Tuesday, June 15, 2021

"Global Shipping Chaos Is Worsening Supply Chain Crisis As Freight Rates Shot Up By 300 Percent"

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by Epic Economist, PM 6/15/21:
"Global Shipping Chaos Is Worsening Supply Chain 
Crisis As Freight Rates Shot Up By 300 Percent"

"For the past twelve months, global supply chains have been facing a crippling shipping crisis that has only become more acute. But now, global traders are extremely alarmed about the proportion of the chaos the world is about to experience as a new round of lockdowns is severely aggravating the logjam of box ships and containers in Asian ports. Since 2020, a critical shortage of shipping containers has been causing massive delays in the delivery of imported goods from China to Europe and the U.S., which resulted in widespread shortages and rising prices for businesses and consumers. But again, businesses and consumers have to brace for yet another shipping crisis, more shortages and more expensive products, as a virus outbreak in southern China is interrupting port services and delaying deliveries.

In the Chinese province of Guangdong, a sudden uptick in new infection cases was recorded during the past week. In response, authorities decided to completely shut down districts and businesses to prevent the virus from spreading uncontrollably. However, major Chinese ports are currently halted, which has been jacking up already-soaring shipping costs as waiting times at berth "skyrocketed," according to analysts in the shipping industry. "The disruptions in Shenzhen and Guangzhou are absolutely massive. Alone, they would have an unprecedented supply chain impact," said Brian Glick, founder and CEO at supply chain integration platform Chain.io.

Spiking shipping costs have been a direct effect of the closure of the Chinese ports. But higher freight costs are plaguing the industry since the burst of the sanitary outbreak, skyrocketing by almost 300% over the past 18 months. Small and medium-sized businesses that managed to navigate through the recession are now facing extra hardships to send their products overseas as they can't afford the exorbitant freight rates. According to Drewry Shipping Consultants, prices for containers climbed from $1,486 per 40-foot container in May 2020 to $5,472 by May 2021, but as more and more companies have started to look to convert ocean freight shipments to air freight - since they simply cannot afford both the delays and the huge costs - that is likely to further increase shipping costs.

"This is uncharted territory in terms of carrier profits - in terms of freight rates, in terms of just the level of disruption that the supply chain is seeing," emphasized Simon Heaney, Drewry's London-based senior manager for container research. Heaney revealed he hadn't seen this level of disorder in the market in his career of more than 20 years. "It's unprecedented in terms of the chaos that we're seeing right now," he said.

In a recent Bloomberg piece, one leading economist argued that most Americans are not fully aware of the full impact the current shipping crisis will have on higher prices for consumer goods. It's a ripple effect, and even if companies pass the cost of rising shipping fares directly to their customers, this will only have a minor effect on headline inflation - "but its full impact might be being overlooked," argued Volker Wieland, an economics professor at Frankfurt's Goethe University. "Even if the order of magnitude is smaller than estimated, the dynamic builds over a year and has significant effects. That means there's a danger we're underestimating the impact."

Some big companies, including Costco and Chipotle, have announced that they will pass some of the higher freights costs to their customers, while industry analysts told Bloomberg that the prices of low-cost and bulky goods, such as toys and cheap furniture, is going to soar in the coming months. This crisis may also affect the delivery of other international products that don't come from China. For instance, olive growers in Europe can no longer afford to export to the U.S. This news couldn't have come at a worse time for U.S. supply chains, given that much of California and other key agricultural states are experiencing the worst drought in history and millions of acres of crops are at risk of being destroyed since there's no available irrigation water to all the farmers of the region.

"If you would have asked 100 economists a year ago on this date where the world would go, probably 100 economists would have told us: "it's going to be doom and gloom, we're going to go into a recession". And that is what it looked like: Global shipping volumes tanked," said Sanne Manders, the Chief Operating Officer of Flexport. With all things considered, we should all be preparing for the challenges that are looming on the horizon because we're about to enter times of horrific inflation, turbulence in international trade, acute food shortages, explosive prices, extreme weather, and another worldwide wave of virus infection that can send our economy back to rock bottom with the blink of an eye."

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