On March 1st, I wrote in this space about a scarcity of shipping equipment and containers available for ocean freight from China to the U.S. and Europe impacting the supply chain for consumer goods and the costs companies were paying to import products. At that time, indexes tracking such container rates had surpassed $5,000 from typical levels in the low-to-mid $1,000s. Additionally, capacity limits were adding weeks to supply chain lead times causing late arrivals to miss their delivery windows – leading to chargebacks, lower sell-throughs and outright cancellations, especially for fashion and seasonal merchandise. Since that time, the situation steadily worsened week-by-week until a month ago – when availability constricted precipitously and costs rocketed even higher. The past month of extreme supply chain woe has coincided with earnings season, as publicly traded companies report on recent performance and, typically, update their outlooks for the remainder of the year. With seemingly (if not literally) every consumer company’s quarterly disclosures citing supply chain logistics and container prices as an issue, attention on this usually mundane back-of-house cost center has exploded across chat boards, trade journals, business publications and even mainstream media.
The underlying statistics leave everyone yearning for the olden days of March! The Freightos Baltic Index tracking container cost for the bellwether China/East Asia to North America West Coast route measured last week at $18,425 (not a typo). When this metric had just crossed $5,000 in early March, it was already a stunning 4X increase from a year earlier. At that time, to provide context on the extremes being required of some businesses, I shared that Consensus clients had confided paying an up to then-astronomical $9,000 per container. Similarly, we now hear clients stretching up to $23,000. In fact, Freightos reports that its composite index includes a high price of $28,101 for the week ended August 27th. The following chart reflects the Freightos Baltic Index for China/East Asia to North America West Coast container shipment prices over the past year (and compared to the preceding year).
While the costs of operating cargo ships have increased over the same period as the freight rate spike, consider that the rate for the return trip transporting containers of U.S. exports from California to China is $914.
The Delta variant driving the ongoing fourth wave of COVID-19 across the globe has exacerbated supply chain pressures. Factories have slowed or paused to allow outbreaks to subside, making transportation time even more critical to meet delivery deadlines. Ports in Asia also have closed for days or weeks to quell outbreaks; most notably, the Meishan terminal handling approximately 25 percent of volume at China’s second largest port of Ningbo-Zhoushan closed from August 11th to 25th following a positive COVID test. As this infection wave plateaus and then recedes, hopefully the mechanics of the global supply chain will begin to catch up and be more prepared for the ups and downs to come as the pandemic runs its course. Like everything these days, opinions vary widely about when and what the recovery to supply chain normalcy will look like. Even optimists see the current state-of-play sustaining into 2022 and costs remaining above historic pre-COVID levels for the foreseeable future. Many experts with the most informed views are likely just too busy addressing each day’s evolving challenges to formulate or share prognostications.
In the interim, business managers are left with few choices – none of which are good. The biggest businesses have chartered entire cargo ships for their own use. But for everyone who is not a Walmart or a Home Depot, the question is whether to pay the market rates or wait them out. I have yet to hear anyone willing or able to wait. With no way to know how costs will evolve over what timeframe, businesses can only take the plunge heading into the key holiday selling season lest they suffer the consequences of economist John Maynard Keynes’ famous aphorism: “The market can stay irrational longer than you can stay solvent.”
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