Increasing global shipping charges and delays in shipping are expected to have an adverse impact on Sri Lankan importers and exporters.
Shippers’ Academy International Founder and CEO Rohan Masakorala, speaking to us, stated that shipping costs will continue to increase over the next 12-18 months until the market stabilises or new capacity additions are made to the container ship fleet.
According to Masakorala, exporters are struggling to balance production with maintaining warehouse space, as export shipments are delayed by over 10-12 weeks. Further, importers are required to manage inventories very carefully and may have to maintain large stocks in their inventories to ensure that shipping delays do not impact the production process, thereby adversely impacting their short-term cash flows.
The increase in freight costs and shipping delays appears to have a disproportionate effect on small and medium enterprises (SMEs). Moreover, the impact on large-scale importers in the textile industry is expected to be quite low as their freight is usually booked by the North American and European buyers, and such contracts are honoured and given priority by shipping lines.
In addition, according to industry sources, most textile companies have entered into long-term shipping contracts and are offered special rates.
Therefore, according to Masakorala, small-scale exporters who have not entered into long-term shipping contracts with shipping lines, and exporters of low-value cargo will be the most vulnerable to the increases in shipping costs as they will be required to ship at the increased market rates.
Shipping costs are expected to continue increasing over the perceivable future due to increased demand, as a result of the Chinese Golden Week in October, the Christmas season, and the Chinese New Year, from developed countries.
According to the Freightos Baltic Index (FBX): Global Container Freight Index, as of 24 September 2021, the cost of a standard 40-foot container stands at $ 10,839 which is a 382.4% year-over-year (YoY) increase compared to $ 2,247 recorded on 25 September 2020.
Soaring shipping costs has led to allegations by shippers of artificial manipulation of shipping costs by carriers.
However, Masakorala claimed that such allegations have been proved by investigations to be unfounded as this price increase is purely due to supply and demand forces. He further stated that disruptions in global supply chains have led to higher container turnaround rates, which in turn has led to the soaring shipping rates.
Increased consumer demand in developed countries, particularly in the US, has made ship operators pile more capacity into the trans-pacific route. This increased supply together with Covid-19-related disruptions have led to significant congestion within the route, which in turn has resulted in mounting shipping delays.
Therefore, this increase in consumer demand together with shipping delays caused by port congestion has led to shippers paying a premium price to gain access to available shipping slots. The world container capacity was around 23.9 million TEU (20-foot equivalent unit) which is handled by a container ship fleet of 5,374 as of January 2021. According to Masakorala, 8-10% of this fleet is stuck in ports throughout the world, unable to get a berth.
This situation is reflected by the fact that last week, a record number of 73 container ships were lined up at the coast of Southern California waiting to deliver cargo at the Port of Los Angeles and the Port of Long Beach, with around 30 more ships adrift up to 20 miles of shore. Similarly, over 150 ships are anchored off Shanghai and Ningbo, with over 240 in total awaiting berths throughout China. This situation is due to port congestion as port infrastructure is unable to handle the increase in supply of containers.
Due to the increased demand, container ships are being piled higher with containers than they’ve ever been. According to data from the port of Long Beach, which has been mired with delays over the past months, the number of average containers per vessel has increased to 7,000 from 4,000 in 2020.
Therefore, discharging ports are not only struggling to offload and organise the containers, but they also lack adequate terminal capacity to handle this surge in containers. Therefore, port infrastructure has been pushed to its limits, leading to an increase in ship berthing and waiting times.
Similarly, origin ports in China are plagued with congestion as they struggle to handle the increase in export volumes amidst the disruptions caused by Typhoon Chanthu.
Such port congestion observed globally has been exacerbated by the disruption of port activities and lack of workers due to Covid-19 restrictions and supply chain bottlenecks outside the ports, which includes lack of truckers and lack of warehouse facilities.
In addition, according to Masakorala, empty containers are piling up in container yards in developed countries unable to return to Asia due to a lack of export orders, which in turn has been exacerbated by delays in inflow shipment of machine components and raw material.
Masakorala added: “Therefore, the increase in shipping costs is due to a multitude of supply chain disruptions at origin ports, discharging ports, and transhipment ports which has created a supply-demand imbalance.”