One of the hottest stories in international trade in recent times is the shipping container crisis. In a nutshell, the cost of international trade has sky rocketed because 90% of trade takes place through the oceans. Due to the shortage of shipping containers in major exporters like India and China, the cost of shipping has multiplied by 5 times. Almost everything that is traded through the ocean is sent in 20 or 40-foot containers.
The container cycle works on the basic principles of demand and supply.
Suppose you send consignments from my country to another in a container with an expectation that in return the container comes filled with another consignment.
Sounds simple enough?
Umm..No
The equation does not equate all times. There might be chances that due to lack of demand/political turmoil, you’re forced to ship the container back home empty, causing container imbalance. Thus, to cover the cost freight charges increase, leading to an increase in the overall cost of production.
The Question
Where are all the containers then?
Exactly where all the oil went. America.
American and European nations currently have the vast majority of the global shipping containers and this is because of the COVID-19 pandemic. China was the first nation to impose lockdown and restrictions which made it the fastest nation to recover from the impacts of the pandemic. China began its exports and when the American and European nations could not resume trade as they were still recovering from the pandemic, the containers started piling up in their ports.
Due to the lack of supply of containers and the heavy demand by Indian exporters for shipping containers, the price of these containers has risen. Naturally, the supply of containers in America and Europe is in excess, therefore the freight price from America and Europe to India is very less.
This can be seen in the Freightos Baltic Index (FBX). The FBX from Asia to North America West Coast is $19,040 and the FBX for the other way around is just $ 919. This clearly shows the discrepancy of containers globally.
Impact of the Crisis:
● Freight Charges
The container crisis has pushed freight costs to an all-time high. On average, it is 581% more expensive to ship anything from India to a major port. The following infographic might clear the freight conundrum.
● Companies:
This crisis is also making your smartphones costlier!
Look at Xiaomi for example, they had to raise the retail prices of some of its smartphones including the popular Redmi Note 10 from a starting price of Rs 11,999 to its current price of Rs 13,999. Post these problems the Chinese technology group has signed a collaboration agreement with COSCO Shipping Lines to ensure sufficient shipping capacity.
A big loophole in the story
As we know pretty clearly by now that the freight rates have increased significantly, but the container imbalance isn’t the only cause for this increase. Recently the container shipping industry has undergone massive consolidation. In 2000, the ten largest shipping companies controlled 12% of the market. Today, it is more than 80%, leaving domestic manufacturers who need to export goods at these large foreign companies’ mercy. This means that due to lack of competition, these companies can charge high prices. The United States Government has issued an executive order to deal with the anti-competitive pricing in the container shipping industry as well.
How are we fixing the container problem?
The Federation of Indian Export Organisations (FIEO) has called on the government to ask Indian shipping lines to lease containers and provide freight subsidies to adjust abnormal hikes in shipping rates. So can’t we just make new containers to fix the shortage? India doesn’t have a container manufacturing unit and is entirely dependent on China. Our long-term strategy is to fix this by developing Bhavnagar in Gujarat as a container manufacturing hub. This will not only solve the container problem, but will also create one lakh new jobs in the area.
We hope for a solution soon,
Until then...
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