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Having already scaled all-time highs, shipping costs hit another record high this week as the fast spread of the Delta variant across several countries has added to the upward price pressure by slowing global container turnaround rates. Last week, devastating floods ravaged China’s southern coast, which also contributed to the worsening of the crisis that is affecting the world’s most important method for moving everything from appliances and furniture to car parts and electronics. “These factors have turned global container shipping into a highly disrupted, under-supplied seller’s market, in which shipping companies can charge four to ten times the normal price to move cargoes,” as explained by Philip Damas, Managing Director at maritime consultancy firm Drewry. “We have not seen this in shipping for more than 30 years,” he added, revealing that he expects the “extreme rates” to last until Chinese New Year in 2022.
According to Reuters, the soaring container prices have resulted in higher charter rates for container vessels, which pushed shipping firms to prioritize service on the most lucrative routes. “Ships can only be profitably operated in the trades where freight rates are higher, and that is why capacity is shifting mostly to the U.S.,” outlined Tan Hua Joo, executive consultant at research consultancy Alphaliner. The sharp rate increase is a reflection of a series of disruptions that started to happen ever since the health crisis pushed the global economy to the brink in early 2020 and sparked huge changes to the flows of goods and healthcare equipment around the globe.
When new virus cases were detected at Yantian Port in late May, that key export center halted its operations by 70% for most of June. Similar disruptions are likely to occur in the coming weeks, while shipyards might soon see their delivery schedules come under extra pressure if any stricter lockdown measures are put in place. With the latest weekly update of container shipping rates showing that there’s no drop in sight for prices, the Delta variant is a new threat that can send already sky-high prices into orbit. Right now, most Chinese ports are now requiring all crew to be tested, with vessels forced to remain at anchor until negative results are confirmed, and requiring ships to remain in isolation for 14-28 days if they are coming from India or changed crew within less than 14 days of arriving. Meanwhile, according to a report from Braemar ACM released this week, for freight markets, the restrictions mean there will be more “delays at ports as authorities screen crews of incoming vessels and a hit to China’s oil demand if widespread lockdowns are imposed”.
The head of the consultancy firm Shipping Strategy, recently warned that “if those lockdowns include coastal regions, key ports, and logistics centers, then globalized supply chains will become chaotic”. At this point, chaos has already become a constant factor in the U.S. supply chains, and the aggravation of the shipping crisis is remarkably burdening the economy. Recent reports show that shipping a container of hazardous chemicals from Shanghai to Chicago previously cost about $6,600. In recent days, John Logue, the Royale Group chief executive, revealed that he pays as much as $29,000 – and that’s if he is lucky enough to find much-sought-after cargo vessel space plying the Pacific trade routes.
The freight troubles faced by the Royale Group, which compromise both existing operations and efforts to increase manufacturing in the United States, illustrate the market power of a handful of shipping companies and railroads that transport goods from distant factories to American homes. U.S. consumers are currently feeling the impact of stressed supply lines, but the worse is yet to come.
Several U.S. companies are in deep distress due to transportation problems. Unfortunately, no one in the industry expects any kind of relief until well into 2022. In the meantime, supply chain issues and shipping prices continue to weigh on inflation forecasts and rates. All of these factors are a clear sign that as opposed to what the Federal Reserve persistently affirms, inflationary pressures are not at all transitory. Even Deutsche Bank analysts recently said that due to the current policies, higher prices will persist for much longer than people expect. “We worry that inflation will make a comeback,” it said, adding that “it is a scary thought that just as inflation is being deprioritized, fiscal and monetary policy is being co-ordinated in ways the world has never seen”. With so many strains in global trade, disrupted supply chains, surging shipping costs, and more notably, the lack of effective policies to fight inflation, the price of products can only head in one direction: upwards. So we should all brace for astronomical price increases in the coming months as the global shipping crisis continues to go from bad to worse.