Shipping costs: Another danger for inflation watchers to navigate



Container ships wait in front of the congested ports of Los Angeles and Long Beach in California. Photo: Reuters / FILE


Container ships wait in front of the congested ports of Los Angeles and Long Beach in California. Photo: Reuters / FILE

Similar to the coronavirus pandemic and the economic disruptions it caused, a global shipping crisis is expected to delay the movement of goods well into 2023 and fuel inflation.

Shipping seldom plays a role in economists’ inflation and GDP calculations, and businesses are more concerned with raw material and labor costs than they are with transportation. But that could change.

The cost of shipping a 40-foot container unit (FEU) is down about 15 percent from record highs of over $ 11,000 in September, according to the Freightos FBX Index. But before the pandemic, the same container was only $ 1,300.

With 90 percent of the world’s goods transported by sea, there is a risk that global inflation will worsen, which is already proving to be more difficult than expected.

Peter Sand, chief analyst of the freight rate benchmarking platform Xeneta, does not expect container transport costs to normalize before 2023.

“That means the higher logistics costs are not a passing phenomenon,” said Sand. “That means trouble for inflation … Shipping’s share of total prices, however small, is much larger than ever and could raise prices permanently in the future.”

Sea transport costs initially skyrocketed after a six-day blockade of the Suez Canal in March caused backlogs around the world. This exacerbated an already tight market for ship rentals as uncertainty about future fuel and emissions regulations had pushed orders for new ships to record lows.

Then demand for goods rose from consumers in coronavirus lockdowns as shipyards grappled with COVID-related labor shortages.

At the beginning of November, 11 percent of the world’s loaded container volume was in traffic jams, less than in August but well above the 7 percent before the pandemic, Berenberg analysts estimate.

At the end of October, the ships in Los Angeles / Long Beach, one of the largest container ports in the world, took twice as long to turn as before the pandemic, estimates RBC Capital Markets.

While the worst may be over, RBC analyst Michael Tran doesn’t expect freight prices to return to pre-pandemic levels in the next few years.

Even if plans to unload an additional 3,500 containers each week are implemented, the Los Angeles / Long Beach backlog is unlikely to resolve before 2023, he said.

“The price drop that we saw in late September is a false dawn. What we’re seeing from a big data perspective is that it’s not getting much better.”

A United Nations report last month said high freight rates are threatening global recovery, suggesting they could increase global import prices by 11 percent and consumer prices by 1.5 percent by 2023.

The impact also spreads; A 10 percent increase in container freight rates will reduce industrial production in the US and Europe by more than 1 percent.

The report found that the prices of cheaper goods will rise proportionally more than more expensive ones and that poor countries that produce low value added products such as furniture and textiles will have the greatest impact on competitiveness.

The retail price of a low-end refrigerator will increase 24 percent compared to 6.5 percent for a more expensive brand, said Ben May, director of macro research at Oxford Economics, adding, “Businesses could just stop making very cheap refrigerators deliver because it just won’t be worth it. “

The shipping boom was expected to subside as the economic reopening allows people to spend on travel and restaurants instead of clothes or appliances.

However, this theory is being challenged by new COVID flavors and the huge pandemic time savings customers could put in even more goods.

During last reporting season, toy maker Hasbro, retailer Dollar Tree and consumer goods giant Nestle were among the companies complaining about freight costs – and easing price increases.

With the US inventory-to-sales ratio near a record low, companies need to restock their inventories as well.

“This will support demand for goods in the first half of next year,” said Unicredit analysts.

The problem could worsen if smaller companies fail to meet their commercial obligations and struggle to stay afloat, said James Gellert, CEO of analytics firm RapidRatings.

“These time bombs have been blown through the supply chains of large companies and will cause many problems for their customers who depend on their goods and services.”

Real relief can only come when more vessels appear.

Ship orders have increased significantly this year. But it takes three years to build and deliver one, and it will be a sizable new tonnage of water before 2024, predicts ING chief economist Rico Luman.



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