Container chaos: The year that broke freight

Supply chains are under enormous pressure with shipping delays, port closures and container shortages. Baker Tilly’s experts in logistics and planning explore how are different markets adapting or dealing with freight challenges.

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When the cargo ship Ever Given got stuck in the Suez Canal, holding up hundreds of vessels and creating waves across global supply chains, it was the most visible sign yet of the strain on international freight. 

A Lloyd’s List estimate puts the cost of the Ever Given delay at $9.6bn per day for the week it held up shipping traffic, with westbound traffic costing $5.1bn a day and eastbound around $4.5bn. 

But while the 400-vessel logjam created headlines and slowed global freight, it is just one of a series of threats to trade returning to pre-pandemic levels, from delays at ports with tougher Covid and customs inspections to a shortage of shipping containers and box container prices doubling in many markets.

At the same time, a surge in retail sales has seen inventories, already low thanks to the pandemic, fall sharply, making it harder to capitalise on the return to life after lockdown. 

The situation has seen some freight operators declare ‘the worst operational crisis in years’, while both exporters and importers are concerned spiralling costs will need to be pushed through to consumers. 

The Global Financial Crisis in 2008-09 presented issues for freight, says Andrew Thurston, a Customs Duty Consultant with MHA MacIntyre Hudson, but not to the degree of the pandemic.

“Back in 2008, we didn’t have the issue of stockpiling and hoarding, the panic buying and everything else that we saw when lockdowns first came in,” he says.

“Plus, we didn’t have the online marketplaces that we have now, and we weren’t stuck at home for three or four months, or longer.”

Transporting a 12m container by sea costs at least four times as much as it did one year ago, with the average price now around US$8400 – in the last three months alone, the price has risen 53%.

If you are looking at sea transport between Rotterdam, Europe’s largest port, and the world’s busiest port in Shanghai, it’s closer to US$13,000 and if something opens up last minute, you won’t get much change from US$20,000.

“Companies in the freight and logistics sector, some of them are making an absolute squillion,” says Darryl Daisley, Director – Customs and International Trade at Baker Tilly partner firm Pitcher Partners.

Container line Hapag-Lloyd is a classic illustration – the company is forecasting a profit as high as US$11.2 billion for 2021, with preliminary earnings figures of around $4.2bn for the first half of 2021, more than three times higher than the same period in 2020.

“Carriers, shippers, port operators, have suddenly been jacking up their prices. And who pays at the end of it? It’s the importer,” Mr Daisley says.

“And what do they do with those costs? Either absorb it, which is pretty difficult, or they pass it on to the consumer.

“There are no market pressures keeping costs down. Companies have no ability to say, this guy is charging me $1000, I’ll go to one of his competitors and pay $800. The narrative is they are both charging me $1000 and next week it will be $1100.

“Some of the big shipping companies are talking about building new vessels in the next year or two. There has been this latent demand, we’ve all been locked up and then suddenly, we all want to buy stuff.

Mr Thurston says the difficulty in just getting hold of a container to ship their goods into the UK means they are stockpiling items in China, adding another factor into the cost.

“You’ve got the normal consumer traffic but then you’ve got this massive surge for PPE (personal protective equipment) coming in that is on top of normal trading,” he says.

“Certainly, in the UK, there are 1000s of containers at the port that are waiting to be emptied as and when the PPE is needed, so all these containers that have been coming into the UK are not going back empty to China, which is causing an imbalance across the world.

“We’ve seen a lot of companies trying to absorb the costs to remain competitive, but with Brexit as well, it’s another added pressure onto their existing profit margin.

“There’s only so long they will be able to maintain that.”

Firms are holding larger stock quantities as they shift from just-in-time to just-in-case supply models, but that brings with it a raft of other considerations.

“There’s an expense to that, so these companies have got to buy more products and not potentially sell it as quickly to hold on to a little bit longer,” Mr Daisley says.

“They’ve got to find space to store that stock. They’re then going to assess, well, where should I hold it? If I’ve established an Asian hub in Singapore, should I hold my stock in Malaysia, or Singapore, or Jakarta?

“All that analysis can’t be done within a couple of days, because then you need to get an understanding of the additional logistical costs associated with that change in your supply chain.”

Airlines are tapping into the freight void to make use of empty passenger planes. Korean Air, for example, has operated 10,000 cargo-only flights in the last 12 months to shift 400,000 tonnes around the world.

Mr Thurston said UK clients are reconsidering where production occurs, but those moves had as much to do with complying with the EU’s rules of origin as it did with supply chains.   

“I’ve got a client who has moved production from Africa into the EU, because it’s more local, they get more control over that manufacturer and over a product that attracts a high duty as well.

“The duty aspect is a consideration when you’re looking at moving goods or importing goods from outside of the UK or the EU.

“With Brexit, there will be a reconsideration of supply chains because we’ve got companies who are importing goods from outside of the EU, but the processing is being completed in the EU. Under the rules of origin, they must be wholly obtained, so they then import into the UK at a full rate of duty.

“So, companies are having to revise their supply chains to directly ship into the UK and get a UK processor to do that work, so those goods aren’t liable for a 10% to 15% duty.

“That’s a consideration but it’s outside of COVID, that’s more a Brexit implication where you’re subject to some sort of processing but have to be wholly produced.”

In Europe and the UK, the COVID freight crisis came hard on the back of Brexit, the withdrawal of the United Kingdom from the European Union.

Customs controls are now applied to British goods entering the EU, which has dramatically slowed freight movement. While import controls for goods entering the UK from the EU were pushed back because of the COVID-19 pandemic, they are being phased in from October 1, 2021.

Marisa Hut, Senior manager VAT and Customs Advisory at Baker Tilly Netherlands, says the upheaval on both the COVID and Brexit fronts has made freight life very difficult for companies.

“Not everybody was completely aware of the fact that Brexit really changes things, and we still see in our day-to-day practise the consequences of that,” she says.

“Terms have been agreed upon that have never been thought of before, because it was all intra-EU traffic. Now the term DDP (delivered duty paid) really means something for VAT and customs, which leads to additional costs because they need to comply with reporting obligations in countries like the UK.”

Shipping problems such as the Ever Given crisis, or a Chinese port shutting down for weeks due to an outbreak of COVID-19, creates knock-on problems that take months to resolve.

“If something like that happens, as there are just jams of stuff that needs to go through and it causes delays and we’re not only looking at the EU but the bigger global picture,” Mrs Hut says.

“Then you see that the virus has escalated somewhere around the world, which again causes delays.”

It’s not just shipping that is giving companies grief – road freight is also suffering as deadly floods in China and Germany further damaged global supply lines.

In the UK, there are fears that a shortage of truck drivers could lead to gaps on supermarket shelves.

“We’re seeing pressures on supply chains from internal transport within the food industry and suppliers to supermarkets as well,” Mr Thurston says.

“There’s not enough drivers or people in the food-producing factories to be able to make all these products and move them about.

“If you have a major disruption like those that we’ve seen with shipping, you’ve got more disruption in that supply chain and then things just skyrocket again.”

Mr Thurston says clients should be looking at whether there are going to be any potential long-term issues with countries that they are using as their supplier base.

“When you’re dealing with things like fresh fruit and vegetables, if there’s an issue in the country of origin, and they can’t get the goods out or they can’t pick and pack the goods over there, then that suddenly creates an issue,” he says,

“With supermarkets for example, they’re not interested in the supply of the goods, they just want the goods in their warehouse to put in their stores.

“UK importers across the world have keep an eye on the worldwide picture and consider whether it is going to affect their supply chains and how they manage it.”

Mrs Hut says businesses are doing their research to shore up their supply strategy, but she says many are simply trying to keep their head above water.

“People are still trying to cope with what is going on at this moment, they are thinking about changing things but not everything can be changed,” she says.

“It is, of course, key that the staff is also still available to operate things and so on, so protecting their personnel is also of high importance.”

In the 15 months since the pandemic emerged, sectors such as tourism have managed at least partly overcome the challenges of accessing overseas markets with a renewed focus on growing their domestic customer base.

But for many firms, the inability to traverse the seas to manage imports or exports has badly hamstrung their growth, says Mr Daisley.

“Take Australia’s rock lobster industry,” he says.

“As soon as they couldn’t export, Australian homes all had cheap crays and that did help generate some revenue for that particular industry sector.

“The licenses are expensive, so companies discovered that they had to be extremely agile and scale back potential exports and look at the domestic market in the short term.

“But what was a short-term problem is becoming a medium-term issue.

“There are some success stories of businesses being able to sell their new products overseas but it’s not to the percentage that we would expect to see normally.

“It’s just that much harder to cement or establish a relationship on Zoom.”

Mr Daisley says companies are reaching out to industry bodies and international trade associations more than ever to try and open a channel overseas.

“The Australian-Indonesian business council for instance, they have been swamped with enquiries along the lines of, ‘we can’t go but do you have connections?’” he says.

“Historically, there were only minimal people who had these association memberships but now, everyone is thinking, ‘is there another avenue that I can tap into where they may have an existing network that I can find out about?’”

The freight crunch may force companies rethink their strategies in terms of manufacturing out in the Far East, says Mr Thurston, because there is a realisation that if they cannot get goods from where they are being manufactured, they are out of business.

“If we’ve got it more localized, we’ve got a bit more control, it might cost a little bit more, but at least we can manage it in house,” he says.

“So that might be a movement of manufacturing close to home, where it it’s not such a profit issue as it is with high quantity goods.

“For more specialised products, we are seeing companies looking to bring that manufacturing process back into the UK and into Europe to give them more control in their supply chains.

But while the strategy for transferring manufacturing and production closer to home is being planned, such ambitious goals are yet to be realised, says Mrs Hut.

“Changes to company supply chains to make them more resilient, such as moving manufacturing from the Far East to let’s say the EU, can only be done over time,” she says.

“Only a year has passed and while we have been talking to clients who are thinking about changing things, bringing things closer to home, it cannot be done in a day.

“What we have seen is that additional stock is being transferred to their country and warehoused, and that stock is used for supplies.

“But the real big changes where they move their production from, let’s say, China to another country? That’s not happening yet.”