Maritime freight rises 470%, feeds global inflation, ‘swallows’ companies’ margins

In 2020 alone, with the pandemic, the price of maritime freight rose almost 500%. At the beginning of 2022, the cost was 4.7 times higher than two years ago, according to Brazil’s National Confederation of Industry (CNI). Currently, 90% of international trade flow is carried out through the sea.

The high inflation caused by the pandemic and supply chain disturbances contributed to the emergence of this scenario. These factors combined made everything seaborne more expensive. However, the impact of product prices that depend on sea freight was even greater in 2022, partially because of the closure of the Port of Shanghai, which accounts for a relevant share of the world’s maritime traffic.

The closure occurred after some resistance to carrying out a lockdown in Shanghai after some resistance by the Chinese government. The decision, however, is not ‘central and unilateral’ as most people think, explains Rodrigo Zeidan, a professor at New York University Shanghai (China) and Fundação Dom Cabral.

“The Shanghai government was the one that rejected the shutdown. We must understand that China is not as centralized as many believe. Shenzhen, in the country’s southeast, is a more important area in terms of foreign trade and implemented a lockdown before other cities. Shanghai believed it could manage the situation without a lockdown. When things got out of hand, the central government, while not interfering, complained that the given autonomy was not being used properly,” he says.

The economist explains that the current scenario will have lingering effects for a long time.

“I believe we will feel the impact for at least a year. It’s not just the port [of Shanghai] that is closed. There are centralized rules that players must follow, and truckers need to take goods into the ports. The entire internal logistics are in check. In fact, there is a multifaceted logistics problem in China that extends much beyond ports. Any single case of Covid can stop a company. The government will apply its Zero Covid policy at any costs,” says him.

The economist notes that the scenario of global inflation seen in practically all countries cannot be verified there. “There are clearly cases of products that have actually gone up in price, especially for producers. The problem is that there is no way to measure inflation in the midst of a lockdown,” he says.

The production cost is one of the driving forces leading to higher prices everywhere, given the rise in commodity prices as well as other inputs.

“These economic patterns in China directly impact the rest of the world, as the country is the largest importer of commodities such as soybeans, corn, and cotton. The importance of Chinese demand for the world makes this abrupt surge in prices generate a huge impact globally,” says Fabio Louzada, economist, CNPI analyst, and founder of Eu Me Banco.

“In addition, several raw materials flow through China, which means that multinationals that rely on Chinese parts face production delays. As it affects businesses and supply grows limited, the trend is for prices to climb,” he adds.

The specialist stresses that the current scenario has two major consequences:

• High inflationary prices, pushing prices upward;
• Weaker economies, with companies generating less value.

In accordance with other specialists like Zeidan, Louzada agrees that economies all around the world will feel high inflationary pressures long-term.

“The normalization of the productive chain takes time as, in a globalized world, different input distribution dynamics depend on the country. Thus, it is necessary to adjust suppliers’ timing, so no one gets harmed. However, each supplier has different demands, making it necessary to resume negotiation processes and adjust deadlines, volumes, and values,” assesses him.

In a report released in early April, the World Trade Organization (WTO) signaled that, in the worst-case scenario, long-term global GDP could shrink by 5%.

Port congestion in Shanghai

According to a report by the Royal Bank of Canada (RBC) dated the last week of May, a fifth of the global container fleet was stuck in several ports. The entity shows that more than 345 ships were waiting to dock at the port of Shanghai.

The person responsible for the report, Michael Tran, gave an interview to CNN stating that “bottlenecks in supply chains are different today than they were six months ago.”

“There are several versions of this, but six months ago, bottlenecks manifested in a very US-centric way at the Port of Long Beach. Now, bottlenecks are going global. For example, the war between Russia and Ukraine has caused big port congestions in Europe, while lockdowns in China and congestions in the US remain untouched,” he said.

Even giant multinational companies have had interruptions in their activities, such as Tesla and Volkswagen – which discontinued their activities in early April and are now gradually resuming them, according to Reuters.

According to Mike Kerley, investment manager at the company Janus Henderson, lockdowns in Shanghai affect the port flow, accumulating containers and reducing productivity by about 30%.

In addition, the decrease in the number of port workers also harms the production chain.

Thus, the stoppage adds to several problems in the global economy that raise prices worldwide, such as the escalation of oil costs after the invasion of Ukraine.

Not-so-possible solutions

On the national scene, experts do not see a way to get around these problems in the short term. For example, until recently, there was only one Brazilian cabotage company – Log-in, sold to Maersk by Alaska Asset in mid to late 2021.

In terms of economic growth, the professor at NYU Shanghai says that high maritime freight has swallowed the margin of several companies, despite the scenario being considered positive for greater profitability.

In regulatory aspects, Louzada explains that even with some recent changes – such as the approval of BR do Mar – it is difficult to see the cabotage sector in Brazil growing as a way of becoming more resilient to external economic fluctuations.

“The project to recreate Reporto was vetoed, which would facilitate investments in equipment and other expenses in Brazilian ports. Several pieces of equipment are needed to handle products after moving between two ports, making this option unfeasible due to the high cost”, he says.

“I believe that this point could assist us in achieving greater financial independence. Despite developments brought about with the ‘BR do Mar,’ such as the introduction of new cargo transport companies in the port-to-port business, Bazil continues to depend on foreign maritime freight alternatives,” he concludes.

Source: Suno

To read the full original article, please go to: https://www.suno.com.br/noticias/frete-maritimo-precos-inflacao/

Sharing is caring!