Uncontrollable shipping costs drive up retail prices, from coffee to toys
Soaring prices for shipping merchandise around the world may hit your wallet sooner than you think – from the cup of coffee you get each morning to the toys you thought you were buying for your kids.
Shipping a 40-foot steel container from Shanghai to Rotterdam now costs a record $ 10,522, 547% more than the seasonal average of the past five years, according to Drewry Shipping. With more than 80% of all trade in goods carried by sea, soaring freight costs threaten to push up the price of everything from toys, furniture and auto parts to coffee, sugar and anchovies, compounding the problems. worries about global markets already poised to accelerate inflation.
“In 40 years in toy retailing, I have never experienced such tough pricing conditions,” Gary Grant, founder and executive chairman of UK toy store The Entertainer, said in an interview. . He had to stop importing giant teddy bears from China because their retail price should have doubled to add higher transportation costs. “Will this have an impact on retail prices? My answer must be yes.
A confluence of factors – high demand, a shortage of containers, saturated ports and too few ships and dockworkers – have contributed to the compression of transport capacity on each freight route. Recent outbreaks of Covid in Asian export centers like China have made matters worse. The pain is more acute on longer routes, making transportation from Shanghai to Rotterdam 67% more expensive than to the west coast of the United States, for example.
Often dismissed as having an insignificant impact on inflation because they represented a tiny part of overall spending, rising transport costs are now forcing some economists to pay a little more attention. Although still considered a relatively minor input, HSBC Holdings Plc estimates that a 205% increase in container shipping costs over the past year could push up producer prices in the Eurozone up to ‘to 2%.
At the retail level, sellers are faced with three choices: stop the trade, increase the price, or absorb the cost and pass it on later, which would actually mean more expensive goods, said Jordi Espin, head of sales. strategic relations at the European Shippers Council. , a Brussels trade association representing around 100,000 retailers, wholesalers and manufacturers.
“These costs are already passed on to consumers,” he said.
Prices for customers are also increasing in other ways. For example, anchovies from Peru have largely stopped being imported into Europe because, with the higher transportation costs, they are not competitive with what is available locally, Espin said. In addition, European olive growers can no longer afford to export to the United States, he said.
Meanwhile, bottlenecks and shipping costs hamper the transportation of Arabica coffee beans, favored by Starbucks, and robusta beans used to make instant coffee, which largely originate from Asia.
Few industry watchers expect container rates to drop much anytime soon. Lars Jensen, CEO of consultant Vespucci Maritime in Copenhagen, told a Flexport Inc. webinar last week that there was “zero slack in the system.”
French shipping company CMA CGM SA, which posted a net profit of $ 2.1 billion in the first quarter compared to $ 48 million for the same period of the previous year, recently indicated that it expects that “the sustained demand for the transport of consumer goods” continues throughout the year.
Shipping costs are more onerous for businesses that move bulky and low-value items like toys and furniture. “If it is bulky product, that means you can’t fit a lot of it in the container and it will have a significant impact on the landed price of the goods,” said The Entertainer’s Grant.
For some lower-value furniture makers, freight now accounts for around 62% of retail value, according to Alan Murphy, CEO of consultant Sea-Intelligence in Copenhagen.
“You just can’t survive on this,” he said. “Someone is bleeding very badly.”
Companies are desperately trying to get around the higher costs. Some have stopped exporting to certain locations while others are looking for goods or raw materials in closer locations, according to Philip Damas, founder and COO of Drewry Supply Chain Advisors.
“The longer these extreme ocean freight rates last, the more structural measures companies will take to shorten their supply chains,” Damascus said. “Few companies can absorb a 15% increase in the total cost of delivering products traded internationally. “
Some companies in Europe are resorting to extreme methods, such as using convoys of trucks to obtain products such as auto parts, bicycles and scooters from China, Espin told the European Shippers Council.
Central bankers have so far been optimistic about the phenomenon, arguing that the rise in consumer prices linked to supply hiccups will not last. European Central Bank President Christine Lagarde said on June 10 that while supply chain bottlenecks will push up producer prices and headline inflation is expected to rise further in the second half of the year. this year the effect will wear off.
Several factors explain the relative lack of concern. Shipping costs are only a small fraction of the final price of a manufactured product, with economists at Goldman Sachs Group Inc. estimating in March – when China-Europe rates were about half of current levels – that internationally, they represented less than 1%.
To top it off, the companies have annual contracts with the container lines, so the prices they’ve frozen are considerably lower than the spot rates that make the headlines. Although the last round of contract negotiations in May reflected the strengthening of the spot market, HSBC trade economist Shanella Rajanayagam said that “long-term rates are much lower than spot rates, even though they are falling. reverberate “.
With the bottlenecks ending, consumer demand is likely to shift to services from goods, but “the risk of course is that higher shipping costs will persist – especially given the shipping disruptions in the world. course – and that producers become more willing to pass these higher costs on to consumers, ”Rajanayagam said.
While many economists note that even a full pass-through of higher shipping rates to consumers will have a marginal effect on headline inflation, Volker Wieland, professor of economics at Goethe University in Frankfurt and a member of the council of German government economic advisers, warns that they may not be sufficiently taken into account.
“Even if the order of magnitude is smaller than estimated, the momentum is built over a year and has significant effects,” he said. “This means there is a danger that we are underestimating the impact.”