By Paul Gallagher
It goes without saying that the impact on the world of the recent covid-19 pandemic has been immense. It is widely accepted that the effects are likely to be lasting and that the way we do business will have now changed forever.
Since the onset of the coronavirus, we have witnessed Asian ocean freight rates rise to alarming levels, which has pushed them way beyond the financial reach of an increasing number of commodities.
You do not need to be an economist to understand that low to mid-value products cannot absorb increases of this magnitude without something having to give.
Many observers and analysts have reported that even established verticals, such as those shipping furniture and electrical appliances, are struggling to work with ocean freight costs that constitute over 40% of the net value of their goods.
It stands to reason that many importers cannot afford the overall cost of importing products from Asia, without risking damage to their business, which naturally forces them to consider sourcing elsewhere.
Consumers are already feeling the impact through increased sales prices, and that’s if they can find the product they want ‘in stock’. These are not good signs for recovering economies worldwide.
So, you may now thank me for stating the obvious. However, the purpose of this article is to question whether ocean freight rates really need to be this high and whether this will lead to longer-term issues.
The Asia-European container shipping market has traditionally been the epitome of supply and demand. We have become accustomed to the ebbs and flows over many years. When supply (capacity) outweighs demand the rates fall, and when demand outweighs capacity, the rates rise.
Taking this back five years, a significant period of low demand, and therefore low rates, resulted in the loss of Hanjin – a major carrier – to bankruptcy. Those were dark times for the industry and the catalyst for a period of significant carrier mergers and acquisitions. We witnessed the cementation of new alliances, and a significant reduction in the number of carriers and choice in the marketplace.
So, when I consider the current rate levels, I first acknowledge that carriers have had to ride the supply and demand rollercoaster and have certainly had to stomach some bad times. That said, in my view, what we are witnessing now is way beyond an upcycle in demand outweighing supply.
Carriers are undoubtedly facing some extreme operational difficulties, such as port congestion, temporary terminal closures, misplaced slow moving equipment, covid measures, rising fuel prices, and the environmental imperative to slow vessels down. It would be foolish for me to suggest that carriers have not incurred a host of extra operational costs since the pandemic took hold.
However, it is the carriers that are setting the ocean freight rates, not the pandemic. Make no mistake, nobody has been twisting their arms to get rates to this level. Yet, the high profitability they have been reporting over the past year is unprecedented. A week barely passes without me reading another carrier reporting another record high quarter.
Taking this into consideration, and since there isn’t any cost per container data produced by carriers to justify such a high pricing policy, I can confidently answer the first part of my question – no, the rates do not ‘have’ to be this high.
I am by no means an expert, nor do I have insight into the global decision trees which determine the location of manufacturing production, but I have serious concerns about what the market is likely to look like, as inevitably in time, things settle down.
Supply chain disruption caused by interruptions or delays can usually be managed, with contingencies factored in over a period. However, a long-term over-the-top pricing structure may be disruptive to the whole basis for Europe and America to establish production in Asia.
In my view, neither market can support rates at this level for too much longer. Factor in unreliability of service, which is currently being experienced, and we have a model that does not support the economic value of buying from Asia.
The longer-term impact of rates continuing as they are, will surely be more businesses ceasing to exist and the more resourceful importers sourcing elsewhere, which we have already been witnessing.
One would hope that these multi-billion-dollar companies have both the interests of their long-term investors, and sufficiently well-informed advisors, to be certain that they are taking the container shipping business in the right direction. So, are carriers looking at the longer-term market, or just making hay?
Written by Paul Gallagher, Managing Director