Ocean freight rate hikes and effects on global demand and supply

Tuesday, 18 January 2022 00:57 - - {{hitsCtrl.values.hits}}

By Dr. Charitha Perera

With the onset of the COVID-19 pandemic in early 2020 and the subsequent lockdowns witnessed in countries across the world, global demand for goods showed a dramatic increase in the second half of 2020 as well as in 2021. Services were severely restricted due to the lockdowns which left consumers with no option but to spend on goods as they tried to cope up with extended lockdown periods at home. During this time, the transition of work from the office to homes (working from home) as well as education from classrooms to homes, together with online shopping and entertainment triggered a massive increase in demand for tech devices and other goods.

Despite the increasing demand for goods, the shipping companies were faced with a number of capacity constraints including container ship carrying capacity, labour shortages, and container shortages, all of which were caused by COVID-19 restrictions across ports in many regions. This disparity between increasing demand and limited supply has resulted in record container freight rates on almost all container trade routes.

These high freight charges have resulted in retailers facing a serious dilemma where they have to decide between three choices. They have the option of halting trade of that particular product. They can also raise the price of the goods so that the increased cost is passed on to the consumer directly without negatively impacting their bottom line although this would almost certainly result in a drop in revenue. The third option is to absorb the costs to some extent and pass them on later to the consumer.

With the arrival of new variants such as Omicron, the pandemic is set to carry on into the foreseeable future. There will be continued demand for goods that allow consumers to work, study, stay entertained and keep fit while at home. Pandemic uncertainty and restrictions will continue to cause bottlenecks in the global supply chain and therefore, in my opinion, it is unlikely that the prices will settle and return to their normal state at least until the middle of 2022.

(The writer is the Director at Transco Cargo)