Rising Freight Costs And Time On India's Busiest Trade Routes
Ajay Aggarwal manufactures toys and games at his factory near New Delhi and exports them to the Middle East. It’s a high-volume, low-value export.
From Delhi, Aggarwal first ships his products to the Mundra port in Gujarat, from where they make their way to Dubai in 20-foot containers. The cost of these shipments have risen by nearly 30% compared to times before the pandemic, to the point that shipping is now a tenth of his cost of production.
Aggarwal’s predicament is faced by many others in the export and import communities. Since the pandemic hit, the cost of shipments has risen and in many cases the time taken has also increased. This, as one-off incidents like the Suez canal blockage have coincided with a surge in demand and limited supply of containers.
These factors, together, have driven freight rates to record highs.
For instance, the Baltic Dry Index, a globally tracked shipping cost benchmark, surged to 3,267 on June 17, 2021, the highest since 2009, according to Bloomberg. It is up 222.4% compared to January 2020 before the pandemic hit.
The Shanghai Containerized Freight Index, which represents rates to and from Chinese ports, also rose to a record high of 3,748 on June 18, from 1,000 a year ago.
Another informal indicator comes from the average containership earnings across the industry as compiled by Clarksons, a service and research provider to the shipping sector. Average containership earnings, Clarksons estimates, rose to $40,244 per day in June 2021 from $9,569 per day in June 2020. Earnings are also up sharply from $13,310 in June 2019. The data was provided to BloombergQuint by an official at Great Eastern Shipping as it’s not publicly available.
Measuring The Hit To India
Measuring the impact is not easy since shipments of different sizes to different locations are seeing disparate change in costs and shipment time.
One way to judge the impact is to track costs across India’s most frequented trade routes. Trade routes to the U.S, China and U.A.E. are the busiest routes for imports and exports.
Data compiled by the Engineering Export Promotion Council of India via an informal dip-stick survey among it members shows:
Along the U.S. trade route, the cost of a 20-foot container to the country's west coast has risen roughly to about $6,000 compared to a pre-pandemic cost of about $1,300. Time taken for shipments has increased up to 70 days in some cases from about 30 days pre-pandemic.
To and from China, the cost of a 20-foot container rose to about $450 from $150 pre-pandemic. Delays are shorter along this route due to the proximity between India and China.
Along the third largest trade route to U.A.E., the cost of a 20-foot container has risen to $800 from $350 earlier.
Another busy trade route to Germany is seeing costs for 20-foot containers at $2,700 from $700 earlier.
Business is in disarray, said Arun Garodia, vice chairman at the Engineering Export Promotion Council of India.
Freight rates have seen a sharp rise of about 3-5 times compared to pre-pandemic costs. And that’s only one factor. The uncertainty in securing adequate containers and unanticipated delays at large ports is adding to the problem.
Like globally, even in India, the crux of the problem is the container shortage, said Garodia. Those who were able to book a container at regular intervals, now have to wait for 3-4 weeks even if they pay more in freight charges, he said.
The delay is often because of congestion at the port or when the container is scheduled for a roll over onto a different ship. The delay is even longer if the cargo has to be rolled over more than once.Arun Garodia, Vice Chairman, Engineering Export Promotion Council of India
The problem is particularly acute in the container segment.
While freight rates for dry bulk carriers and tankers have eventually eased, container freight rates continue to rise and are at an all-time high because of a combination of factors, including congestion in certain routes and supply chain disruptions, said Sai Krishna, assistant vice president and sector head for corporate ratings at ICRA.
Unlike in the case of dry bulk carriers and tankers with fragmented players, supply in containers is consolidated and can be controlled and managed, Krishna added.
These shortages have built up over time.
According to Captain BB Sinha, former chairman of the Shipping Corp. of India, container manufacturers in China were unable to recover costs when demand was low in pre-pandemic years. “Now, several have shut shop and there is no supply at a time when there is a shortage.”
Garodia agreed. The current container crisis highlights the need for manufacturing of containers in India, he said.
How Businesses Are Coping?
With little control over availability or costs, businesses have little option but to adjust. From sector to another, manufacturers are either raising prices, compromising on margins or losing business.
Take, the furniture segment. Here, prices have risen by nearly a fourth because of a combination of rising container freight rates and material costs, said Adurthi S Rao, president of the association of furniture manufacturers and traders. With higher prices and the broader weakness in the economy, business has slowed.
In the textile sector, it hasn't been entirely possible to pass on cost increases.
A Sakthivel, chairman of the apparel export promotion council, said some manufacturers have had to honour existing contracts even at a loss. Others have passed on higher costs.
At Aggarwal’s toy business, the sharp rise in shipping costs has meant a price revision of about 7-8%, because of which some business has been lost already.
Problems of financing have crept in, too.
Sharad Kumar Saraf, president of the Federation of Indian Export Organisation, said the increased container costs have led to higher working capital requirements. “Shipping costs are almost a capital cost now.” While companies across different geographies may be facing the same problems, they don't have the add-on costs that are higher in India, Saraf said.
The Macro Impact
The rise in freight rates comes at a time when inflation in India is already elevated. A pass through of higher transportation costs from overseas into India could push up prices across select commodities further.
The impact of the rise in container freight rates will reflect in India's foreign trade in the coming months, said Vivek Kumar, economist at QuantEco Research. It’s already reflecting to some extent in the Wholesale Price Index inflation, Kumar said.
Madan Sabnavis, chief economist at CARE Ratings, agreed. India being a trade deficit nation risks importing inflation because of freight rates and this will be more evident as imports start to normalise, he said.
The impact will vary based on the commodity, its value and where it’s being imported from, said Sabnavis, adding this makes it hard to determine the aggregate impact of the current spike in freight rates.
Sameer Narang, chief economist at the Bank of Baroda, said freight rates have partly remained strong because of the rebound in demand especially from the U.S. and Europe. As a result, India’s exports have held up and remained strong even when all other indicators saw a dip because of the second wave.
On the other hand, Indian consumers, like their global peers, are paying more for goods and commodities amid an inflationary environment that has been persistent for several months now.
There are two sides to the coin, he said.