Global attention focused on shipping in March, as a container ship Never given blocked the Suez Canal, disrupting movement along a route that channels nearly 12% of world trade. As supply chains were eventually hijacked and the canal backlog quickly cleared, the ripple effects of delays at ports lingered for weeks and disruption to trade (about US $ 9 billion was delayed per day) will contribute to inflationary pressures. the Never given History has put a magnifying glass on the stress already undergone by shipping due to the pandemic.
While much has been said about the impact of the pandemic on shipping in Asia, Europe and North America, little has been focused on the spillover effects on small economies. As might be expected, there are early signs that these markets, including in the Pacific, are likely to be overlooked as shipping companies focus on more lucrative routes.
COVID-19 has caused or exposed structural weaknesses in global freight systems, disrupting previously predictable demand for the movement of people and goods around the world. In some places, the demand for maritime transport has increased while it has decreased in others, leading to imbalances in the finely tuned global logistics system.
In some countries, production has fallen due to blockages, reduced volumes of cargo to be transported and longer turnaround times for vessels. In others, demand has increased, which means that many ships and containers arrive full and leave empty. In North America, where demand for manufactured goods (most of which are made in China) has skyrocketed, the result has been the build-up of empty containers in US ports and critical shortages elsewhere. In order to bring the containers back to Asia as soon as possible, three in four leave the United States empty. The container shortage caused a sharp increase in shipping costs, which in April had increases 63% on routes between Asia and the United States and 443% between Asia and South America.
Once ships arrive at their destination, they can be quarantined for a week or more before docking. Disrupted customs and port services add to the delays. And finding a crew also becomes a challenge. At certain times in 2020, only 25% of normal crew changes were taking place due to border restrictions and closures. These labor issues are likely to continue to cause delays in 2021 as shipping companies rely on staff from developing economies, where vaccine deployment is slow. About 14% of seafarers in the world are from India, so that the current increase in cases poses a particular challenge for companies.
What does this mean for the developing economies of our region?
The Australian Government-funded Market Development Facility (MDF), which currently operates in Fiji, Papua New Guinea (PNG), Sri Lanka and Timor-Leste, regularly organizes market information collections with business partners and their networks. Over the past few months, MDF has gathered insight into how disruptions in the global supply chain have impacted partners.
This information suggests that delays and price spikes are starting to impact countries in the Pacific and Asia, as these low-volume routes are increasingly overlooked by shipping lines. This in turn affects the trade of commodities which contributes significantly to the export baskets of these countries, as well as the import of commodities.
Shipping goods from Indonesia to Timor-Leste previously took less than a week, but importers report that it now takes two weeks or more. In addition, as exporters wait longer for ships to be full enough to travel, fewer ships arrive. As an example of the impact, this means that coffee sector exporters are forced to ship beans less frequently – once every two weeks, instead of twice a week. This is felt throughout the coffee value chain, including by smallholders in Timor-Leste who are less able to sell their products. In Fiji, export shipment delays are also caused by route changes to get sufficient volume, with many ships adding new stopovers (e.g. Noumea) before heading to Australia or New Zealand , increasing delivery times from three days to ten days in some cases.
The increase in costs exacerbates the impact of delays. In Sri Lanka, shipping costs were reportedly three to four times higher than normal during the country’s second wave of COVID-19 in late 2020. This added financial hardship to businesses already suffering. For example, in the tea sector, it took about three months to receive payment for exports, but this now extends to six to nine months.
The pandemic has also upset the balance between air freight and sea transport due to exponential increases in air freight charges. In Fiji, container prices have risen from $ 1,200 to $ 2,000, but companies say the increase is minor compared to the tripling of air freight prices. The same is true for PNG, where container prices went from US $ 50 to US $ 70 per tonne on routes to Asia, and from US $ 170 to US $ 221 to the United States. Again, this is less than the 50% increase in air freight prices reported. This pushes companies that transport their products by air to divert their products to the sea where possible in order to reduce costs.
Likewise in Fiji, canceled flights have prompted some freight forwarders to switch to ocean freight as a more reliable option for inter-Pacific trade. This means longer transaction and payment times for businesses that may already be facing liquidity issues, and is also an issue for perishable or time sensitive goods. Conversely, in smaller markets like Tonga, exporters have to resort to air freight despite soaring prices due to the scarcity of ship arrivals.
Of course, imports are also affected. Some Fijian companies have reported that their suppliers have started to impose minimum order quantities, such as for agricultural inputs, which are difficult to meet in small markets. This points to the growing danger of small markets being overlooked (both for goods and freight services) as more lucrative consumer demand soars elsewhere.
In Timor-Leste, while companies cite delays as their main concern rather than price spikes, they note that because they depend on Indonesia for goods (mostly by sea), no increase in prices from freight is not sufficient to deter them from shipping. Importers simply have to bear the extra costs or pass them on to customers, which could potentially have serious consequences if this causes commodity prices to skyrocket.
The smooth and predictable movement of goods, which has been responsible for much of the global decline in poverty over the past two decades, has been severely disrupted. It will face other challenges in the future, such as increasingly disruptive weather conditions due to climate change, restrictive trade policies and geopolitical tensions. Nonetheless, this trade managed to continue during the pandemic testifies to the resilience of the global logistics system. It will undoubtedly adapt to these challenges too – hopefully without leaving developing economies too far behind.