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A global imbalance of containers, port disruptions caused by Covid outbreaks, and a still-wobbly supply-demand curve as economies recover at differing rates are causing chaos in the shipping industry, and small and medium enterprises (SMEs) are beginning to find themselves priced out of trade.

This month, the Drewry World Container Index, which measures the average price of a 40-foot shipping container, hit an all-time high of US$6,957 – a 305.7% increase versus last year. For popular trade routes between China and Europe, this increase was even more pronounced: a container on the Shanghai to Rotterdam route now costs US$11,196 – up 534% on last year, while a container headed for Genoa now costs five times what it did in 2020, at US$10,845.

“It’s just not viable,” says Pushkar Mukewar, CEO of digital trade finance company Drip Capital, which has produced a study on the impact of the price surges on SMEs.

The fintech firm offers buyer financing solutions – supply chain finance and inventory finance – to SME importers in the US. Meanwhile, in developing markets including India and Mexico, the company offers invoice discounting.

“We are hearing from agri-commodity exporters in India that they are simply going to avoid long distance trade for now,” he tells GTR. “Meanwhile, buyers in the US are starting to look for alternative options such as sourcing domestically or sourcing from geographies which are close by.”

A confluence of factors

The eye-watering increase in the cost to send goods by sea is caused by a confluence of factors, each of which alone would be enough to disrupt trade, but when taken together are wreaking nothing short of havoc.

Problems began back in the first quarter of 2020, when global trade capsized amid the onset of the Covid-19 pandemic. Containers that were coming into China were stuck at ports due to a shortage of workers to unload, handle and transport them to factories, while plummeting exports from China meant few containers were leaving the country.

With demand for ocean freight plumbing new depths, shipping liners announced blank sailings to shield themselves from further potential top-line losses, which meant empty containers in the US were no longer being picked up. Once Asian exports began to recover in the second quarter of 2020, there weren’t enough containers available to transport goods, leading to rising costs as demand outstripped supply.

At times, shippers were forced to decide between paying a significant premium versus pushing back deliveries and disappointing their customers. In Drip Capital’s report, Vivek Pandit, CEO of Indian Foods and Spices, an SME wholesale importer from the US of Indian food items, says the company is planning shipments “well in advance” compared to a year ago.

“Still, container availability has been an issue. When the goods are sitting ready for two to three weeks, we don’t get an empty container to have the goods shipped to us from India. This has been affecting our sales and delaying our collections.”

As if this wasn’t enough, in March 2021, the Ever Given, one of the world’s largest container ships, became wedged across the Suez Canal, bringing one of the busiest trade routes to a standstill. The disruptions and backlogs caused enormous delays, and a further increase in prices.

For SMEs like Rise and Shine Overseas, which spoke to Drip Capital as part of the study, this has meant making changes to their business plans for the new financial year. “I trade with products that have a low shelf life,” says Jignesh Mehta, the spice exporter’s CEO. “Delays in shipments mean the products would barely have a few months on the shelf of the buyers, who now run the risk of not selling the products.”

Despite the unblocking of the Suez Canal, maritime trade’s woes are not yet over. A current backlog of containers at the Port of Yantian, the world’s fourth-largest container port – a result of Covid outbreaks in Shenzen and Guangzhou – is having a knock-on effect across trade routes, as shipping lines re-route vessels or avoid port calls entirely. In an update sent out on Monday, global shipping line Maersk said that 90 of its and its partners’ vessels have omitted the port entirely, and cautioned that shipments not directly impacted by the Yantian situation might also be affected as it adjusts its network.

No end in sight

With no end to the disruption in sight, industry onlookers caution that shipping costs look set to remain high.

“There is a big increase in the cost to ship all traded goods which there is just no escaping from,” says Joanna Konings, senior economist at ING. “SMEs are right to worry because it looks as if these costs won’t come down any time soon.”

“SMEs only have one choice, which is just to pause those shipments that they can’t afford to ship,” she tells GTR. “And if that pause lasts too long and they don’t get enough income then they either have to cease exporting or restructure to serve a closer market. What we are seeing is textbook stuff: if you can’t cover your variable costs, you have to cease to trade. And normally we talk about variable costs as being things like the staff bill, but people have really been blindsided by this.”

However, not all is bleak. Drip Capital’s Mukewar points out that co-operation by all stakeholders in trade is enabling SMEs to keep going – for now.

“Some buyers are willing to share ocean freight costs with their sellers, and some sellers are able to have discussions with their buyers to perhaps renegotiate product rates,” he says. “We’ve also seen an increase in demand for our products because the working capital requirements for some of these SMEs has gone up given the higher costs.”

Nonetheless, the principles of economics mean that, if increased costs continue, companies will have to look for other solutions.

“Many of these buyers and suppliers will probably continue to work with each other and see through the crisis as long as prices become more sustainable in the long run. But if prices don’t become more sustainable, we may actually see that trade patterns change, because the landed cost just doesn’t make sense,” says Mukewar.

Record profits for liners

Unfortunately, the indications are that prices will indeed remain high. The container shipping industry, which has long been characterised by its lack of profitability, has been racking up record earnings as a result of the upheaval. Chinese shipping giant Cosco said in April that its Q1 net profit rose 26-fold versus the same period last year, while AP Moller-Maersk group’s net profit of US$2.7bn for the first quarter was just short of its full-year net result for the entire year of 2020.

Essentially, carriers have now succeeded in what they’ve been attempting to do for years: tailor supply to demand on a tactical level – and they have little incentive to cut prices now.

“The big container liners are saying, we have had record results this quarter and we are really thinking that capacity management is working well for us and that it’s a really good strategy,” says ING’s Konings. “Therefore, we think that until there is some kind of regulatory intervention, only then will prices come back down.”

However, with a higher floor under prices based on capacity management by the liners, and new highs being tested all the time, SMEs are bracing themselves for more spikes to come – and a tough trading environment ahead.