Global demand’s recovery from the COVID19 outbreak saw Indian exports rise by 46% from a year earlier in August 2021. Beneath this recovery lies perhaps the most demanding shipping and logistics crisis in modern supply chains history. Shipping rates have skyrocketed 300% from the pre-pandemic levels. Drewery Shipping says that the cost for transporting a 40ft container from Shanghai to Rotterdam is now $14,047, up 632% from last year. With further increase expected, rising freight rates could immensely detriment Indian export’s competitiveness. Here’s a glance on the developments and what it means for the economy:
1. SME SECTOR UNDER INTENSE PRESSURE
The shipping crisis has come about due to issues with container availability, diminished workforce, fewer shipping vessels in operation, and erratic demands for various commodities. The SME sector has been struggling to absorb the increased costs. Exporters have to face delays and lose orders. Due to stressed margins, SMEs are choosing to keep shipping lines short and closing supply on longer routes. Rising shipping costs could worsen an SME sector already under fire by the pandemic’s tumult.
2. RESHORING COULD HURT INDIAN EXPORTERS
Reshoring is the process of bringing a business operation back to the home country from which it had been originally moved. Rising shipping costs have led Indian exporters to fear the worst. If the crisis does not abate, consumer-led economies like the US could have local sellers rethinking sourcing decisions, opening up opportunities from suppliers within their country. This would end up plummeting Indian export and becoming a challenge for the economy.
3. RISE IN DOMESTIC PRICES
All increased costs have a way of trickling down to the consumer. The rise of shipping costs from China by 200% has hurt the Indian engineering, auto-parts, pharmaceuticals and medical services industries. Indian imports from China far exceed Indian exports, meaning India is a net importer. Consumer items coming from China such as electronics, computer hardware, telephone equipment will see their prices hiked in the markets. In confluence with this is an upsurge in crude oil rates meaning that the Indian economy could suffer from accelerated inflation.
4. SHIPPING COMPANIES RICHER THAN EVER
American President Joe Biden signed an executive order urging the Federal Maritime Commission to amp up its efforts to combat unfair competition. French shipping company CMA CGM SA posted an income of $2.1Billion as compared to $48Million a year ago. Danish shippers AP Moller-Maersk announced an income of $2.7Billion, up 13 times from last year.
In India, there are allegations of cartelisation and Monopolisation in the shipping sector. Experts say that companies are deliberately keeping shipping lines closed or under-employed to keep sea freight rates high. There are demands for the Indian regulators to step in, like the American government, and curb any such practices.
5. GRIM FUTURE
For small businesses, Freight rates now constitute up to 62% of their retail cost. Shipping rates are skyrocketing, and they will continue to skyrocket. It is for exporters to find alternative routes and markets for their goods. Supply to European hotspots such as Turkey and Spain might become a better choice than sending a container to the US. In any case, as the shipping crisis is expected to worsen in the short term, export traders must prepare for a grim future.
SHIPPING CRISIS: KEY FACTS
- More than 80% of all goods are transported by sea.
- The Shipping crisis came about due to the irregularities in countries ending their respective lockdown.
- Suez Canal blockage in March accelerated the pricing surge.
- Some European companies are using truck convoys from China to get products like Automobile parts, bikes and scooters.
- A 20ft container from India to North America cost an average of $1800 during pre-COVID times, now increased to $6000.
- Freight rates from Mundra Port to the US was around $2,000 and has now gone up to $10,000 to $11,000.