China’s shipping insiders brace for another full year of rising freight rates having a ‘profound impact on trade

China’s shipping insiders brace for another full year of rising freight rates having a ‘profound impact on trade
Luna Sun 19 Dec, 2021 https://www.scmp.com/economy/china-economy/article/3160158/chinas-shippi...

Surging shipping costs in a year riddled with supply-chain disruptions are straining China’s small commodities exporters, and industry insiders are bracing for more challenges to come as they say high freight rates could stretch into 2023.

Jiang Tianqing, an exporter from Yiwu, Zhejiang province, said many of his clients have dropped orders due to the high shipping costs. He is also struggling to maintain adequate cash flow, as his goods such as mirrors and combs are low added-value items that return slim profits.

“Everyone is in a difficult position,” Jiang said. “The intensity of the blow depends on their capacity to weather and manage risk and pressure. The shipping cost for a 40-foot container with 500,000 yuan (US$78,500) worth of goods was about 30,000 yuan, but now shipping costs have risen to 100,000 yuan while the value of the goods hasn’t changed.

“Costs for everything are rising domestically, but we can’t raise the price for our old clients, who are basically the only ones still doing business with us. You can imagine what we are going through.”

To keep abreast of the market changes and broaden his client base, Jiang also started an e-commerce shop on Alibaba’s international site. Alibaba owns the South China Morning Post.

“This way I can wholesale while retailing as well, and they will normally transport by air,” he said. “It’s more expensive this way, but compared with the price of a 40-foot container, individual customers will find it acceptable. I can also broaden the market for my products this way. Foreigners can’t come into China now anyway, and many people overseas are increasingly shopping online.”

The surge in freight rates and associated costs are largely the result of a mismatch between soaring demand and reduced supply capacity, plus labour shortages and continued on-and-off coronavirus restrictions imposed in port regions, according to last month’s Review of Maritime Transport 2021, a flagship report published annually by the United Nations Conference on Trade and Development (UNCTAD) since 1968.

Port congestion has also led to global container shortages, further driving up prices.

In early November, 11 per cent of the world’s loaded container volume was being held up in logjams, down from August peaks but well above the pre-pandemic total of 7 per cent, according to Berenberg analysts cited in a Reuters report.

Containers may end up waiting three or four more weeks at ports on West Coast of the United States now, compared with pre-pandemic levels, according to shipping and logistics company Maersk.

“Hundreds of cargo ships are waiting to be unloaded, while workers are in short supply. Fundamentally, it has become a land-side problem now. Lower efficiency at terminals and a lack of trucking power are making it slower to move cargos in and out of terminals, and sometimes containers have to be dug out due to high yard density,” a Maersk spokeswoman told the Post.

Container rates for China-US routes surpassed US$20,000 per 40-foot container in September. And while the price has since dipped, it remains two to three times higher than pre-pandemic levels due to congestion at major ports.

Logistical disruptions in Southeast Asia, as well as a resumption of work in the region, have also contributed to record-high ocean rates.

The Southeast Asian routes of the Ningbo Containerised Freight Index, which reflects the spot rate of container ships departing from Ningbo-Zhoushan port – the world’s largest port by cargo tonnage – recorded a price surge in the past month and reached an all-time high.

A 40-foot container may cost about US$3,000 to ship from China to major ports in Vietnam, Thailand, Malaysia and Indonesia – a more than tenfold increase from the US$200 to US$300 level before the pandemic.

For freight-forwarding agents, higher logistical costs mean fewer orders.

“Ports in Southeast Asia can be 30 per cent more congested than usual, with ship schedules seriously delayed,” said Frank Xu with Guangdong Smart Logistics. “There are fewer returning ships, and they are returning more slowly.

“The effects ripple throughout the supply chain.”

China is both a contributor to, and a victim of, the supply-chain disruptions wreaking havoc across the globe, according to a Moody’s Analytics report published in October by economists Katrina Ell and Ryan Sweet.

“China’s [zero-tolerance] approach to Covid-19 can mean that ports or factories close at short notice in response to an infection outbreak,” they said, adding that such closures at critical production hubs “disrupt production and the flow of goods on a global scale, and not just at home”.

Shen, a textile trader in Yiwu who asked not to use his full name, said this year’s supply-chain disruptions have been challenging everyone’s ability to respond to uncertainties.

His clients who are exporters, for instance, have been struggling to make their deliveries this year.

“Many of my clients have been forced to stockpile their goods in the warehouse while waiting for the ships to come,” Shen said. “Because of delayed payments, many of them are having cash-flow problems, and one of my clients resorted to taking out a loan.”

Bigger manufacturers such as Huang Feng, a textile exporter in Yiwu, are faring better. But still, due to congestion and logistical disruptions in his port of discharge, and the additional time required in the transport cycle, he had to shorten his production process for his clients to get the goods promptly for the holiday season.

Despite fretting exporters, China’s foreign trade performance beat expectations in November, with an 8.4 per cent growth in exports over the previous month.

The high freight rates are likely to stretch well into 2023, according to UNCTAD’s analysis.

If container freight rates continue to surge, global import price levels could increase by 11 per cent between now and 2023, while consumer price levels could rise by 1.5 per cent.

“The current surge in freight rates will have a profound impact on trade and undermine socioeconomic recoveries, especially in developing countries, until maritime shipping operations return to normal,” UNCTAD Secretary General Rebeca Grynspan said.

“Returning to normal would entail investing in new solutions, including infrastructure, freight technology and digitalisation, and trade-facilitation measures,” she said.

Cheaper items are especially at risk of seeing their comparative advantages eroded, according to the UNCTAD report.

“Concerns abound that sustained higher shipping costs will not only weigh on exports and imports but could also undermine a recovery in global manufacturing,” the report said.

“A 10 per cent increase in container freight rates, together with supply-chain disruptions, is expected to decrease industrial production in the United States and the euro area by more than 1 per cent, while in China production is expected to decrease by 0.2 per cent.”

Meanwhile, the coronavirus variants could further shake up port operations and labour capacity moving forward, according to a report by Christian Roeloffs, co-founder and CEO of logistic services company Container xChange.

“Persistent unpredictability is warranted,” Roeloffs said. “The current spike in rates was caused by a temporary supply crunch. But with disruptions such as labour union conflicts at US ports easing up, we’ll also see the capacity challenge improving.

“We’ve also started to observe container prices and leasing rates going down. Once prices slide significantly, they risk crashing. If we look at the current demand, we see that the demand for containers hasn’t increased significantly.”