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Global supply chain bottlenecks have sent shipping costs soaring – on popular routes rates are up six-fold in the last year. Coupled with a shortage of raw materials that has pushed up prices, importers are raising the cost of goods to deal with these shocks, stoking fears of an inflationary spiral.

Freight rates from Shanghai to Rotterdam have leapt by 596% compared with the price last year, according to the latest figures from Drewry World Container Index, which tracks the cost of a 40-foot shipping container.

Meanwhile routes from Los Angeles to Shanghai are up by 154%, with a trip from the Chinese city to southern California increasing by 229%.

This spike in rates is due to supply chain bottlenecks that have weighed on global trade and pent-up demand as the world economy attempts to shake off the damage of the pandemic. Additionally, quarantine measures and labour shortages are hampering port workers’ ability to carry out operations.

Earlier this year a coronavirus outbreak at the port of Yantian in trade hub Shenzhen caused days of congestion as authorities raced to disinfect and quarantine the port.

Maersk, the Danish shipping line, said in an advisory statement on July 2: “After a six-day stop on export containers in the end of May, the current situation in the port of Yantian is looking up.”

In a July 8 statement, the company addressed issues in European ports, saying: “We are doing our utmost to keep your cargo moving… but due to current market conditions, Northern European hub terminals are currently stressed due to delayed arrivals from origin, high demand and significant yard density that all contribute to lower than usual productivity in several ports.”

It added that ongoing Covid-19 disruptions and challenges getting sufficient labour for the holiday period has exacerbated the situation.

Waiting times in Rotterdam for vessel berthing are one to two days, says Maersk, while in Antwerp ships are being delayed by three to five days.

Phil Levy, chief economist at Flexport, a freight forwarder, said: “Carriers have scrambled to make space available on oceanic routes, but supply chains have been challenged by port congestion, by Covid-induced port closures, and by incidents such as the Suez Canal impasse with the Ever Given.”

He adds that this disruption as well as an increase in shipping rates will “inevitably” impact the price of goods – though the magnitude of the effect will likely vary (inversely) with the average value of a shipment.

“Even beyond the direct impact of higher shipping costs, the inability to restock inventories promptly may cause store owners to raise prices, just to balance high demand against limited supply,” he says.

 

Balancing the books

The bottlenecks and higher costs are raising worries of an inflationary spiral as importers hike the price of their goods to balance the books.

French tyre company Michelin has put up the price of its tyres twice since the start of the year, said CEO Florent Menegaux in an interview with Bloomberg.

He added that the company has faced shortages of vessels, containers and some raw materials, leading to higher input costs. As the Michelin brand is “very strong”, Menegaux said the company will push the extra costs on to customers. “At the end it is always the customers that pay the price.”

He stressed that while some view the Covid crisis as nearly over, the global economy is far from recovered with regions such as Asia – excluding China – and South America struggling.

The shortage of raw materials for manufacturing and construction is widespread. “Demand both in the UK and globally continues to dramatically outstrip supply and shows few signs of slowing during the seasonally busy summer months,” reads a statement by the Construction Leadership Council, a trade body, in late June.

“Inevitably, all of this is feeding into price inflation, and the expectation is that high demand coupled with tight supply will sustain elevated prices throughout the year.”

Meanwhile the cost of food has also jumped. The UN’s Food and Agriculture Organization found that despite prices across key commodities falling by 2.5% in June compared with May, prices remain 33.9% higher than the same period last year. The decline marked the first drop following 12 consecutive monthly increases.

A shortage of raw materials and goods owing to pent-up demand, supply chain issues and shipping prices are likely weighing on inflation forecasts and rates.

The US consumer prices index increased by 0.9% in June from May, according to the US Bureau of Labor Statistics, marking the largest one-month change since June 2008. Over the last 12 months, the index has climbed by 5.4%. Meanwhile think tank Resolution Foundation says that UK inflation could rise above 4% in the coming months – double the Bank of England’s target of 2%.

Others believe any increase in inflation is likely to be temporary. Andrew Bailey, the Bank of England’s governor, said at the start of the month it is important not to panic about a rise in inflation.

However, in a June report by Deutsche Bank that examines whether inflation is transitory, the bank states: “We worry that inflation will make a comeback.” It adds: “It is a scary thought that just as inflation is being deprioritised, fiscal and monetary policy is being co-ordinated in ways the world has never seen.”

For trade, the cost of materials and shifting goods is rising, and that shows no signs of slowing. The prices of products, like that of Michelin tyres, are heading in one direction: upwards.