• Sat. Oct 16th, 2021

By Imesha Dissanayake

Maritime Freight rates have been on an upward trend since the second half of 2020. The Drewry’s
composite World Container Index (WCI) as of 30th September 2021 increased to $ 10,361 per
40ft container, which is 292% higher than the same period in 2020. The average composite index of
the WCI (Drewry), for year-to-date, was about three times higher than the five-year average of $
2,430 per 40ft container.


The causes of the historic highs in shipping freight rates have been owing to a multitude of factors.
These include COVID-19 disruptions, container inventory imbalances, Suez Canal blockage and lack
of competition in the shipping industry, which has been weighing into the growing trend of freight
rates. Industry experts believe that the freight rates would not recover to pre-pandemic levels in
the 6 to 12-month period. However, recently, two of the world’s top container lines (CMA CGM
Group and HAPAG-Lloyd) have pledged to freeze their spot rates and put off any further increases
in spot freight rates for containerized cargo. This may persuade other carriers to follow suit and
lead to an improvement in freight rates.

  1. COVID-19 Related Disruptions
    In the second half of 2020, global economic activity and trade witnessed a sharp rebound driven
    mainly by the manufacturing sector. However, the services sector and especially the most
    contact-intensive activities such as port operations lagged behind owing to the continued need
    for social distancing, labour shortages and other limitations of the pandemic. This resulted in
    delays and congestions at ports particularly in Europe, USA and recently in China with the
    outbreak of the Delta variant. This led to increased turnaround time for vessels causing
    disruptions to regular schedules of carriers and also created a large-scale container imbalance.
    The outbreak of the Delta variant can also further disrupt trade in Asia where around 42% of
    global exports are sourced according to United Nations estimates. These disruptions are coming
    at a time when the industry is preparing to ramp up for the Christmas holiday season, which
    could cause a further acceleration of freight rates in the near future.
  2. E-commerce – Split shipments
    As lockdowns and limitations on movement became the new normal, consumers opted for
    electronic modes of purchasing goods and services and, businesses followed suit by improving
    their e-commerce channels. E-commerce retailers have been relying on split shipments where
    when an online order that contains multiple products is broken down into separate shipments
    to enable fast and efficient delivery. These factors coupled with the shortage of containers have
    further aggravated the freight rates while also creating a harmful ecosystem of increased
    shipments and freight costs.
  3. Less Competition in Shipping Lines and Alternatives for Shipping
    The limitations on belly capacity in passenger aircraft due to the decline in passengers
    travelling by air has led to the lack of alternatives for ocean freight. This has led to capacity

constraints in the shipping industry as opposed to the overcapacity seen in the industry prior to
2020 and the difficulty in avoiding soaring freight rates. However, at present, the strong
earnings of the shipping industry have triggered new orders for ships this year, doubling the
orders received for all of 2019 and 2020 according to Baltic and International Maritime Council
(BIMCO). These new ships that are scheduled to be added to the fleet from 2023 onwards, could
ease capacity constraints.

  1. Decarbonisation
    Globally we are witnessing an accelerated effort towards decarbonisation measures such as the
    International Maritime Organisation (IMO) measures to reduce the Greenhouse Gas (GHG)
    emissions by ships, which are to be in force on November 2022. A study done by UNCTAD on
    the impact of these measures by IMO revealed that this will lead to slightly higher freight rates
    as a result of internalizing external costs and also as a result of going at lower speeds to reduce
    CO2 emissions. While the magnitude of these increases are relatively small when compared to
    current fluctuations in freight rates, these will be relevant for many years to come until the
    sector has reached an energy-efficient level.
  2. Suez Canal blockage
    The container ship that was wedged in the Suez Canal at the start of the year, though for a short
    period, had ripple effects on the industry. This further aggravated the already stretched
    shipping market. As the ships took longer to reach their destinations, the shortage of empty
    containers increased further in this period. This led to high pressure and increased freight rates
    not only for the routes passing through the Suez Canal but also for the routes nearby.

Impact on Sectors:


Exports


Sri Lanka’s export industry is reliant on imported raw materials for its exports. According to
statistics by the Central Bank, intermediate imports account for around 50-60% of total imports in
the country. This makes the country’s exports relatively expensive due to the increased procuring
cost of imported raw materials and increased shipping cost of exports. Even though exports such as
apparel, which consists of a larger portion of the country’s export basket are exported Free-On-
Board (FOB), still increases the final price of the export as the buyer incorporates the freight
cost into the final price of the product.


Factors that had supported Sri Lankan exporters to receive competitive freight rates prior to the
pandemic such as the country’s strategic location (being the last port of call to destinations such as
the UK, Europe and USA) and regulations such as “All in Freight Rate” where all charges of shipping
had to be consolidated into one rate, too are no longer working favorably for Sri Lankan exports,
given the current constraints in capacity.


Sri Lanka historically had an imbalance between the 20ft containers and 40ft containers. This
imbalance was further aggravated by the imposition of the import ban on certain items such as
vehicles, which limited the 40ft container imports to the country. Therefore, exporters in Sri Lanka
are also facing a container shortage, which in return adds to the already high freight rates.

Imports
Importers usually pass on their freight costs to the consumers. Under almost every conceivable
scenario (whether FOB, Cost and Freight – CNF, etc.), an importer will bear the cost of any increase
in transportation costs including paying for insurance and other related costs, which too have
increased. The higher freight costs also increase the duties and levies. All of these costs are
eventually passed on to the consumers. This could further intensify the inflationary pressure in the
economy given the expansionary monetary measures followed by the Government during the past
year. The inflationary pressure will also affect consumer welfare with the unprecedented
challenges posed by the current pandemic.
On top of exorbitant freight rates comes the limited availability of dollars in the country to settle
import bills. This creates delays initially at the banks, which then in most cases lead to delays in the
customs clearance process, adding further demurrage charges that have to be borne by the
importer. These again exacerbate the cost of imports to the country and the price paid by
consumers.

Solutions to Navigate through High Freight Rates


The solutions to navigate through the growing freight rates are twofold. The first set of solutions
are for the private sector, which can be carried out by individual exporters and importers prior to
the shipment of goods in order to mitigate high freight rates. The recommendation for Government
entities is to reduce other trade costs and lower the business operational costs for traders, as, price
controls would not resolve the current situation and, may further aggravate it by creating more
supply chain bottlenecks. A brief overview of these solutions are set out below.

  1. Solutions for the Private Sector
    a) Strategic Planning
    Strategic planning can aid in limiting the exposure to high freight rates and be a cost saving
    for traders as rush orders can incur heavy costs on the traders. Through careful planning,
    these high freight rates can potentially be managed. Strategic planning also includes
    analysis done on freight rates both historic and future estimates in order to better
    understand the trends and to plan accordingly. This will enable traders to make informed
    decisions backed by data and information.
    b) Optimising Markets and Shipments
    Freight rates can be optimised by focusing on numerous factors such as route, market and
    shipment. Deciding between Full-Container-Load (FCL) or Less-than-Container-Load (LCL)
    or as groupage can help optimise the freight rates as there are multiple charges involved in
    an LCL or groupage compared to FCL. Using the right type of containers such as 20ft
    container for weight-based cargo and 40ft container for volume-based cargo can also help
    optimise freight cost. It is also imperative to identify the right incoterm such as FOB, CNF,
    CIF (Cost, Insurance and Freight), FAS (Free Alongside Ship), etc. as these aid in identifying
    who pays for the various charges of the shipment and the responsibilities thereof. Route
    and market optimisation is another option to lower freight rates by analysing the routes

used by the various carriers and markets that have a container deficiency. Carriers may
offer special deals to customers who are able to ship cargo where a container is already
being repositioned or customers that can triangulate container shipments. This would also
offer an opportunity for Sri Lankan exporters to diversify into new markets such as China,
Japan, Taiwan, Korea, etc. where there is a container deficit. This will induce shipping lines
to drop off empty containers in Sri Lanka for exports to these markets and defray carriers’
empty re-positioning costs.

  1. Solutions for the Government
    Reducing Other Costs through Trade Facilitation
    Automation of all trade related agencies are pivotal to have a resilient industry and bring in
    strategic transformation, leveraging on the opportunity presented by the pandemic. Under
    Category C commitment for Sri Lanka under the World Trade Organisation (WTO) Trade
    Facilitation Agreement (TFA), Article 8, a mechanism to develop a Border Agency
    Corporation is required by Sri Lanka. Although, the automation of few individual agencies
    were seen, the lack of integration and inter-agency connectivity is a deterrent for this
    process. Implementation of the National Single Window (NSW) is the long-term permanent
    solution for the country to keep the business operational costs low to face situations of this
    nature or worse scenarios in the future. Therefore, the Government can look to accelerate
    the implementation of this long-overdue project without any further delay. The blueprint
    for the National Single Window has already been developed.

(The strategic insights article (opinion article) was developed by the Economic Intelligence Unit of the Ceylon Chamber of Commerce.)

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