It costs over three times to ship a container from Asia to the USA now than it did two years ago. What has caused this spike in shipping prices? Will these prices continue to rise?
Supply and demand analysis:
Since the onset of the pandemic, there has been a shift in consumption patterns. The demand for goods increased as people started spending their increased savings on goods rather than on services. People are spending on home appliances and gadgets- to upgrade their remote office spaces and gyms. Imports in the USA are 40% higher and the peak shipping season has not even begun. This paradigm shift has led to severe congestion and crunch at the ports, thereby increasing prices.
Congestion on ports has increased transit time by 42%. The ships are stuck at American ports for longer than expected not allowing them to return to Asia. There are no buffer ships to replace missing or delayed ships. Thereby, also causing a drop in supply from the USA.
Ship movement peaked in September 2020 then progressively dropped. Instances like COVID breakout at the Yantian port and blockage of the Suez Canal by Evergiven worsened the problem and increased the pressure on shipping lines. Throughout this spike, shipping lines are facing operational challenges but are still managing to make money, while the shippers are desperate and paying huge amounts.
The shipping industry’s infrastructure is built for seasonal highs but the pandemic has caused a steadily growing year-round demand with no signs of slowing down. This non-stop demand left container lines with no breathing room resulting in long-standing backlogs and delays. Increasing demand and massive sales volumes are not giving manufacturers a chance to replenish their inventory either.
Future analysis:
It is unlikely that consumer demand will decline until COVID-19 restrictions are completely lifted. Consumers are expected to continue to spend their savings on goods. With the peak shipping season around the corner, the prices will continue to remain high. This season spans from August to October and it primarily consists of back-to-school goods and holiday presents. However, soon we will witness increased overall capacity as there has been a surge in new vessel orders by shipping companies. The situation is estimated to cool off by the start of 2022.
65% of the shipping industry is comprised of the top 5 shipping companies. The industry is more consolidated so price wars are unlikely. Experts at McKinsey are optimistic that reasonable prices will be established that work for both container lines and shippers.
Impact of shipping on World Trade and Economy:
World supply chains are highly interconnected which determine import-export volumes and therefore impact world economy. Over 80% of the trade volume is transported by ships. There is large trade imbalance- most countries are either large importers or exporters. There is a significant difference in the cost of importing containers to China as opposed to exporting from it.
Each year shipping companies transport billions of tons of goods that could not be moved by any other mode of transport. This cargo makes up a huge chunk of raw materials that are used in industries and for construction in developing countries. The global economy is riding on these goods given the plummeted state of services and tourism.
The fact that the Suez Canal blockage costed 12 percent of the Global Trade or $900m goes to show how much of the World Economy depends on those small containers.
Comments