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Surging freight rates push up import prices while shippers book profits

Rising freight rates are threatening to push up global import prices by 11% by 2023, according to a UN report, as shipping lines post record profits for the third quarter.

High freight prices, if sustained, will have a knock-on effect on import and consumer price levels, according to research by the United Nations Conference on Trade and Development (UNCTAD).

Titled the Review of Maritime Transport, the report says freight rates are expected to remain high, fuelled by continued strong demand against a backdrop of growing supply uncertainty and concerns about the efficiency of transport systems and port operations.

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The average price for a 40-foot container stands at US$9,146.41, according to shipping consultancy Drewry’s World Container Index. The benchmark decreased 0.5% last week but remains 238% higher than a year ago. Drewry expects rates to remain steady this week.

The report comes as container lines are booking hefty profits. Last week, French shipping line CMA CGM reported an eye-watering profit of US$5.6bn for the third quarter, up from US$567mn for the same period last year.

It is a similar story at other major carriers; Maersk, for example, notched up a profit of US$5.5bn for Q3 – a fivefold increase on the same period last year. “Ocean performance was driven by high rates in an exceptional market during which we kept growing our long-term contract business, thus guaranteeing reliable transportation to our customers,” said Maersk CEO Søren Skou in the company’s financial report.

In what they said was an attempt at calming the market and inflation fears, shipping companies moved to freeze spot rate increases earlier this year and shift to longer-term contracts.

However, experts were sceptical of the impact of such measures. “In other words, setting a cap on spot rates is a different way of saying that a higher willingness to pay on spot is not necessarily what gets you space on the ship. And, of course, if the market is at peak anyway there is nothing lost in implementing such a cap,” Lars Jensen, a shipping container specialist, wrote on LinkedIn at the time.

Steve Saxon, a partner at McKinsey, said in a briefing last week that longer-term contracts are likely to become more common and this will help stabilise the market. He added that shipping rates may “normalise” in the first half of 2022: “When we say normalise, we don’t see rates likely to fall back down to the levels seen in 2019.” In a less optimistic scenario in which there is prolonged congestion at ports or further Covid outbreaks, rates will remain elevated next year, he said.

 

High price to pay

The potential effect of high freight rates on consumer and import prices varies by country groupings. UNCTAD suggests small island developing states, or SIDS, and least developed countries (LDCs) are most at risk of higher prices because they depend more on the international trade system for goods.

The research shows SIDS are facing a 24.2% hike in import price levels, while LDCs could be lumped with an 8.7% rise (figure 1). Meanwhile landlocked developing countries (LLDCs) face an import price increase of just over 3%, with the global average standing at nearly 11%.

Figure 1: Potential impact on import and consumer price levels



“The impact is generally greater in smaller economies. Thus, in Estonia consumer prices would rise by 3.7% and in Lithuania by 3.9% compared with only 1.2% in the United States and 1.4 per cent in China,” states the report.

“This partly reflects their greater ‘import openness’ – the ratio of imports to GDP – which is typically higher in smaller economies – 55% in Lithuania and 60% in Estonia, compared with 11% in the United States and 15% in China.”

The findings also indicate that sustained high shipping rates would not only impact exports and imports, as well as production and consumer prices, but also the prospects for short and medium-term economic recovery from the pandemic. Governments including those of China, the US and Vietnam are “worried” about this and have raised concerns about shipping companies, UNCTAD says. An investigation into carriers has also been launched by competition authorities in Australia.

Elsewhere, UNCTAD’s report predicts that annual growth in maritime trade between 2022 and 2026 will slow to 2.4%, compared with 2.9% over the past two decades. It also states the pandemic has accelerated maritime “megatrends” such as digitalisation and sustainability that are set to transform industry over the longer term.

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