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Spectre of inflation looms as shipping costs skyrocket

June 21, 2021
finance & economy

Vendors may have no choice but to pass on costs to consumers

Consumers in the UAE will soon be facing an inevitable price escalation across a wide range of commodities and products as skyrocketing shipping costs show little signs of abating, traders and importers warned.

A phenomenal zoom in sea and air freight cost and indiscriminate surcharges levied by some cargo agents coupled with escalating cost of raw materials and products have left traders and importers with the only option — hiking their prices.

Globally, a combination of factors including rising transportation demand, a shortage of containers, saturated ports and too few ships and dock workers have contributed to the squeeze on freight capacity on every route. Recent pandemic outbreaks in Asian export hubs like China have made matters worse.

Since more than 80 per cent of all goods traded in the UAE are transported by sea, freight-cost surges threaten to spike prices of everything from raw materials, building materials, IT goods, electronics, household appliances and automobiles to food items.

The value of annual imports by the UAE in 2019 was $267.94 billion, according to the World Trade Organisation.

At the retail level, vendors in the UAE are faced with two choices — either to increase prices or absorb the cost to pass it on to consumers later, all of which would effectively mean more expensive goods, said analysts.

Transporting a 40-foot container of sea cargo from Shanghai to Dubai now costs a record $6,150, an astronomical 700 per cent escalation in the past 15 months, said Paras Shahdadpuri, chairman of Nikai Group of Companies.

“For example, the freight rate of a 40-foot container was $800 in March 2020, increased to $1970 in October 2020 and currently stands at $6,150 in June 2021. The routes that have witnessed the maximum hikes are the ones from China to East and Central Africa,” he pointed out.

Deepak Babani, vice-chairman of Eros Group, expects prices of goods to rise rapidly across all segments as a result of inventory shortfall.

“We were averaging with the inventory that we carried in the past. Now with the supply chain getting disrupted, only minimum stock is available in the market, so we expect prices to rise rapidly,” he added.

Babani said freight rates had escalated six to seven times during the pandemic. The China-Dubai sector is the most affected followed by Thailand-Dubai.

“Until now the increases have been marginal as the rates have gone up gradually. After dropping for a while, the freight rates have rapidly risen again in the past one month,” said Babani.

Nazeer Veliyil, chief executive officer of BorgRollsWarner Middle East, said production cost of goods increased by 20-30 per cent due to various reasons including hike in raw material cost, currency fluctuations and shortage of manpower during the pandemic.

“On top of that, shipping costs soared to an unmanageable level — for instance from Shanghai to Dubai, the rate has surged from $300-$400 per 20-foot container to $3,000 at present. Adding to importer’s woes are irrational surcharges imposed by some shipping agents on several pretexts,” said Veliyil.

“Some agents fleece importers by charging for various reasons such as BAF [bunker adjustment factor]; CAF [currency adjustment factor]; GRI [general rate increase]; peak season surcharges; cargo transfer charges; storage charges and on the guise of other little-known acronyms such as LSS, EBS, etc. These are too overburdening for the traders,” said Veliyil.

“Apparently, the shipping lines have reduced the sailings, or in other words, made a cartel which has pushed the freight rates up. In the melee all the stakeholders in the shipping business might have further increased the rates under whatever acronym of BAF, CAF, GRI, etc,” added Shahdadpuri.

The Nikai boss said the routes that have witnessed the maximum hikes are the ones from China to East and Central Africa. “The increase in freight rates is pushing up the procurement cost of the product which is basically being passed on to the final consumer. Due to the increase in the cost, demand has reduced with families pushing back the big-ticket purchases and postponing the same to another date when prices can possibly soften,” he stressed.

He said increase in freight rates has led to an increase in the cost of basic necessities like food items and has strained the monthly budgets of many families, leaving them with limited disposable income for spending on electronics and appliances and general purchases.

“Not only has this impacted import, re-export business has also been affected as customers who come to Dubai to consolidate containers are faced with high freight rates for shipping the goods back to their home countries,” said Shahdadpuri.

“With the added pressure of currency devaluations in the African countries this is affecting business as customers are faced with falling sales and are apprehensive about picking up big quantities due to falling demand and lack of stability in the economies.”

Trade analysts said a sustained surge in new container capacity will ease price pressures, but not before 2023.

Container liners have enjoyed outstanding financial results during the pandemic, and over the first five months of 2021, new orders for container vessels reached a record high of 229 ships with a total cargo capacity of 2.2 million TEU.

khaleejtimes

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