The recovery of the global economy is threatened by high freight rates that are likely to continue in the coming months, according to the “Review of Maritime Transport 2021” from the United Nations Conference on Trade and Development (UNCTAD).
“The current surge in freight rates will have a profound impact on trade and undermine socioeconomic recovery, especially in developing countries, until maritime shipping operations return to normal,” UNCTAD secretary general Rebeca Grynspan said. “Returning to normal would entail investing in new solutions, including infrastructure, freight technology and digitalization, and trade facilitation measures.”
Demand for goods surged in the second half of 2020 and into 2021, as consumers spent their money on goods rather than services during pandemic lockdowns and restrictions, according to the report. Working from home, online shopping and increased computers sales all placed unprecedented demand on supply chains.
This large swing in containerized trade flows was met with supply side capacity constraints, including container ship carrying capacity, container and labor shortages, on and off Covid-19 restrictions across port regions, and congestion at ports. This mismatch between surging demand and reduced supply capacity then led to record container freight rates on practically all container trade routes, the report noted.
Drewry’s composite World Container Index (WCI) decreased 0.5 percent to $9,146.41 per 40-foot container of equivalent unit (FEU) for the week ended Nov. 18, but remained 238 percent higher than a year ago. The WCI year-to-date was $7,374 per FEU, which was $4,724 higher than the five-year average of $2,650 per FEU.
The impact of the high freight charges will be greater in small island developing states (SIDS), which could see import prices increase 24 percent and consumer prices by 7.5 percent, while in least developed countries (LDCs), consumer price levels could increase 2.2 percent, UNCTAD said.
Supply chains will continue to be affected by higher maritime trade costs, while low-value-added items produced in smaller economies, in particular, could face serious erosion of their comparative advantages. In addition, concerns abound that the sustained higher shipping costs will not only weigh on exports and imports, but could also undermine a recovery in global manufacturing, the report noted.
A surge in container freight rates will also likely add to production costs, which can raise consumer prices and slow national economies. The high rates will also impact low-value-added items such as furniture, textiles, clothing and leather products, production of which is often fragmented across low-wage economies well away from major consumer markets. UNCTAD predicts consumer price increases of 10.2 percent are possible on these products.
The impact of the high freight rates will not be evenly spread and will be generally greater in smaller economies. It is suggested that prices would rise 3.7 percent in Estonia and 3.9 percent in Lithuania, for example, compared with 1.2 percent in the United States and 1.4 percent in China.
Manufacturers in the United States rely mainly on industrial supplies from China and other East Asian economies, so continued cost pressures, disruption and delays in containerized shipping will hinder production, according to the report. A 10 percent increase in container freight rates, combined with supply chain disruptions, is expected to decrease industrial production in the U.S. and the Euro area by more than 1 percent, while in China production is expected to decrease 0.2 percent.
UNCTAD emphasized that transport costs are also influenced by structural factors, including port infrastructure quality, the trade facilitation environment and shipping connectivity, and there is potential for significant improvements. It urged countries to consider a portfolio of measures that span hard and soft infrastructure and services. Improving the quality of port infrastructure would reduce world average maritime transport costs 4.1 percent, while costs would be reduced 3.7 percent by better trade facilitation measures and 4.4 percent by improved liner shipping connectivity.
It calls on governments to monitor markets to ensure a fair, transparent and competitive commercial environment and recommends more data sharing and stronger collaboration between stakeholders in the maritime supply chain. The report also urged continued monitoring and analysis of trends to find ways of cutting costs, enhancing efficiency and smoothing delivery of maritime trade.
In the medium to longer term, the report said the maritime supply capacity will also be affected by the transition of the industry towards zero-carbon shipping. To ensure that the necessary investment in ships, ports and the provision of new fuels is not delayed, it will be important for investors to count on a predictable global regulatory framework.