The global economy has done better than almost anyone expected coming out of the pandemic-induced recession of the last year, pushing up Irish goods exports by a spectacular 25% in the first quarter year-on-year.
The roll-out of the vaccine and the lifting of Covid restrictions have created much of the international demand, with an added surge driven by wholesalers and retailers who ran down on stocks due to slow demand last year, and who now need to restock urgently.
However, shipping lines have not been able to keep up with demand, creating a transport price bubble not seen for over a decade. Transporting a 40ft freight container of cargo by sea on one of the busiest routes used by Irish traders, from China to Europe, has increased by 547% higher than the seasonal average over the last five years, according to international consultancy Drewry, as reported in its June report.
All major trade corridors have seen rate growth during the first five months of 2021 and fresh records continue to be set. With upwards of 80% of all goods trade transported by sea, freight-cost surges are threatening to boost the price of everything imported into Ireland from building materials, furniture and car parts, to coffee, sugar and anchovies.
This is compounding concerns of Irish importers already bracing for accelerating inflation.
A confluence of factors continues to drive prices. These range from soaring demand, a shortage of containers, rising oil prices and too few ships. Recent fresh Covid outbreaks in Asian export hubs have made matters worse, indicating that price rises are likely to continue.
The market intelligence firm Xeneta has reported that the historically high long-term contracted container rates are being pushed to new heights. During May their analyses showed an additional 9% surge in prices, and they foresee little relief in the months ahead.
Often dismissed as having an insignificant impact on inflation because they were a tiny part of the overall expense, rising shipping costs are now forcing some economists to pay them a bit more attention. Although still seen as a relatively minor input, HSBC estimates that a 205% increase in container shipping costs over the past year could raise euro-area producer prices by 2%.
‘’At the retail level, vendors are faced with three choices: halt trade, raise prices or absorb the cost to pass it on later, all of which would effectively mean more expensive goods,’’ said Jordi Espin, strategic relations manager at the European Shippers’ Council.
In giving a typical example, Mr Espin states that shipping bottlenecks and costs are hurting the transport of arabica coffee beans, used by Starbucks, and robusta beans used to make Nestle and Nescafe instant coffee, which are largely sourced from Asia.
Freight costs are more painful for companies that move clunky goods, such as building materials and furniture. If they are bulky products, it means you can’t get very many in the container and that will have a significant impact on the landed price of the goods. Some Irish furniture importers, say freight now makes up about 62% of the retail value.
Expensive and unreliable ocean freight is pushing exporters to air cargo, but this demand is impacting pricing and increasing the landed cost of goods.
Central bankers have, so far, been sanguine about the phenomenon, arguing that the rise in consumer prices tied to supply hiccups won’t last.
ECB president Christine Lagarde said last month that while supply-chain bottlenecks would push up production prices and the headline inflation rate is expected to rise further in the second half of this year, the effect will fade.
The Central Bank’s Sharon Donnery has said “price pressure is transient”.
This is cold comfort for companies who desperately need to work around higher costs now to continue trading profitably. Some have stopped exporting to distant markets. Others are scrambling for other lower-cost sources of supply.
- John Whelan is managing partner of the Linkage Partnership
