Shipping rates expected to stay high in 2022, stoking inflation

Ocean-freight carriers pulled in estimated profits of US$150 billion in 2021 - a nine-fold annual jump after a decade of difficulty eking out any gains. PHOTO: REUTERS

LOS ANGELES (BLOOMBERG) - Shipping rates are expected to stay elevated well into 2022, setting up another year of booming profits for global cargo carriers - and leaving smaller companies and their customers from Spain to Sri Lanka paying more for just about everything.

The spot rate for a 40-foot container to the United States from Asia topped US$20,000 (S$26,970) last year, including surcharges and premiums, up from less than US$2,000 a few years ago, and was recently hovering near US$14,000.

Tight container capacity and port congestion also mean that longer-term rates set in contracts between carriers and shippers are running at an estimated 200 per cent higher than a year ago, signaling elevated prices for the foreseeable future.

Large customers of sea-borne cargo like Walmart or Ikea have the heft to negotiate better terms in those deals, or absorb the added expense. Smaller importers and exporters - especially those in poor countries - that rely on carriers to haul everything from electronics and apparel to grains and chemicals, cannot easily pass those costs along or weather long periods of stretched cash flows.

The situation is throwing a spotlight on the market concentration of shipping lines, and their legal immunity from antitrust laws.

"Small- and medium-sized enterprises are being badly affected," said Mr Amruth Raj, managing director of Green Gardens, a vegetable processor based in rural India. After container rates shot up in the past year, more than 50 per cent of his company's capital was wiped out when European buyers balked at the higher costs. "They exploit our desperation."

Ocean-freight carriers pulled in estimated profits of US$150 billion in 2021 - a nine-fold annual jump after a decade of difficulty eking out any gains.

Denmark's A.P. Moller-Maersk, the world's second-largest container carrier, was on track for an annual profit last year that would match or surpass its combined results from the past nine years.

The extended windfall has touched a raw nerve across the political spectrum as economists warn that persistently high transportation prices are stoking inflation and clouding the recovery.

Federal Reserve Bank of Kansas City economist Nicholas Sly has done research that found, in the past, a 15 per cent increase in shipping costs led to a 0.10 percentage point increase in core inflation after one year. Shipping rates, he said, currently are a persistent - rather than temporary or transitory - challenge.

Shipping Alliances

Faced with forces that are upending traditional business models, shippers around the world are pleading with regulators to rein in ocean freight carriers.

Just 10 container lines based in Asia and Europe, led by Maersk, Mediterranean Shipping Co, France's CMA CGM, and China's Cosco Shipping Holdings, control nearly 85 per cent of the capacity for shipping goods by sea. Twenty-five years ago, the top 20 companies controlled about half of the global capacity.

While officially competitors, nine of them operate under vessel-sharing agreements called "alliances" that coordinate schedules and share space on ships. Meanwhile, carriers have long enjoyed leeway from anti-competition laws in most major economies, including in the European Union and in the US.

Pandemic's impact

For the first time, the pandemic demonstrated just how adept the carriers have become at managing the market's supply of cargo capacity, by curtailing it when Covid-19 first shook the world's economy and then ramping it up when demand rebounded strongly, driving prices higher than ever. Shippers have chafed at how the alliances' lock on capacity - the ships, their schedules and speeds, and the millions of steel boxes in circulation - has translated into asymmetric pricing power.

"This market is not working to the benefit of everybody," said Mr James Hookham, director of the Global Shippers Forum, which represents importers, exporters and cargo owners. "We believe this market needs some investigation to make sure those customers are not being abused."

Carriers insist the high prices are an anomalous spike born of pandemic-sparked imbalances in supply and demand that will naturally resolve. Mr John Butler, chief executive of the World Shipping Council, a group representing the container lines, defended the alliances as arrangements that make the whole system work more efficiently. The council points to stronger-than-normal consumer demand in the US, and Mr Butler blames many of today's disruptions on problems with land transportation.

Regulators from the US, the EU and China met in September and determined there was so far no evidence of anti-competitive behavior in container shipping. Still, governments are on high alert as global supply chains are being pushed to the breaking point.

The US Federal Maritime Commission says it has increased monitoring of carrier alliances, to better track trends and spot potential illegal behavior, such as artificially limiting supply or not competing on prices.

In late December, the agency opened an investigation into the Taiwanese carrier Wan Hai Lines alleging relatively narrow violations of fee rules governing container returns. Beyond such steps, even the agency's chairman Daniel Maffei said that under current US law there is little regulators can do to rein in more widespread potential abuse.

Regardless of who is to blame, customers are anguishing over the situation. Smaller importers and exporters have seen their cargo getting "rolled" - bumped like passengers from an oversold flight - and sometimes canceled outright despite contractual obligations with carriers.

In the heart of Sri Lanka's apparel manufacturing belt, exporters are struggling to meet orders as carriers shift more vessels to lucrative routes connecting China to the US and Europe, said Mr Sean Van Dort from the Joint Apparel Association Forum Sri Lanka.

"Yes, they have to make money, don't get me wrong - but when you have a 10 times, 12 times, 16 times higher freight rates - there's something radically wrong," he said.

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