LONDON • The skyrocketing price of shipping goods across the globe may hit your pocketbook sooner than you think, from that cup of coffee each morning to toys you were thinking of buying your children.
Transporting a 12m steel container of cargo by sea from Shanghai to Rotterdam now costs a record US$10,522 (S$13,900), 547 per cent higher than the seasonal average over the last five years, according to Drewry Shipping.
With upwards of 80 per cent of all goods trade transported by sea, freight-cost surges are threatening to boost the price of everything from toys, furniture and car parts to coffee, sugar and anchovies, compounding concerns in global markets already bracing themselves for accelerating inflation.
"In 40 years in toy retailing, I've never known such challenging conditions from the point of view of pricing," said Mr Gary Grant, founder and executive chairman of the British toy shop The Entertainer. He has had to stop importing giant teddy bears from China because their retail price would have had to double to add in higher freight costs.
"Will this have an impact on retail prices? My answer has to be yes," he added.
A confluence of factors - soaring demand, a shortage of containers, saturated ports and too few ships and dock workers - have contributed to the squeeze on transportation capacity on every freight path. Recent Covid-19 outbreaks in Asian export hubs like China have made matters worse.
The pain is most acutely felt on longer-distance routes, making shipping from Shanghai to Rotterdam 67 per cent more expensive than to the United States West Coast, for instance.
Often dismissed as having an insignificant impact on inflation because they were a tiny part of the overall expense, rising shipping costs are now forcing some economists to pay them a bit more attention. Although still seen as a relatively minor input, HSBC Holdings estimates that a 205 per cent increase in container shipping costs over the past year could raise euro-area producer prices by as much as 2 per cent.
At the retail level, vendors are faced with three choices: halt trade, raise prices or absorb the cost to pass it on later, all of which would effectively mean more expensive goods, said Mr Jordi Espin, strategic relations manager at the European Shippers' Council, a Brussels-based trade group that represents about 100,000 retailers, wholesalers and manufacturers.
"These costs are already being passed to consumers," he said.
Prices for customers are rising in other ways too. For instance, anchovies from Peru have largely stopped being imported into Europe because with the higher freight costs, they are not competitive relative to what is available locally, said Mr Espin. Also, European olive growers can no longer afford to export to the United States, he said.
Meanwhile, shipping bottlenecks and costs are hurting the transport of arabica coffee beans, favoured by Starbucks, and robus-ta beans, which are largely sourced from Asia.
Few industry observers expect container rates to retreat much any time soon. Mr Lars Jensen, chief executive of consultant Vespucci Maritime in Copenhagen, said on a Flexport webinar last week that there is "zero slack in the system".
Closely held French shipping company CMA CGM SA, which earned net income of US$2.1 billion in the first quarter compared with US$48 million in the year-ago period, indicated recently that it expects "sustained demand for the transportation of consumer goods" to continue throughout the year.
Freight costs are more painful for companies that move clunky, low-value items like toys and furniture. "If they are bulky products, it means you can't get very many in the container and that will have a significant impact on the landed price of the goods," said Mr Grant.
For some lower-value furniture makers, freight now makes up about 62 per cent of the retail value, according to Mr Alan Murphy, CEO of consultant Sea-Intelligence in Copenhagen.
"You can't survive on this," he said. "Someone is bleeding hard."
Companies are desperately trying to work around the higher costs. Some have stopped exporting to certain locations while others are looking for goods or raw materials from nearer locations, according to Mr Philip Damas, founder and operational head of Drewry Supply Chain Advisors.
"The longer these extreme shipping freight rates last, the more companies will take structural measures to shorten their supply chains," he said. "Few companies can absorb a 15 per cent increase in total delivered costs."
Some firms in Europe are resorting to extreme methods, like using trucks to get products including automotive parts, bikes and scooters from China, said Mr Espin.
Central bankers have so far been sanguine, arguing that the rise in consumer prices tied to supply hiccups would not last.
European Central Bank president Christine Lagarde said on June 10 that while supply-chain bottlenecks would push up production prices and the headline inflation rate is expected to rise further in the second half of this year, the effect will fade.
Several factors explain the relative lack of concern. Shipping costs constitute only a small fraction of the final price of a manufactured good, with economists at Goldman Sachs Group estimating in March that internationally, they made up less than 1 per cent.
To top that, companies have annual contracts with the container lines, so the prices they have locked in are considerably lower than headline-grabbing spot rates.
Although the latest round of contract negotiations last month reflected the stronger spot market, HSBC trade economist Shanella Rajanayagam said "the longer-term rates are much much lower than the spot rates, even if they are feeding through".
With the end of lockdowns, consumer demand is likely to shift to services from goods, but "the risk of course is that higher shipping costs persist - especially given ongoing shipping disruption - and that producers become more willing to pass these higher costs on to consumers", said Ms Rajana-yagam.
While many economists note that even a full pass-through of higher shipping fares to consumers will have a marginal effect on headline inflation, Dr Volker Wieland, professor of economics at the Goethe University in Frankfurt and a member of the German government's council of economic advisers, warns that they might not be sufficiently factored in.
"Even if the order of magnitude is smaller than estimated, the dynamic builds over a year and has significant effects," he said.
"That means there's a danger we are underestimating the impact," he said.