Why Supply Chain Pressures Remain despite Lowering Global Shipping Costs

Did you know that the impact of the pandemic is still wreaking havoc on the global supply chain? Although some of these pressures are easing, and new innovative and technological solutions are emerging to advance warehouse management, logistics, procurement, inventory management, and other supply chain-related areas, global trade remains under pressure.

In the wake of the pandemic, international shipping costs experienced an unprecedented surge, as we saw container rates move up by over 300% and earned some of their biggest gains between the first and third quarter of last year. In January, according to the IMF, global shipping costs have been “calming” from their peak in September 2021, which is good for international trade and consumers worldwide.

What Caused the High Shipping Costs?

In the thick of the outbreak, the government introduced lockdowns, which contributed to grounding the supply chain. However, labor shortages and other factors that obstructed the global logistics network led to an increase in shipping costs, making deliveries take longer.

In September, global container rates were at a record price of $10,800. Since reaching that peak, it has declined by up to 16%. Analysts attribute the fall in costs to the falling rates of the containers bound for the trans-Pacific eastern routes. This is the major sea route from China to the US.

What Does This Mean?

Typically, international shipping costs peak between August and October, but the price drop indicates that strong goods demand is waning following a peak shipping season. Would it rise around the same period this year? It’s possible because we’re still reeling from the effects of the pandemic. Countries, on the other hand, are taking steps to alleviate supply bottlenecks. For example, the US recently ordered some ports to extend operating hours and improve efficiency to reduce congestion, which will lessen the difficulties.

However, some supply chain constraints do not have quick fixes. Backlogs and port delays, labor shortages, disruptions in inland logistics, slow capacity growth, and the numerous shipping industry challenges are all examples of such issues. As a result, the increase in shipping costs may occur again.

If it rises higher than the previous peak, it could have disastrous consequences. According to the United Nations Conference on Trade and Development (UNCTAD), if freight rates remain high through 2023, global import and consumer costs could increase by 10.6% and 1.5%, respectively. This impact would be disproportionately greater for small, developing islands that rely heavily on seaborne imports.

So, will shipping costs ever return to pre-pandemic levels? According to Bloomberg, analysts believe it will take two years for container shipping rates to return to normal.

What Is Best for Global Trade?

Cheaper freight rates will lower the price of goods, making them more affordable for low-income earners in developed countries, and even more so for developing economies. Higher freight rates, on the other hand, will have the opposite effect, making it difficult for consumers and emerging economies to recover from the pandemic’s devastation.

Shipping rates will thus benefit the entire world if they return to pre-pandemic levels. However, as the IMF suggests, this will necessitate greater infrastructure investment, the implementation of trade facilitation policies, and the adoption of digitalization in the freight industry.

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