Surprise, surprise. The pandemic that brought entire economies to their knees has a hand in this fiasco. But it’s actually more of a confluence of factors that COVID kicked off.
Here are a few of our culprits:
Health concerns and lockdown restrictions caused the market to depend heavily on ecommerce. Online retail activity increased immensely, and it led to a much higher demand for retail goods. People are setting up home offices, buying fitness equipment to work out at home, and even ordering food and essentials strictly online.
While a lot of consumers took to shopping online to comply with stay-at-home rules and avoid exposure to the virus, average savings actually went up and a lot of people became more cautious on their purchases.
According to a McKinsey survey, as lockdowns have eased up and vaccines are rolling out, these savings translate to pent-up demand waiting to be unleashed in what we can call revenge shopping. Categories like apparel, beauty, and electronics will are eating up a huge chunk of that post-pandemic discretionary spending.
Depending on the item category you are selling in, you’ve either had a really bad year or a really good one. But the increased demand for certain goods comes with a price, that price being soaring sea freight costs.
Picture this: China sends three containers filled to the brim with iPhones to the United States. In turn, those containers get carried by trucks inland to be filled with soybeans. Those soybean-filled containers then get shipped back to China.
The problem arises when China does not really need three full containers of soybeans back.
This is called a trade deficit, or when a country’s exports exceed its imports (or vice versa). At the time of writing, the Port of LA receives around three and a half containers from China for every one it sends out.
A trade imbalance is nothing new (especially between China and the US), but global Chinese exports soared 60.6 percent over the first two months of 2021, when a lot of Western economies started to recover from the pandemic and demand for Chinese goods skyrocketed.
China’s global trade surplus reached 103.25 billion early on in 2021, whereas it recorded a deficit of $7.21 the past year.
So, you have a pandemic-induced increase in ecommerce, plus lockdown restrictions forcing idle ships and empty containers just sitting at port, plus China being among the first economies to recover from COVID, hence sending in a lot more products into Western markets than it is shipping in.
To boot, the soaring demand for Chinese exports means that shipping companies are finding it a lot more profitable to just send empty containers back to China than have them go the entire trip inland to pick up imports.
Combine all that with the fact that Chinese exports are usually high-value products, while US exports are relatively lower-value agricultural produce like wheat and soybeans.
The result: Competition over containers (when Western economies bounced back) drove prices through the roof.
Want to see how much your competitors are importing from China?
Custom import records are public information in the United States and there are multiple tools that allow you to simply search for a company name and see exactly how much these companies are importing from China.
Another key factor is the ongoing trade war between China and the US, which we touched on when we talked about the best countries to source private label products from.
Even with the recent change in administration, the uncertainty surrounding tariffs has caused a lot of Chinese exporters to rush their goods into the US before new tariff schedules take effect, which has caused freight charges to increase over the past year.
Reuters has also reported some sort of mafia activity in China’s shipping industry.
Seeing the money to be made in all this, big private firms have stockpiled containers and are making them available to the highest bidders, making sea freight even more of a pay-to-play situation.
Again, ecommerce sellers may bear the brunt of the increased sea freight costs, and perhaps some of it could be passed on to consumers. Either way, it’s bad for business.
Here’s a few things you can do to protect your business:
With freight costs going through the roof, it’s more important than ever to book your cargo early and have a well-planned procurement process. Consider booking your shipments weeks or even months ahead.
Avoid booking shipments during peak seasons and holidays.
Also, make a solid shipping plan so you are always on top of your inventory and never run out of stock.
Admit it or not, it’s not so much what you can do, but what your freight forwarding company can do for you.
Be sure to work with a reliable forwarding company. Large and established freight forwarders can deal on your behalf more effectively than smaller companies, and they have much more resources at their disposal.
Also make sure to work with companies that communicate with you and are transparent about your shipments.
US shipping regulators have also started looking into disadvantageous shipping practices to reduce bottlenecks, complexity in shipping, and costs relative to the recent price surge.
As of this writing, there is only a marginal price difference between a 20’ containers and a 40’ container. If you can, order more products and ship a 40’ to lower your per unit costs. LCL in fact is becoming a more viable option for items less than 25 CBM.
Even with the high cost of sea freight, air shipping is still much more expensive than sea freight. However, the gap between air shipping and sea shipping has narrowed slightly, and there may be more times when air shipping is viable, such as optimizing cash flow and reducing stock outages.
The short answer is nobody knows. Matter of fact, no one is sure if it will normalize at all.
Some reports say that there may be no easing until Q2, which could sound like ages if you’re in ecommerce, especially if you’re shipping fast-moving products that are in high demand due to the pandemic.
Others say that the container shortage will likely last longer into 2021, despite a lot of carriers recently placing new orders for containers.
This whole sea freight rate fiasco doesn’t seem to be going away any time soon, and we are all on the same boat.
Understanding why sea freight has become more expensive and a lot more complex will help you prepare and plan out your procurement more effectively.
Where do you think sea freight goes from here? Let us know in the comments down below.