A Christmas troubled by congested ports and lack of containers

If the Christmas gift does arrive on time, it could pretty much be more expensive as well

Getting presents underneath the Christmas tree this year may be problematic with global trade routes in disarray because of fewer empty containers and high freight rates.

Congested ports around the world have created bottlenecks that are hitting Maltese importers and exporters hard. And the blame lies squarely on the disruptions caused by the COVID-19 pandemic.

Port and factory closures during the pandemic, coupled with an increase in global order books have squeezed supply and forced prices up.

The situation means that people like Chris Vassallo Cesareo, CEO at Domestica Ltd, a furniture importer and manufacturer, cannot give clients quotations that are valid for long on some products.

“When we quote for certain products we tell customers the prices are valid for two weeks not for two months because of the disruptions in the supply chain that have led to exorbitant increases in freight rates and raw materials,” Vassallo Cesareo tells MaltaToday.

And the cost increases he mentions are frightening. “Freight costs from the far east over the past year have increased by around 300%,” he says.

Frederick Schembri is the managing director at Aurobindo, a pharmaceutical firm that imports 15 containers per week from India where its parent company is.

“The cost of shipping a container from Asia to Europe was in the region of around €4,000 and this has now doubled or even tripled as a result of COVID. Costs have climbed and this has impacted local businesses,” Schembri says.

Stranded containers and Freeport costs

He notes that air freight is nowhere near experiencing a return to normality after the aviation sector was grounded and sea freight is hampered by disruption.

“Containers are stranded in and just outside different ports around the world and to secure space we now pay for the roundtrip, to get the container from -Asia to Europe and send it back,” he explains.

Consumers will eventually feel the burden of higher costs although manufacturing companies like Schembri’s are doing all they can to improve their processes to remain competitive.

He also laments the higher tariffs at Malta Freeport and calls for some form of government intervention to minimise the domestic costs.

Freight costs have increased across the board but the magnitude varies from region to region, according to Norman Aquilina, Group CEO at Farsons, a brewer and food and beverage company.

“The cost increases connected to logistics are a mix of domestic port charges (Freeport and Valletta Gateway) of around 5% and freight costs to and from various European ports and beyond, starting from 10% surges from within Europe to as much as five to seven-fold increases for shipments from outside the EU,” Aquilina says.

Farsons is big on importation but it also has an export business for its own beer products, which has also been hit hard by global disruption.

Aquilina says that higher freight costs and the difficulty to source containers has had a direct impact on the company’s export operations. “This has somewhat undermined our export competitiveness and the extent of these increases makes it impossible for our customers to absorb these freight cost increases resulting in some lost opportunities, even if these increases are not unique to Malta,” Aquilina says.

He notes that freight costs had been increasing regularly since 2019 but COVID-19 simply made things worse. “The frequency and magnitude of freight rate increases were dramatic as a result of the pandemic and we experienced several instances in which shipments were delayed due to unavailability of space on container ships,” Aquilina says.

He explains that the exponential rise in international orders as a result of markets re-opening and economic activity picking up has led to the supply chain bottlenecks.

‘A backlog like never experienced before’

Alex Montebello, CEO at Malta Freeport says the pandemic has had a knock-on effect that started with port closures in Asia, most especially in China.

“Industrial production in China dropped, partly fuelled by factory closures because of COVID, while consumption grew. Orders have been increasing but the whole industry is seeing a backlog like never experienced before in the world,” Montebello says.

On the West coast of the US there are around 77 large container ships waiting to be serviced in ports and similar situations are found in northern European ports like Hamburg, Felixstowe and Antwerp.

“A four to five-day wait outside a port inevitably has a knock-on effect and this is leading to a lack of availability of ships and consequently containers. The economics of supply and demand mean that freight rates have increased at unprecedented levels,” Montebello says.

Malta Freeport is not immune to this situation although Montebello says the company is managing to avoid congestion. “There are times when we are working flat out but in general, Mediterranean ports seem to be holding up well.”

However, Montebello says that the blockage of the Suez Canal last March in the Evergreen incident had a direct impact on the Freeport, indicating the sensitivity of the global supply chain to singular events.

“Across the globe, schedule reliability in ports has dropped to its lowest level at around 33%,” he says.

The Freeport has increased its tariffs by 3.4%, which has caused consternation among industrialists and wholesalers. Montebello says the rate hike is linked to the inflation rate of the past three years in line with contractual commitments.

But there are signs that the increase in international freight rates may slow down. A fortnight ago two large shipping companies, CMA-CGM and Hapag Lloyd, announced that they will cap freight rates.

‘Nightmare to find containers’

Whether this will be of any consolation to industry is another matter altogether and Chris Sullivan, CEO Logistics at Sullivan Shipping, says there are many unpredictable factors.

“COVID has led to disruptions along every level of the supply chain and with the closure of some Chinese ports many containers were caught in the far east. Now that global demand has picked up we are seeing a slower turnaround of containers. For companies like ours, it has become a nightmare to find containers for clients. We have had to deploy more resources and find creative solutions to accommodate clients,” Sullivan says.

He adds that the biggest problems are on the far east and middle east routes, including India and Turkey.

“I would assume the situation will persist until the Chinese New Year (February) but it is difficult to predict how it will pan out after that because there are many unknown variables,” he says.

And business leaders are not confident the situation will return to pre-COVID levels.

Aurobindo’s Schembri says there is no such thing as going back to normal and does not see the global economy returning to pre-COVID levels in the foreseeable future.

New lessons and fresh warnings

But he says COVID was a significant game-changer that has also taught companies new things. “We discovered the usefulness of remote working, which employers can adopt to lower costs,” he says.

Aquilina from Farsons is also coy on the prospects of freight costs dropping. “In practice cost increases are difficult to reverse once they’re in place, even if the root causes may no longer be there. Nonetheless, we hope that, applying economic principles, costs will decline as supply catches up with demand in the medium term and international trade stabilises on a global level.”

Aquilina believes there is little to do to directly mitigate the situation, which originates from international dynamics. However, he advocates some sort of support programme to reduce the domestic logistical and freight costs.

But he insists the issue goes beyond shipping costs. “There is a looming threat resulting from growing inflationary pressures together with significant price increases across a wide range of raw materials, products and services,” Aquilina warns.

If the Christmas gift does arrive on time, it could pretty much be more expensive as well.