Next Threat to Prices: A Surge in Shipping Costs

The shipping industry, already reeling from supply-chain disruptions and labor shortages, is facing a new challenge: rising freight rates. Container ship operators and major importers like IKEA and Walmart Inc. are preparing to negotiate freight contracts that could significantly impact consumer prices for goods ranging from jeans to cars.

These negotiations, set to take place at the TPM conference in Long Beach, California, are pivotal. The average price to move a 40-foot container from China to the U.S. West Coast is expected to reach between $7,000 and $8,000—a record high for annual freight contracts, compared to last year’s average of around $5,500.

Rising Freight Rates and Their Impact on Importers

After two years of supply-chain disruptions caused by the Covid-19 pandemic, importers are increasingly valuing reliability and predictability in their shipping services. This has driven some companies to seek longer-term freight contracts, despite the higher costs.

According to shipping operators and freight forwarders, more than a quarter of all containers entering the U.S. carry cargo for large importers like Walmart and Amazon.com Inc. As Lars Jensen, CEO of Denmark-based advisory firm Vespucci Maritime, explains, “We are now increasingly seeing importers sign up to yearly contracts early as well as to contracts of a longer duration. It is about managing risk in an environment where the uncertainty about the stability of the supply chain in 2022 continues to be very high.”

Negotiating Freight Contracts in a Volatile Market

Freight contracts, which account for up to three-quarters of annual revenue for container ship operators, are key to the global logistics market. However, representatives from both shipping companies logistics and cargo owners have been tight-lipped about the ongoing negotiations.

A number of companies have already reported that rising transportation costs have impacted their profit margins. David Bergman, finance chief of Under Armour Inc., highlighted this during an earnings call, saying, “The biggest challenge we have on the gross margin side right now is the freight costs.” He added that freight rates will “take a little bit longer to subside.”

How Companies Are Adapting to Higher Freight Costs

In response to rising shipping costs, some companies are planning price increases. Hasbro Inc. recently announced that it would raise prices in the second quarter of 2022 to offset the rising freight costs. However, the company also warned that the supply-chain environment will remain challenging.

Patrik Berglund, CEO of Norway-based transportation data and procurement specialist Xeneta, pointed to the power imbalance in the shipping industry, saying, “We’ve never had such market dynamics, with the liners holding all the cards. The top five operators control three-quarters of all container capacity. That’s a lot of pricing power to very few players.”

The Pandemic’s Impact on Container Shipping

Container shippers saw a massive surge in profits during the pandemic. As demand for manufactured goods like appliances, cars, and home improvement materials soared, the shipping industry struggled to keep up. A shortage of ships, combined with labor shortages caused by Covid-19 outbreaks at ports, led to long delays and extended delivery times.

In an effort to replenish inventories, some importers booked sailings at spot rates, which were separate from their annual contracts. Last year, some paid more than $20,000 per container for sailings across the Pacific Ocean, as vessels waited for weeks to unload cargo at congested ports.

Current Spot Prices and the Future Outlook

While spot prices for shipping a container from Shanghai to Los Angeles have eased slightly, they still hover around $16,000, according to the Freightos Baltic Index. This is a dramatic increase compared to the $4,700 rate from a year earlier.

Analysts predict that daily rates will decline later this year as more people return to offices and spend money on services like entertainment, food, and travel, rather than goods. In 2021, strong demand, supported by economic stimulus packages and higher commodity prices, lifted global trade to a record $28.5 trillion, according to the United Nations Conference on Trade and Development.

“As these trends are likely to abate, international trade trends are expected to normalize during 2022,” the UN report said.

The Power of Shipping Alliances

The shipping industry has undergone significant consolidation since the 2008 financial crisis, and by 2016, major container carriers had formed three powerful alliances. These alliances share ships, port calls, and networks, giving them considerable control over global shipping capacity. As a result, smaller operators struggle to compete, and freight rates are unlikely to return to pre-pandemic levels anytime soon.

“With the alliances controlling capacity, there is no chance freight rates will fall off a cliff and return to pre-pandemic levels,” said Xeneta’s Berglund.

Conclusion

Rising freight costs, supply-chain disruptions, and the consolidation of power within the shipping industry are all contributing to higher consumer prices. As shipping companies and major importers negotiate new freight contracts, the impact on global trade and prices will be significant. While daily shipping rates may fall later in the year, analysts caution that pre-pandemic levels of pricing and stability are unlikely to return in the near future.