Will soaring shipping costs make Australian manufacturing more attractive?

The cost of shipping around the world has skyrocketed. So far, most retailers have absorbed the costs, but without an end in view of the shipping crisis, the price of goods to consumers may rise. Some retailers have already announced that they will pass these costs on to their customers.

What drove up the shipping costs?

In short, a story of supply and demand unfolded.

In 2019, sea freight fell. Then, in 2020, the pandemic triggered an unprecedented surge in demand for goods, leading to a global shortage of shipping containers. At the same time, in Australia, the government’s stimulus plan, at a time when international travel was interrupted and restaurants, etc. closed, resulted in an increase in household disposable income (RBA).

Spending has shifted from services to goods, demand for which is now at pre-pandemic levels.

Small retailers are disproportionately affected by supply chain disruption. They have less ability to take mitigating actions such as stockpiling due to cash flow and warehousing costs. We hear about a large retailer’s 8 to 12 month storage inventory!

Large companies enter into long-term shipping contracts at agreed prices.

Retailers like Ecodownunder that are not large enough to secure long-term shipping contracts have to buy the remaining space available on ships, in the spot market. It is the cost of this space that has increased. The shortage of shipping containers and the inability to bring empty shipping containers back to the source of the goods compound the problem.

Australia imports more container ships than it exports, which means Australian retailers often have to pay extra just for ships to dock here. All of this is compounded by industrial action at local ports and the lack of flights from passengers who, before COVID, carried significant amounts of cargo.

Getting inventory in time for Christmas is the biggest concern for many. Not only are Asian manufacturers experiencing production delays due to blockages, products are taking more than twice as long to get here. Ecodownunder received goods 4 weeks after leaving Mumbai. It now takes at least 2-3 months and that is if you can get a container! We just got a quote of US $ 9,500 for a 40ft container, 7 times what we used to pay. Freight prices are increasing every week.

Soaring shipping costs increase the landed cost per unit of commodity. For bulky goods, the added cost per product is high. We are fortunate that our woolen products, duvets, pillows, etc. larger volumes are made in Australia and therefore do not incur any shipping costs. If prices continue to rise and shipping delays continue to increase, more businesses will start looking for products locally. A victory for the Australian Made! We are already seeing our competitors who are importing from China looking to source from our Australian manufacturers.

The seasonality of inventory surprised many retailers with winter products arriving in the spring. The new standard for us means planning and ordering inventory at least 6 months in advance instead of the required three months before COVID.

RBA figures show the price of shipping containers quadrupled in the year through June 2021, reflecting the Ecodownunder experience. As demand continues to rise, bottlenecks in shipping are expected to persist until 2022, leading to further price hikes. This will likely lead to tighter supply chains. Concerns about the reliability and cost of imported goods will cause more companies to move ashore to reduce costs and shipping time. A victory for the made Australian!

And a reduction in international maritime transport will be a victory for the environment with less carbon emissions contributing to global warming.

This story originally appeared in our sister post, Inside small businesses.