Everyone probably knows that global shipping prices have surged since the end of last year. Shipping a forty-foot container from China to the US East Coast is now costing more than US$20k, even Guangzhou – Lagos line will require more than US$13k per 40-foot container. 

Peeling the onion 

What people seem to disagree with slightly is the cause of such high costs. According to the official spokesperson of China’s Ministry of Commerce, it is a combination of factors including: prolonged pandemic, boom of commodity prices, and structural imbalance with global shipping

Very concerning for Chinese manufacturers and exporters are the Christmas orders that can’t be fulfilled because of the shortage. According to Yiwu-based companies, tens of millions of items, including Christmas trees and Santas, are stuck in warehouses in the Eastern Chinese city, unable to secure a space on any container ship. 

These manufacturers and exporters not only risk missing the Christmas season, but also have to pay warehouse costs to store the items produced. 

While the Ministry Commerce has indicated a number of measures in collaboration with other ministries to help manufacturers and exporters, it is realistically quite hard for them to increase the throughput or efficiency of sea freight. 

According to researchers at the Ministry of Transportation, the growth of container shipping capacity this year has been higher than growth of shipping demand, and hence the surge in shipping cost can be attributed to increased costs of running shipping operations, including fuel costs, leasing costs and crew costs. For example, because of the pandemic, maintaining and changing sea crew is much more costly – causing a shortage.  

“Intermediary costs” is another major factor, according to the same release.  

According to the Port of Guangzhou, another key reason is the processing capacity at ports because of covid, labour and other issues. 

Blame the forwarders? 

Interestingly, an article in a notable sea freight information platform blames freight forwarders, who ‘have added layers upon layers of additional costs’ on the shipping fees. 

That has caused some backlash. We selected a few out of the dozens of comments to that post: 

  1. “Please understand the shipping fees charged by container liners before putting the blame on the freight forwarders!”
  2. “Have you not looked at the P&L of the publicly listed shipping lines? Where have they accumulated all the profit growth?”
  3. “Because demand far exceeds supply – you simply can’t book a slot if you do not pay up. Who has taken this extra profit? I do not want to know.”
  4. “Why didn’t freight forwarders add margins before?”
  5. “It seems you believe that freight forwarders actually control the trade. And freight forwarders have been able to instruct shipping companies to issue one price adjustment notice after another??”
  6. “A thorough investigation is needed to find out how much bribes shipping company employees have taken to selectively release capacity”
  7. “Definitely written by an outsider. If freight forwarders did not pay for the shipping costs before hand, many exporters will simply go bankrupt”
  8. “Freight forwarders are only what you see on the surface. Internal people of shipping companies are the real ones taking all the kickbacks.”
  9. “Freight forwarders are fragmented and highly competitive against each other, how can we get pricing power??”
  10. “Freight forwarders not only need to secure container ship lots, but also need to arrange for all the operations such that you can actually get the goods onto the ship. Our margins are already so thin – do you expect us to run a loss to service customers?”

Murky reality

It seems most of the comments above are left by disgruntled freight forwarders. In China, freight forwarding is similar to travel agents before the age of OTAs – relationship-driven, murky and highly competitive. 

A large freight forwarder told us a few weeks ago that the pandemic is a big test on the industry – while margins are squeezed for them, smaller competitors were simply driven out of business, so things worked out even. 

“I have to increase the pay to my expatriate employees, especially in ports with high covid risk such as those in Africa, so that they remain at their posts,” he said. “Nobody knows how long this situation will last.” 

There have been multiple attempts to use technology to reform freight forwarding, with little results. The same large freight forwarder said “Unlike consumer business, where things are more transparent, in container shipping kickbacks and bribes are quite usual. How do you expect those who profit from it to adopt a more transparent platform, if the shipping lines are not willing to force down from the top?”

Maybe in addition to going ‘carbon neutral’,  shipping companies have more to do. This, will hardly be a priority though, as the lack of which hardly generates any backlash beyond the freight forwarding industry. 

 

Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at hello@mworks.asia.