As shipping costs soar, commodity prices may rise on new disruptions to trade

With shipping costs soaring over the last few months, global trade cannot afford any new disruptions since it could lead to supply chains being affected with prices of agricultural products and metals rising further.

This is particularly valid on the heels of fears that there could be a third Covid wave due to the Delta variant of the Coronavirus, which is spreading fast in some countries, including the US and Europe.

“Given how tight these shipping lines are, any new disruption to trade could pose upside risks to agricultural and metal prices,” said a Fitch Solutions Country Risk and Industry Research (FSCRIR) commentary.

Chaotic conditions

The world’s biggest container company, A.P. Moller Maersk, in a statement on Monday said chaotic conditions in the global supply chain have pushed freight rates higher.

On Friday, Maersk said its income for the June quarter before interest, tax, depreciation and amortization was $5.1 billion, up 200 per cent from the same period a year ago.

Fitch Solutions said shipping costs have continued to increase sharply in recent months with container shipping rates skyrocketing. Rates have increased 79 per cent since the beginning of the year for a 40-foot box.

“Prices of dry bulk shipping (measured by the Baltic Exchange Dry Index) have also risen significantly and are now at their highest level since 2009, with the Baltic Exchange Dry Index having risen by 104 per cent in the year-to-date”, it said.

US-China rates up 500%

According to freight-tracking firm Freightos, rates from the US to China have topped a record $20,000 per 40-foot box, up 500 per cent since the year-ago period.

Fitch Solutions said freight rates have been driven by robust demand for ores, metals and agricultural goods to China.

According to the Cogoport Website, one in three containers missed their scheduled sailing, resulting in a rollover, which means it was scheduled for a sailing later.

A Mumbai-based grains trader said freight rates have increased by three to four times and it was impacting commodity prices. “Leave aside the rise in charges, containers and vessels are also not available,” the trader, who did not wish to be identified, said.

Skyrocketing freight costs were affecting businesses, which did not have ample inventory to tide over the current situation, he said.

The trader said shipping companies were trying to make good the losses they had accumulated earlier. Besides, China was taking away most empty containers either to export or get supplies.

‘ Unable to absorb costs’

“Freight rates have doubled in the last few months. Trade in containers has been ruled out as consumers are unable to absorb the costs,” said Vidya Sagar VR, Director, Bulk Logix.

Delhi-based trade analyst S Chandrasekaran said the high freight rates were affecting demand. “This is an unavoidable situation in view of the rush for containers. But this could lead to payment problems since higher freight puts the trade at a disadvantage,” he said.

Sagar said most shippers were now looking at bulk shipping since it is at least 30 per cent cheaper than shipping by containers. “Earlier, only two or three persons would have come together to engage a bulk vessel. Now, 20-30 shippers come together to hire a bulk vessel, and each one ships small parcels,” he said.

Depleted inventory

Fitch Solutions said the ongoing tightness in the shipping sector was due to a number of factors, including a rebound in manufacturing in China and developed markets, amidst the economic reopening and recovery.

Many companies were trying to rebuild their inventories after production cuts last year. Continued strong demand for consumer goods has resulted in depleted inventory, the agency said.

“Indeed, consumption patterns have clearly shifted amidst multiple lockdowns, towards buying physical goods, and away from services, leading to a boom in e-commerce. Adding to these trends, port and shipping activity has remained constrained by Covid-19 waves and the enforcement of stricter health and safety protocols, which has led to port congestion and has clearly slowed down loading and processing times,” it said.

Though shipping companies have increased capacity in recent months, demand has expanded at a faster rate.

China growth to taper off

But Fitch Solutions held out hope for the situation to stabilise in the months to come. “We forecast China's import demand growth will taper off in the coming quarter, which is likely to help dry bulk shipping rates stabilise as well,” it said.

It pointed out how crude oil shipping rates have been contained amidst a slower recovery in global oil demand and prices. Shipping rates rose in the first quarter, but they have eased in the second quarter. They have stabilised in recent months, it said.

Bulk Logix’s Sagar said bulk freight rates are likely to remain unchanged in the short-term and container shipping could rise further.

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