are guaranteeing delivery within a few short weeks – if the shippers agree to pay premium rates. Industry executives revealed that “importers are attempting to outbid one another, offering extra cash to snap up containers over their rivals”.
With nearly 80% of all goods transported worldwide relying on maritime shipping, and the eight-week window before the holidays accounting for at least half of a retailer’s annual sales, it’s safe to say that more strains are about to emerge in the already stressed global supply chains. This extremely challenging environment is making business owners panic as they realize that the extraordinarily high demand has stretched infrastructure to its limit, and those who cannot afford premium prices may be left at the end of the shipping list and display empty shelves during the busiest shopping season. Since the world lacks alternatives to ocean freight, it’s been incredibly hard to avoid soaring transportation costs.
“I have a gut feeling that we’re going to see empty shelves,” warned Stavros Karamperidis, the head of the Maritime Transport Research Group, referring to the Christmas period. And while shipping companies are expected to make record profits this year, retailers may see their profit margins shrink as the price of everything – from supplies and materials to parts and freight – only keeps going up. In a recent interview with Bloomberg, Genco Shipping President, and CEO John Wobensmith, alerted that companies should brace for the worst.
“I think rates can go higher from here,” he said. “We do get to a point, and we’ve seen this in containers, where we hit a certain utilization rate, and companies start to go parabolic on rates. I think we’re getting close to that period”. Fundamentally, we’ve got demand outstripping supply growth in all product categories, Wobensmith highlights. And that means that consumer price inflation will not be as “transitory” as the Fed insists to affirm. In fact, given that prices are still rising at breakneck speed, the inflation crisis is set to keep running rampant and we might haven’t seen the worst of it yet. Things are getting very ugly, and our economy seems to be gradually slipping into a recession once again.