It's our new normal - spiked shipping costs and aggressive competition for ocean freight capacity. With little signs of short-term relief, it's expected to keep climbing and remain there in the near future. Here is the breakdown of why...
Global Imbalances
We are still dealing with the build-up of problems since the beginning of the pandemic. According to ING, this includes imbalances in the production and demand for goods, with countries locking down and opening up at different times, as well as shipping companies cutting the capacity on major routes and shortages of empty containers. As the recovery has progressed, global demand has recovered strongly, especially in the sectors which are most closely linked to international trade in goods. Competition for ocean freight capacity has intensified as economies open up further and inventories are rebuilt across the several links of supply chains.
Few Alternatives
A lack of alternatives to ocean freight means it’s hard to avoid surging transport costs at the moment. For higher value products, alternative modes of transportation would normally be an option, such as the shipment of electronic devices by air or via train. But capacity is currently limited, and tariffs have spiked as well. Shippers of lower value products such as household items, toys, promotional articles, or t-shirts have seen freight costs increase from around 5% of their sourcing costs to more than 20%! The difficulty of absorbing increases on this scale in margins means that consumers may start to feel the impacts through price increases, or changes in product availability.
An Unbalanced Recovery
Some countries are already exporting more goods than they did before the pandemic, while in others, including the US, exports continue to lag behind the overall recovery in output. Trade-in goods will rise further while not only the major trading countries but also their trade partners, continue recovering. With the competition for ocean freight capacity set to remain, the unbalanced recovery will continue to exacerbate some of the problems for world trade, including displaced empty containers. It all adds up to more pressure on freight rates in the near term.
Canceled Port Calls
Globally, capacity on major shipping routes has recovered to levels before the major lockdowns in 2020, although canceled port calls or blank sailings continued to cut 10% of scheduled capacity through the first quarter. There are signs of improvement which on current plans will average at 4%. But cancellations have partly been a response to delays, so while the system remains congested, shipping capacity may continue to be taken out of the system at short notice.
Port Congestion & Closures
As the link between canceled sailings and delays suggests, congestion is part of the problem. Shipping performance in 2021 has carried on where 2020 left off, in terms of lower rates of vessels keeping to schedule, and average delays for late vessels rising. There are some signs that average performance will start to improve as the share of vessels reaching their destinations on time stopped sliding in April, and average delays improved. But overall performance remains the lowest it has been in ten years of records.
The main culprit leading to disruptions is still the pandemic. Although China and other major trading countries are making progress consequently handling interruptions will still remain a risk over the coming months. One way to offset these spiked shipping costs is by purchasing your food processing and refrigeration equipment from Genenco. We sell quality pre-owned equipment for 40 to 60% off the price of new. Even better, here are tips on how to negotiate your equipment to save even more!
