The recent Ever Given saga has shone a spotlight on the sharp spike in freight rates. Global trade has started seeing the rising freight rates as early as late Q2 of 2020. Importers, exporters and those in the supply chains are facing huge cost pressures and we are now in the midst of a perfect storm.
What is Causing Freight Rates Spike?
In H2 of 2020, there has been a spike in freight rates at an unseen levels for the past decade. Exporters are up in arms over the increase in freight rates. The surge in demand and drop in container availability has everyone scrambling to secure a container to ship out their goods. Globally, customers are facing delays in receiving their goods. Some are facing unpredictable shipping schedules and are unable to manage their re-stocking plan effectively. Businesses are facing a double whammy of increasing prices and lack of containers to ship out their goods.
So why are freight rates going up? The perfect storm was formed mainly because of COVID19. But a few main factors resulting from this pandemic caused the sharp spike in freight rates.
Shortage of Containers
There is a shortage of containers for shipping goods globally. It’s a case of supply and demand issue where demand for containers outstrip what is available. Every importer and exporter is looking for an available container to ship out or import their goods. And because of the surge in demand, it caused a sharp spike in the freight rates as businesses have no choice but to pay the premium to get goods moving. But what exactly is causing such a high demand for containers?
Uneven Economy Recovery
China’s pandemic situation was by and large resolved much faster than other economies. Although factory production output was affected in the early stages of the pandemic, they had contained the outbreak effectively and were able to revert back to normal operations much earlier compared to other countries. And riding on the back of economic recovery and a change in consumption behaviour, consumer demand surged beyond anyone’s expectations. Other economies such as the USA were still facing a struggle to contain the pandemic in 2020. Their output was still stagnated compared to China.
China was thus ready and hungry for containers to ship out their goods to the USA. This is a main cause for the surge in empty container demand because they were at the wrong place “all the time”. This imbalance was so great that companies were willing to pay for containers to be returned empty to the port of origin just so that they can ship out the next batch of goods. There are reports that as much as 75% of containers were returned empty due to the demand.
Slow Container Turn Around
Due to the pandemic, labour shortages were causing a bottleneck in all sectors. This causes a huge problem when clearing the containers at international ports. It was taking a much longer time for containers to be loaded/unloaded resulting in longer turnaround time. And outside of port operations, logistics in general were facing similar issues such as container trucking delays. The congestion at the port resulted in only 40% of containers being returned back to China from the USA. And thus the imbalance of containers worldwide is further exacerbated.
In Singapore, this issue has translated to a shorter turn around time for us. It used to be that we were given 7 days to unload a container starting from the day the ship docks at our port. Ever since the beginning of 2021, our freight forwarder has advised us that the container must be returned within 3 days. Otherwise we will incur an additional surcharge for the delay. We believe this is in a bid to quicken the return of containers so that it can be redeployed again within the shortest possible time.
Shipping Operations
The labour shortage has also overflowed onto ship operations. Ship operators are facing a labour crunch and are unable to operate at a pre-COVID19 frequency. In particular, a 14-day quarantine imposed by many countries on arriving ships further disrupts shipping operations. The result was that shipping schedules became unpredictable. So not only are containers delayed at the ports, but they are also facing a long waiting time to secure a spot on the ships.
Ever Given
Having the Ever Given stuck at the Suez Canal further exacerbated the situation. An average of 50 ships pass through the 193km long waterway and accounts for 12% of global trade. Despite the coordinated efforts of the local authorities, Ever Given was still stuck for 6 days. This will further aggravate the backlog at ports. In fact experts warn that the supply chain will be impacted for months on end.
How Much Has Freight Rates Spiked?
There have been varied reports about freight rates. Some reported an increase of 25% to 50% for routes from Asia to North America. Other reports cited more than 250% jump for spot freight rates from Asia to North Europe. Freight rates from China to the USA and Europe reportedly soared by more than 300%.
From our local experience, rates from China to Southeast Asia have increased more than 200%. What used to cost USD350 has jumped to as much as USD1,300. Shipping from Southeast Asia to Europe can cost as much as USD10,500. This is a 200% jump from pre-pandemic levels of USD3,000. Thus the freight rates we were offered do validate international reports on the spikes in freight rates.
Who Is Impacted?
Singapore is a country without natural resources and we are an “import” nation. Virtually every sector is impacted by this crisis. If one is fortunate enough to secure enough containers to bring in their goods, price increase is an eventuality. On the other spectrum, some businesses face restock issues due to this container crisis. For instance IKEA Singapore had announced in January 2021 that 850 of its 8500 products will experience shipment delays.
For the tyre industry, there is another layer of price pressure – price of raw materials have also increased concurrently. From rubber to crude oil, all these raw materials reported an increase in prices which further pushes up tyre costs. Tyre shops are reporting a price increase across the board anywhere from 5% to 15%.
When Will Freight Rates Revert To Normal?
The initial forecast in late 2020 to early 2021 was that this shipping crisis will ease off by H1 of 2021 with respite in H2. However as we draw closer to June, this seems an unlikely event. Speaking to our contacts in the freight industry, our international partners and customers, they are uncertain on the short term outlook. Most are pessimistic and predict that this will last till the end of 2021 and even into 2022. In other words, price increases and supply chain delays will stay with us for some time to come.
For now, one of the key factors to alleviate the situation seems to rely on a worldwide vaccination programme. With more countries being vaccinated, the hope is that labour shortage can relieve not only port congestion but along the supply chain as well. With workers back in force, containers can be cleared sooner and goods delivered in a timely manner. And this does not apply to just the major economies. With the world linked through global trade, it takes a global effort to overcome this crisis together
That is why initiatives such as COVAX co-led by WHO to vaccinate the global population is a step in the right direction. Not just to alleviate the shipping crisis, but achieve a new normal as soon as possible. Singapore, being an open economy, recognizes this and contributed US$5 million in support of the COVAX initiative.