SMBs most hurt by rising tide of freight costs: study

SMBs most hurt by rising tide of freight costs: study

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  • Small and medium-sized businesses or SMBs worldwide contribute over 25% of the US$18 trillion maritime trade
  • While every exporter and importer felt some degree of the brunt from the economic contraction, the most heavily affected were the SMB traders
  • As of June 10, 2021, Drewry’s composite World Container Index peaked at $6,727, up by more than 300% since the emergence of the coronavirus in December 2019
  • Desperate companies fighting to export their products abroad meant their willingness to pay to acquire containers was relatively high, and they ended up paying premium rates

Small and medium-sized businesses (SMBs) have been the most badly hit by the unprecedented rise in sea freight costs, the spike in rates taking a big slice of their small profits and making survival nearly impossible, according to a new report from Drip Capital.

The California-based digital trade finance company said the SMB sector worldwide contribute over 25% of the US$18 trillion maritime trade, but has been going through a more profound and widespread crisis since the onset of the COVID-19 pandemic and the resulting economic contraction.

“While every exporter and importer felt some degree of the brunt from the economic contraction, the most heavily affected were the SMB traders of the world,” Drip Capital said in its report on the global shipping crisis.

“The entire global supply chain has been disrupted. It has become challenging to cater to the buyer’s demand because of the shortage of shipping containers,” Jignesh Mehta, CEO of Rise and Shine Overseas, a small agri-products exporter from India, told Drip Capital.

“Even after getting a container, we pay astronomical ocean freight costs that we have never seen before. The agri-commodity industry operates on low-profit margins, and this spike in freight rate has been deeply cutting into our margins, and survival at times has become tough.”

Beginning of a crisis

The shipping crisis is a consequence of the uneven post-COVID-19 economic recoveries of the world’s largest importing and exporting countries, said the report. The novel coronavirus has hit the world with multiple waves and new variants. But different countries have had different experiences when it comes to lockdowns and the subsequent easing of restrictions.

The COVID-19 pandemic led to an economic contraction across the world. In March 2020, with social distancing protocols and coronavirus clusters amongst dockworkers, there emerged a shortage of containers in Asia as empty metal boxes were stranded at North American and European ports. As China started to recover from the virus and its economic impact, it was flushed with orders from North American and European markets, and it recorded a 3.5% year-on-year growth in April 2020.

Hence, China began ramping up its global empty container repositioning program. On the other hand, more cargo came into consumer-led economies like the US, where the goods movement system had slowed down due to a lack of workforce and a series of lockdowns.

Between August and October, when the lockdown was gradually relaxed, and demand started picking up in the west, the requirements for shipping containers returned. This surge in demand, coupled with the fact that empty containers were at the wrong place at the wrong time, saw Drewry’s composite WCI jump by almost 27%, from US$2,059 at the start of August to $2,615 at the end of October.

But the worst was yet to come, noted the report. Desperate companies fighting to export their products abroad meant their willingness to pay to acquire containers was relatively high, and they ended up paying premium rates. This led to shipping costs skyrocketing, and Drewry’s composite World Container Index (WCI)—a global index for container spot market freight rates on all the major routes—rallied from $2,628 at the start of November 2020 to a whopping $5,340 in January 2021.

Simultaneously, freight rates for the US went up too, though not that substantially. It became harder for US exporters to get containers because of China’s aggressive tactics to bring back empty containers. This competitive environment affected many but especially all the SMB exporters who were burdened by these high costs.

The shortage of shipping containers has led to freight costs skyrocketing over the last year and settling on all-time highs. As of June 10, 2021, Drewry’s composite WCI peaked at $6,727, up by more than 300% since the emergence of the coronavirus in December 2019.

A collective sigh for SMBs

Many other shippers around the world share the plight of SMB exporter Jignesh of Rise and Shine Overseas, said the report released in May 2021. Richard Lam from First Choice Seafood, a major importer and distributor of seafood in the US, highlights that shippers are forced to pay demurrage and storage fees to shipping lines over and above the mammoth freight costs.

“It has become difficult to manage inventory due to this crisis which is beyond our control. We will be carefully planning our business strategies this year, given that the market is uncertain. Staying stable and afloat will be our main aim” he shared.

Facing similar problems is Sandip Patel from SLT Foods, an importer of food products in the US, who said, “Our main business is in the west coast where the logjam is causing a long delay of three/four weeks. Hence we are trying to divert our shipments to the east coast. Moreover, the repeated opening and closing of the country’s borders has made inventory uncertain. To be on the safer side, we are trying to keep at hand more inventory than we would normally do. Our profits have been affected, and we don’t foresee this problem going away anytime soon.”

Some SMBs have had to change their business plans for the new financial year. Jignesh said, “I trade with products that have a low shelf life. Delays in shipments mean the products would barely have a few months on the shelf of the buyers, who now run the risk of not selling the products. New orders will not be placed if the buyer suffers a loss. As a result, my strategy for the coming year until the container shortage issue persists is to only export on shorter and close-by trade routes. To avoid spoiling my trade relations, for the rest of 2021, I will not be servicing long-distance clients.”

To summarize, the crisis has primarily arisen for four reasons—a significant fall in the availability of containers, reduced workforce, fewer shipping vessels operating, and erratic movements in demand for various commodities, said the paper.

However, all is not bleak. Sachin Malani from Shree Metal Products, an industrial metal goods exporter from India, commented, “The buyers are understanding the gravity of the issue and are willing to share the ocean freight costs with us. They are also willing to renegotiate the product rates. There is cooperation by everyone in the shipping industry in these pressing times.”

But Malani is also worried, adding: “If the transport cost keeps increasing, there might come a time when our local distributors in the US start doing a cost-benefit analysis. They might evaluate whether they should keep importing from us or source locally from the US. Competing with US manufacturers could be a problem for Indian SMBs.”

This seems to be a worry shared by many more Indian small and medium exporters who do not see this crisis normalizing soon, said the report.

As countries continue to roll out massive vaccination drives and pandemic restrictions are lifted globally, consumers are more likely to spend on recreational activities like travel, entertainment, and hospitality. This would bring some relief to merchandise exporters, said the report. “However, until then, the container crisis will continue to wreck the shipping industry. It’s time to look at the container shipping industry holistically and as a key enabler of globalization and not just a means of transportation of goods.”

Photo by Ian Taylor on Unsplash

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