Increasing Freight Costs Are Becoming A New Matter Of Concern For Global SMEs

The sudden outbreak of the Covid-19 hit hard in 2020 and left its tremendous impacts on the global economy. The disrupted supply chains due to the global port & container disruptions caused a delay of the ordered goods in international trade & resulted in rising freight costs, making trade deals complex for the global SMEs exporters on an international level. In this regard, the Drewry World Container Index that tracks the average price of a 40-foot shipping container issued a report in June stating an all-time high with the average price rising to US$6,957, which is highlighting an eye-watering 305.7% compared to the last year. A few expected that the price will likely rise well in 2021. There is nothing wrong with accepting the fact that the global pandemic has brought chaos to the supply chain & shipping industry.

The most popular trade routes between China and Europe experienced a more whopping boost in freight prices where a container on the Shanghai to Rotterdam route costs US$11,196 – up 534% compared to last year, while a container for Genoa now bears five times higher costs than it did back in 2020, at US$10,845.

Pushkar Mukewar, who is CEO of digital trade finance company Drip Capital and has conducted a study on the impact of the price on SME, said that it is not viable. These aforesaid shipping & logistic practices are putting a detrimental impact on the global trade since the freight costs have skyrocketed 300%, worsening the situation for the SMEs operating their business amidst the pandemic. 

He further added that the shortage of containers is causing an increase in logistic costs, but it is also affecting the SME's capabilities to complete orders on time and issues with delayed payment cycles. If the issue continues, customer-focused economies are likely to find alternative markets with shorter trade routes to eliminate costs. This could affect SMEs fighting back to get to the pre-pandemic levels.

What Is Beyond The Shipping Crisis?

SMEs are, in particular, suffering from high freight expenses, largely triggered by the global pandemic with many even being out of the foreign trade game already. The impact can be seen in the defensive measures being taken by many Indian agri-commodity exporters who decided to close their long-distance business operations from now on. Many exporters have reduced capacity and don’t give a positive outlook towards the recovery of the global economy from Covid-19 soon. 

In addition to this, with demand in ocean freight, the global shipping liners opted for blank sailings that meant the empty containers would no longer get returned to the supply hubs to protect themselves from top-line losses due to the massive decline in demand amidst Covid-19. Also, the port delay in the wake of the global pandemic left no stone unturned to worsen the situation. Meanwhile, these factors, the laws of demand and supply are being tried to get to the pre-pandemic levels by supplying shipping space to further improve demand, resulting in price hikes. 

When is the End?

The industry leaders shed no light on normalizing the shipping costs, in fact, caution that it may remain high. Joanna Konings, the senior economist at ING, took these skyrocketed shipping prices as a stressing factor for global SMEs as the prices won’t come down any time soon and SMEs will continue to struggle. 

She further added that to avoid the forthcoming impact of the high freight prices, the SMEs are required to pause those shipments which are beyond their capacity. And if the situation continues, they may need to cease exporting or reestablish to serve a closer market. For the time being, the SME should focus on high-yielding products that are cost-effective to be shipped from cargos. While on the other hand, some buyers are trying to make it less harming by sharing freight costs with the suppliers. Thus, this could be a perfect time for SMEs to form a bond to accelerate future growth.

Record Profits for Shipping Liners

Irrespective of the supplier's complexities around the world, the shipping industry is booming, all thanks to the increased shipping costs. The companies have been experiencing unprecedented profits as a result of the high prices. For example, a Chinese shipping company, called Cosco, posted a 2,600% growth in profit during the first quarter while Moller-Maersk’s first-quarter profits surpassed its entire net profit for 2020 at USD 2.7 billion.

Apart from the hiked prices, SMEs are waiting for more struggles to come and complex their trading possibilities ahead.