NewsNavigating the High Seas of Inflation: The Lingering Shipping Predicament
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Navigating the High Seas of Inflation: The Lingering Shipping Predicament

Coronavirus has significantly influenced society. One of the primary effects of the pandemic has been economic disruption, which has instigated a global shipping predicament. This crisis is set to continue, affecting the traffic of goods and fueling inflation well into 2023. Thus it seems likely that this situation will not improve for another 12 months. 

More often than not, shipping costs do not feature in economists’ inflation and GDP reports. Companies also tend to agonize more about the cost of acquiring ingredients or raw materials and labour than the cost of transportation. However, this is bound to change in the future. 

While shipping costs remain high, the figures have eased by around 15% from the record highs of more than 11000 pounds per container quoted last September  (according to Freightos FBX index). However, before the pandemic, shipping a container cost 1300 pounds.

Around 90% of the world’s merchandise is shipped by sea. This increases the risk of global inflation, which is already proving challenging. According to experts in the shipping market, like Peter Sand, Xeneta’s chief analyst, the shipping costs are not going to normalize before 2023. Zeneta is a freight rate platform for benchmarking. 

“This implies the higher cost of logistics and transportation or shipping is not a momentary phenomenon,” Sand said. He implied that this could negatively affect  inflation. The cost of shipping, however non-influential it may seem, could influence a permanent rise in product prices going forward. This will result in inflation challenges and influence the overall economy. 

The financial state of shipping products started to worsen following a six-day blockage that occurred at the Suez Canal. This was in March last year. The blockage caused worldwide backlogs and tightened the already straining market. It led to ambiguity about the future of regulations in the fuel and emissions space.

A surge followed this demand for goods from clients in the coronavirus lockdown regions. Dockyards also struggled with Covid-related labour shortages. By early November, about 11% of the world’s loaded vessel capacity was held up in the log jams. This significantly affected all shipping costs. 

One of the largest container ports in the world, took twice as much time than normal to turn shipping containers around before the pandemic. This happened at the End of October at Long Beach in Los Angeles, USA. According RBC Capital Markets estimations, while the worst has passed (pandemic-wise), shipping costs are not likely to go back to normal pre-pandemic levels. It should take a couple more years for things to go back to normal in the shipping world. 

There are plans to unload 3500 more containers every week. Even if the plan is implemented, the backlog will still not clear very quickly – it will likely take a year or more to clear. It is worth mentioning that the reduced shipping costs experienced in September are a false dawn. While it may appear optimistic, things are still fraught with difficulties. 

A report by the United Nations explained that the high shipping costs threaten international recovery from the pandemic. The United Nations suggests that the freight rates are likely to increase import and consumer prices by 11% and 1.5% respectively. This will occur between now and 2023 and is likely to also impact industrial production rates. 

According to Analytic Enterprise Rapid Rating’s CEO, the problem could get worse if smaller businesses are not able to adhere to their commercial responsibilities and battle to stay afloat.

Nevertheless ship orders have risen drastically this year. Rico Luman, ING’s senior economist, says “it should take three years to construct and distribute one, and it is bound to reach 2024 before widespread new capacity hits the water.”

 

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