An unprecedented crisis in shipping
Off late shipping costs have gone through the roof, making life miserable for the businesses. The freight rate for a 40-foot container to European base ports from Chattogram has reached to $5,000 level.
Six months back this rate was hovering between $1,500 to $2,000. This is not the case for shipments to Europe only. It applies to all the trade routes.
Freight costs to the US has also skyrocketed -- an overall rise of 85 per cent in recent times compared to that of October 2020.
Traditionally, for imports, freight costs used to be much lower than that of exports. That situation has also changed. Rates for imports have also gone up significantly.
This crisis is not specific to Bangladesh only. Rather, it is similar or worse elsewhere across the globe.
Freight rates from China to the US and Europe have surged 300 per cent compared to the rate of March 2020.
Spot rates for the Asia to North Europe route have seen a nearly 264 per cent year-on-year rise. Freight rates for Asia to the US West Coast are also up by 145 per cent.
The challenge is multifold.
There are acute shortages of containers, because of which shippers around the world have to wait for weeks to get the boxes.
A study suggests against the demand of 100 containers there are only 50 containers available.
That is not the end of the story. To add to the sufferings, transit time to all the major destinations has also increased quite noticeably. A consignment would normally require 25-30 days to reach to the major European ports from Chattogram, whereas nowadays, it requires a minimum of 45 days.
Similarly, to reach to the US West Coast the transit time used to be 30 days which is now at least 50 days.
To add to the worries, a shipping jam occurred on March 23 in one of the world's busiest shipping arteries involving the Suez Canal.
About a quarter mile long (400 metres), a 224,000-tonne container vessel named Ever Given ran aground diagonally across the single lane stretch of the southern canal during a dust storm.
On Wednesday, 185 vessels, mostly bulk carriers, container ships and oil or chemical tankers, were waiting to transit the 120-mile canal connecting the Red Sea with the Mediterranean, according to shipping data compiled by Bloomberg.
As a result, it created another setback for global supply chains, which are already strained by chaotic congestions and a shortage of containers in many ports due to the impact of the pandemic.
A good thing is the freight rates have been stable for last so many years. But an abnormal increase in transit time is really a bolt from the blue in the context of so many other challenges businesses have been dealing with in the past one year due to the pandemic. Experts have identified some of the major reasons behind this crisis:
Lockdown: To contain the deadly virus, many countries imposed lockdown. As a result, normal economic activities were restricted. Containers were lying at different destinations for a longer period of time as there was not enough cargo to fill and ship those out.
Consequently, when the restrictions were being lifted, many countries resumed normal operations, there were shortages of containers at the right places.
Limited ship time: As the demand had dropped significantly during Q1 of last year, major shipping lines were forced to reduce number of ships plying in different routes.
Congested ports: During the lockdown, cargo handling got slowed down massively because of limited operations at different ports. This caused severe delays in vessel turnaround time as well.
Changes in buying behaviour: There have been noticeable changes in consumers' buying behaviours during pandemic period. As there were restrictions on travelling and some other outdoor amusement activities, consumers spend more money on consumables. Demand for certain items suddenly gone up which changed the traditional container movements.
China bounced back earlier than others: China managed to contain the virus much earlier and was able to resume their production and exports since the beginning of Q2 of 2020. When other Asian countries had started their exports, a significant number of containers were already on their way to Europe and North America. Those containers did not come back quickly to Asia.
Surge in demand for Christmas: Approximately 900,000 TEUs of containers were sent from China to North America during September to cater for the Christmas demand. Chinese exporters were desperate to get boxes, 3 out of 4 containers from the US to Asia were going back empty. Resultantly, many countries did not get enough boxes.
Limited land freight capacity: Because of shortages of trucks and lorry drivers, containers were stuck at the port, couldn't be taken to the customers' premises. Whatever containers were taken to customer ends couldn't be returned back to ports timely. In the process, container turnaround time increased substantially.
Delay in delivering new containers: There were more than 3 million empty 20-foot containers lying at Chinese ports at the end of March last year and 1.2 million in storage at container manufacturers. Due to the surplus of the boxes and in the anticipation that business would collapse as a consequence of the pandemic, there were slump in orders for new containers in 2020 to the chinse container manufacturers who supply more than 90 per cent of global demand.
Consumer demand in the US and Europe started uprising from Q2 last year made the situation reverse. Suddenly, there was a huge jump in container demand and so orders for new boxes went up. The industry did not have enough capacity to manufacture new containers quickly enough.
Given the alarming logistics challenges, what should the businesses do? First and foremost, organisations need to take this into cognizance that, this crisis is not going to over soon.
Therefore, right from the raw material sourcing to distribution of the finished goods, few things need to be readjusted:
- Increase the inventory of raw materials and other items to ensure smooth production
- Add adequate buffer to the supply lead-time
- Go for long term contract with the shipping companies to ensure maximum space in advance
- To absorb the additional freight costs, look for the options to save costs from elsewhere or the last resort is to adjust the price of the finished products
- Increased inventory would put pressure on working capital, so plan accordingly
Business associations should start dialogue with the port authorities and other logistics service providers like the transporters etc. to increase their capacities to ease out the huge congestions.
Here come the government's interventions like providing financial support to the logistics companies to build their capacities.
This global crisis needs to be collectively dealt with by all the key stakeholders, otherwise, situation might get deteriorated further.
The writer is the chairman and managing director of BASF Bangladesh Limited.