Shipping costs present another danger to inflation-watchers
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The global shipping crisis has been delaying goods traffic and fueling inflation since at least 2023, much like the Coronavirus pandemic and the economic disruption that it caused.
Shipping is rarely accounted for in economists' inflation and GDP calculations, and companies focus more on raw materials and labour costs than transportation. But that might be changing.
The cost of shipping a 40-foot container (FEU) unit has fallen by some 15% from record highs above $11000 in September, according to Freightos FBX index. Amazon Delivery TopAlpha Yet the same container cost just $1300 before the pandemic.
90 percent of the world's merchandise is shipped by sea, which will most likely worsen global inflation, which is already proving to be more troublesome than we expected.
According to Peter Sand, chief analyst at Xeneta, container shipping costs are not expected to normalize before 2023.
Consequently, Sand said, the higher logistics cost is not a transitory phenomenon. It means trouble for inflation. The element of shipping, small as it may be, is much larger than ever before, and it means future price rises are likely.
The cost of shipping by sea soared after a six-day captcha of the Suez Canal in March caused backlogs around the world. It further tightened already strained vessel-hiring market, because a lack of certainty about future fuel and emissions regulation had pushed orders for new ships to record lows.
Then, when the coronavirus lockdowns hit, consumer demand surged, while dockyards were facing labour shortages due to the disease.
Early in November, Berenberg analysts estimated that 11% of the world's loaded container volumes were held up in a bottleneck, down from August peaks but far above the pre-pandemic 7%.
BACKLOG UNTIL 2023
As of late October at Los Angeles / Long Beach, the world's largest container port, ships are taking twice as long to turn around as they did before the pandemic, RBC Capital Markets estimates.
RBC analyst Michael Tran says freight prices will not return to pre-pandemic levels for at least another two years, even after the worst may have passed.
Even if plans are implemented to unload an additional 3500 containers each week, Los Angeles / Long Beach's backlog won't be cleared until 2023.
Prices weakened at the end of September, but that was only a false dawn. Big data suggests that things are not getting better. (Graphic: Shipping rates,
Last month, the UN warned that high freight rates were hurting the global economy, predicting that they would increase worldwide import prices by 11% by 2023, and consumer prices by 15% by then.
Also, the impact ripples out; a 10% increase in container freight rates reduces U.S. and European industrial production by over 1%.
NOT WORTH IT
Low-value-added goods, such as furniture and textiles, will take the biggest hit to competitiveness because their prices will rise proportionally more than dearer goods.
According to Ben May, head of macro research at Oxford Economics, the retail price of a low-end refrigerator will rise by 24 percent compared with 65 percent for a more expensive one. Manufacturing firms may stop shipping very cheap refrigerators, as the cost just isn't worth it.
Shipping boom should abate as economic reopening allows people to spend on travel and dining out rather than clothing and appliances.
New COVID variants challenge this theory, as well as huge time savings that customers could funnel into more products and services.
Companies including Hasbro, Dollar Tree and Nestle complained about rising freight costs during the last earnings season.
Businesses will also need to restock with the inventory-sales ratio near record lows.
Analysts with Unicredit predict that demand for goods will rise in the first half of next year. (Graphic: Inventories,
According to James Gellert, CEO of analytics company RapidRatings, the situation could deteriorate if smaller companies cannot meet their commercial obligations.
Large enterprises have embedded these time bombs throughout their supply chains, which will pose many problems for their customers who rely on the goods and services they provide.
Real relief may only come after more vessels appear.
Ship orders have risen significantly this year. Rico Luman, senior economist at ING, predicted that it will be 2024 before huge amounts of new tonnage can be added to the ocean. There has been an increase in ship orders this year, as shown in the graph below.
Shipping is rarely accounted for in economists' inflation and GDP calculations, and companies focus more on raw materials and labour costs than transportation. But that might be changing.
The cost of shipping a 40-foot container (FEU) unit has fallen by some 15% from record highs above $11000 in September, according to Freightos FBX index. Amazon Delivery TopAlpha Yet the same container cost just $1300 before the pandemic.
90 percent of the world's merchandise is shipped by sea, which will most likely worsen global inflation, which is already proving to be more troublesome than we expected.
According to Peter Sand, chief analyst at Xeneta, container shipping costs are not expected to normalize before 2023.
Consequently, Sand said, the higher logistics cost is not a transitory phenomenon. It means trouble for inflation. The element of shipping, small as it may be, is much larger than ever before, and it means future price rises are likely.
The cost of shipping by sea soared after a six-day captcha of the Suez Canal in March caused backlogs around the world. It further tightened already strained vessel-hiring market, because a lack of certainty about future fuel and emissions regulation had pushed orders for new ships to record lows.
Then, when the coronavirus lockdowns hit, consumer demand surged, while dockyards were facing labour shortages due to the disease.
Early in November, Berenberg analysts estimated that 11% of the world's loaded container volumes were held up in a bottleneck, down from August peaks but far above the pre-pandemic 7%.
BACKLOG UNTIL 2023
As of late October at Los Angeles / Long Beach, the world's largest container port, ships are taking twice as long to turn around as they did before the pandemic, RBC Capital Markets estimates.
RBC analyst Michael Tran says freight prices will not return to pre-pandemic levels for at least another two years, even after the worst may have passed.
Even if plans are implemented to unload an additional 3500 containers each week, Los Angeles / Long Beach's backlog won't be cleared until 2023.
Prices weakened at the end of September, but that was only a false dawn. Big data suggests that things are not getting better. (Graphic: Shipping rates,
Last month, the UN warned that high freight rates were hurting the global economy, predicting that they would increase worldwide import prices by 11% by 2023, and consumer prices by 15% by then.
Also, the impact ripples out; a 10% increase in container freight rates reduces U.S. and European industrial production by over 1%.
NOT WORTH IT
Low-value-added goods, such as furniture and textiles, will take the biggest hit to competitiveness because their prices will rise proportionally more than dearer goods.
According to Ben May, head of macro research at Oxford Economics, the retail price of a low-end refrigerator will rise by 24 percent compared with 65 percent for a more expensive one. Manufacturing firms may stop shipping very cheap refrigerators, as the cost just isn't worth it.
Shipping boom should abate as economic reopening allows people to spend on travel and dining out rather than clothing and appliances.
New COVID variants challenge this theory, as well as huge time savings that customers could funnel into more products and services.
Companies including Hasbro, Dollar Tree and Nestle complained about rising freight costs during the last earnings season.
Businesses will also need to restock with the inventory-sales ratio near record lows.
Analysts with Unicredit predict that demand for goods will rise in the first half of next year. (Graphic: Inventories,
According to James Gellert, CEO of analytics company RapidRatings, the situation could deteriorate if smaller companies cannot meet their commercial obligations.
Large enterprises have embedded these time bombs throughout their supply chains, which will pose many problems for their customers who rely on the goods and services they provide.
Real relief may only come after more vessels appear.
Ship orders have risen significantly this year. Rico Luman, senior economist at ING, predicted that it will be 2024 before huge amounts of new tonnage can be added to the ocean. There has been an increase in ship orders this year, as shown in the graph below.
