Logistics

Ripple effect of Suez Canal blockage continues to impact shipping trade

TE Raja Simhan Chennai | Updated on May 25, 2021

FILE PHOTO: Ship Ever Given, one of the world's largest container ships, is seen after it was fully floated in Suez Canal, Egypt March 29, 2021   -  REUTERS

Severe shortage of containers have pushed freight rates to an all-time high

It’s been two months since the Suez Canal blockage happened, but its impact continues to worry the shipping trade as severe shortage of containers have pushed freight rates to an all-time high to key markets like the US and Europe.

One of the worst affected are leather and textile exporters with April to August being the peak season for shipment to enable goods to hit the shelf, well before the Christmas and New Year sales.

Before Covid, the export freight rate per FEU (forty-foot equivalent unit) was $2,000 (ex-Chennai). This increased to around $5,000 by end-2020 and it is now $6,500. “Before Covid, to Europe, it was $1,200 but now it is $5,500,” said a leather exporter.

Read also: Cargo ship stuck in Egypt’s Suez Canal imperils shipping worldwide

The freight started to go up from March 2020 when the Covid-19 pandemic started to spread fast. The Suez Canal blockade by a container ship aggravated the situation multi-fold.

“We are having to pay three times the usual charge both for Europe and the US. There is a huge shortage of containers for export, and we have to wait for more than two weeks for each container,” said Sanjay Lulla, Managing Partner at SM Lulla Industries Worldwide. “Buyers are worried if their orders will be delivered, so they are looking at Vietnam and China,” he added.

Off late, the shipping lines are charging sea freight exorbitantly in particular for the US and is at peak and availability of boxes is a challenge. “In today’s conditions, there is no option but to see how best we can service the customer and how soon we get the boxes and ship them on time,” said T Satyanarayana, Vice President Marketing Thiagarajar Mills (P) Ltd. “We have to do our costing at the time of quotation based on previous shipments to the same destination. Unfortunately, these assumptions are going haywire, and we are losing heavily,” he added.

FOB, CIF

Depending on the customer abroad, the goods are sent on FOB (Free on Board, wherein the customer pays the freight and Insurance ) or CIF (cost, insurance and freight, wherein the seller sends the goods on a predetermined contract). “While generally large-scale buyers prefer FOB, the medium and smaller ones send it on CIF, and these are the ones who are worst affected by the escalation as they have to bear the additional cost,” said G Raghu Shankar of International Clearing and Shipping Agency, a leading freight forwarder.

Also read: Egypt seizes Suez ship ‘Ever Given’ pending $900 million compensation

“There is desperation among exporters as they have committed orders to their clients to deliver the goods. Exporters are willing to bear the additional cost as they don’t want to lose their customers,” he added.

AV Vijaya Kumar of Paramount Shipping Services Private Limited, feels the ocean freight is moving upwards consistently with no sign of flattening. In the pre Covid-19 scenario, the freight to Europe was $550 per TEUs (twenty-foot equivalent) and $800 per FEU. Post Covid 19 and on partial resumption of normalcy (after August 2020) rates for Europe was $1,400 per TEU and $1,800 per FEU – (about $1,000 increase).

After November 2020, shipping lines revised/shared rates on fortnightly basis with a general approach to increase approximately $100 to $200 with fortnight release of rates. After December 2020 added concern was equipment shortage for FEU and rationing of boxes for vessel sailings depending on the rate and relationship.

Also read: Lessons from the Suez Canal blockage

In February 2021, equipment shortage surfaced for TEU and shipping lines released empties on relationship/ acceptance of rates but not fully meeting exporter requirements. Maersk Line has stopped accepting bookings stating that their vessels are full until June end. Shipping lines have space constraints for TEUs and accept only 23.5 mt cargo only and above 23.5 tonnes additional $300 to $500 is charged.

“The fluid situation and uncertainty of availability of containers or slots in vessels resulting is escalating freight rates is unlikely to change in the months to come,” he said.

Published on May 25, 2021

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