Markets

Brace yourself, the shipping crisis is not over

Causes of the bottleneck and dealing with further price increases
Brace yourself, the shipping crisis is not over

Concentration of the shipping industry

The competition among ocean carriers which had led to below-cost rates eventually resulted in a concentration of the shipping industry: 9 major companies, joined in 3 alliances (cartels, actually), now control 85% of the containers’ global traffic, after several players either left the market or were taken over. By keeping the freight rates at escalating prices since the beginning of 2020, they were able to recoup the previous losses, invest in ever bigger vessels, and expand their activities to other services connected to transportation. While the European Union has not recognized this as an oligopoly by confirming the Block Exemption Regulation, the Biden administration in the US is asking the Federal Maritime Commission and the Surface Transportation Board to combat what it calls a pattern of consolidation and aggressive pricing.

Container shortage

Another alarming issue emerging in 2020 was the shortage of empty containers. Many of them were used to stock goods when demand decreased because of the pandemic. And a lot of them were sent empty to Asia when China got rid of COVID-19, so they were missing in the rest of the world. The shipping companies immediately ordered new equipment, however delivery takes a long time. Furthermore, 80% of the production is controlled by three Chinese manufacturers who have been inundated with requests. However, they do not seem to be in much of a hurry since their container prices have doubled in the space of a year.

Covid-19 pandemic disrupted the import-export exchange

Creating a perfect storm, the lockdowns and restrictions linked with the pandemic disrupted the import-export exchange. Like a chain reaction, terminals became congested, sea shipments were delayed, transportation times have increased, and services got worse, as an increased number of incidents causing containers to fall off cargo ships in the Pacific shows. Then, in April, the fallout from the Suez Canal blockage further drove up Asia-Europe container spot rates. Small and medium enterprises – like most companies in the toy and nursery product industry – are suffering the most from the increased impact of transportation costs on the product price and the unreliability of the shipment schedule.

Shipping costs are getting even higher

Unfortunately, shipping costs are not expected to decrease until early 2022. Shipping companies are benefiting from the market conditions and container scarcity is going to last for the remainder of the year at least. Hopes that a window of lower shipping volume would be opened because of the Chinese New Year celebrations in February were soon dashed. In any case, there is no chance that freight rates, now edging towards 20,000 US Dollars for a 40ft high cube container (East Asia to Europe), will ever go below 5,000 US Dollars (before 2020 the cost was around 1,500-2,000 US Dollars). The bad news is rates could hit 25-30,000 US Dollars over the late summer period, as festive stock starts flooding in. In the meantime, new strains of the COVID-19 pandemic still impose social distancing rules, sanitizing standards, travel restrictions, and local lockdowns, so that ports are operating at reduced capacities. And this affects both the clearing of terminals and the movement of freight, with ensuing delays and inefficiencies, as it recently happened at the Chinese port of Yantian, critical to the toy industry as part of a triangle with Shenzhen and Hong Kong. What is more, it turns out that only 2.5% of the world’s seafarers have received COVID-19 vaccinations: outbreaks on ships could cause more trade disruptions.

Prices for land transport and air transport are also rising

The cost of rail transportation from East Asia to Europe has also risen sharply, facing the same problems met by maritime shipping. However, the transit time of intercontinental trains is shorter than that of maritime transportation and the number of trains has increased significantly, while last year’s phase of delays seems to be over. Another option on the same route (approximately 13,000 km) is truck transportation, although this is quite expensive. Meanwhile, air cargo rates are between 60 and 120% higher than they were in 2019.

Most experts agree that a partnership among the logistics, shipping, export-import and manufacturing industries is necessary to create synergies and to coordinate efforts aimed at improved planning. However, such a solution appears to be far off.

How to weather the storm

According to the general feeling, the shipping issues are not going to be relieved until 2023. In the short term, this could lead to product shortages, price rises and non-deliveries, just as the Christmas season approaches. Companies depending on transcontinental shipments must adopt measures to face these challenges.

 

  • Insurance costs are not rising. Make sure to have adequate insurance not only to cover your goods but also for protection should a case of General Average be declared, as it happened with the Ever Given.
  • Look for consulting from competent and reliable shippers.
  • Order stock earlier than usual and negotiate space allocation in advance and as precisely as possible.
  • Diversify among different carriers and different transportation options.
  • Be prepared to pay more.
  • Try to find manufacturing resources closer to home.
  • Try to assemble the product or place it in packaging in local warehouses.
  •  Negotiate price increases with the retailers.
  •  If your stock looks short, communicate this to your retail customers and to the consumers to drive a perceived scarcity which increases demand.

None of these is an ideal solution, but there is a need for action and the toy industry is not powerful enough to put pressure on the shipping lines.

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Sources:

  • Associazione Italia-Cina (Italien)
  • Assogiocattoli (Italien)
  • Global Toy News (USA)
  • Toy Industry Journal (Großbritannien)
  • Toy World (Großbritannien)