By Najib Shah
Bengaluru October 17 (newsin.asia): A crisis is again looming for exporters the world over. And this time it is not just the shortage of containers. Global supply chains are under stress. There is a shortage of many essential products – from intermediates to chemicals, to coal, to semi-conductors – leading to what Economist in its recent lead article called ‘The shortage economy’.
The crisis has now shifted to large container carrying vessels. There are traffic jams at very many of the major ports in the globe with vessels not getting berthing space. There are reports of vessels having to wait for up to 47 days in US ports.
A little background to put matters in perspective is necessary. More than 80% of world trade volume is transported by ships; 70% of such trade being in containers. The global fleet that carries seaborne trade involves dry bulk ships, container ships and oil tankers. These vessels operate either on fixed schedules like in the case of container ships or on flexible timing (‘ocean taxis’) like in the case of bulk cargo. Dry bulk ships account for half the seaborne trade and transport ore, coal, grains.
Insightful research has been done in this regard by Brancaccio G, Kalouptsidi M. and Papageorgiou T (The Role of Shipping in World Trade. https://econofact.org/the-role-of-shipping-in-world-trade )
Though this research is in the context of bulk cargo, it is applicable equally to other categories of trade. The study shows that world trade is greatly imbalanced – countries are either net importers or net exporters. There is thus an inherent imbalance in the availability of vessels and containers.
The research of Brancaccio et al., goes on to show that at any point in time nearly 42% of vessels are travelling without cargo-dramatically adding to costs. They point out that “shipping lines demand more to travel towards a destination with low exports, to compensate for the difficulty of finding a new cargo originating from that destination. All else equal, the prospect of having a return trip without cargo or lesser cargo leads to higher prices. The higher transport costs that exporters face in shipping goods to net importing countries tend to reduce the comparative advantages of exporters in those countries.”
We need to juxtapose this with the fact that China, the ‘factory of the world’ has seen volatility. A slow-down in Chinese imports affects their exports and also has a huge domino effect. This again contributes to the trade imbalance. The US is getting particularly impacted because of the increasing emphasis on outsourcing imports leading to imports far exceeding exports.
Incidentally, but not surprisingly, while trade has suffered, the shipping lines have been doing very well. As a Reuters report points out, the seven largest publicly traded ocean carriers — including companies such as Maersk, COSCO and Hapag-Lloyd — reported more than US$ 23 billion in profits in the first half of this year, compared with just US$ 1 billion in the same period last year.
All this is severely impacting exports at a time when the global economy is slowly limping back to normal and we are entering the peak festive season.
An OECD report (https://www.oecd.org/sdd/its/International-trade-statistics-Q2-2021.pdf) reveals that merchandise trade, both imports and exports of the G20 countries, grew in Q2 of 2021 by 6.4% and 4.1% respectively over the previous quarter. These same phenomena have been noticed in other economies too. In India, for instance, merchandise export in September 2021 was US$ 33.34 billion an increase of over 21% over the corresponding figures in September last year. But imports had gone up too, leading to a trade deficit. The data everywhere substantiates the finding in the study, viz., a mismatch between imports and exports.
The Container Availability Index (CAx) (used to monitor the availability of containers) indicates that inbound containers are at an all-time high. What this again means is an imbalance of inbound and outbound containers at ports.
The crisis has hit China in a big way. Sea freight for a Twenty Equivalent Unit (TEU), the standard dimension of a container, which was US$ 2500 in October 2020 for the US, and US$ 900 for Europe, is today at US$ 12,000 and US$ 8000 respectively, up by more than 350%.
India too has witnessed freight increase by more than 300% over the same period. The situation is the same across all global major ports and across all shipping lines. This is unprecedented and severely impacts trade and increases costs. This in turn has triggered inflation across the globe. According to the US Bureau of Labour Statistics as reported in Forbes ( https://www.forbes.com/advisor/investing/why-is-inflation-rising-right-now/) overall prices have climbed up by 5.4% over last year. IHS Markit (the globally respected source for critical information) has reported ( https://www.cnbc.com/2021/09/01/supply-chain-delays-wont-be-easily-fixed-and-trouble-will-continue-into-next-year-commentary.html) that the delay in delivery times caused by the surge in imports and consequential clogging of ports are the “most severe ever recorded going back a quarter century.”
Paradoxically this disruption is being caused by a surge in demand, shortage of labor, all laid off during the pandemic and ‘overstressed’ shipping lines.
The inter-dependence of global economies, the monopoly which China enjoys in manufacture of containers (90% of the containers are manufactured there with just one company CIMC having a 40% share) has not helped matters. The pandemic induced global shutdown, the Suez Canal crisis, the mismatch between imports and exports, the increase in consumer demand caused by consumers cash rich on doles and having little avenues to spend, first led to containers becoming scarce, to congestion in ports and shortage of shipping vessels itself.
The present crisis is expected to last till mid-2022. There are no easy solutions. In the meantime, consumers the world over have to brace themselves for delays and rising prices.
(The writer is a retired Chairman of the Indian Central Board of Indirect Taxes and Customs)