Exporters feel pinch as sea freight to US and Europe rises by 30-40%

The development comes at a time exports from India have started picking up and merchandise exports turned positive for the first time in the last seven months, growing 5.3 per cent

Sea freight rates from Indian ports to the US and European ports have increased by 30-40 per cent to $4,000-4,500 per  twenty-foot equivalent unit (TEU) container, and with further increases expected in October, the rate could soon breach $5,000. 

Traditional export-oriented industries like textiles, leather, automotive and others are feeling the pinch as they dealt with very thin margins only. Adding to that shortage of containers is causing delays for exporters.

The development comes at a time exports from India have started picking up and merchandise exports turned positive for the first time in the last seven months registering a growth of about 5.3 per cent.

Steve Felder, Managing Director Maersk (one of the largest shipping lines) South Asia said "in the recent months we have seen a general shortage of equipment in the market being caused due to an imbalance between imports into and exports out of India. The imports being much lower than exports in the current scenario, we are facing a shortage of containers. However, our goal is to ensure that we can help our customers in enabling their trade. With exports rising from different parts of the country, we need to position empty containers accordingly across India, thus adding up to the overall cost of logistics".

He added, while the period of quarantine for incoming vessels is 7 days for the ones arriving from other ports, it remains as 14 days for vessels arriving from Chinese ports. As a result of this, the vessels arriving from Chinese ports, end up waiting for a couple of at anchorage before berthing adding to further costs and delays.

Freight rates are a function of demand and supply and they vary based on how these two change. Clearly, equipment shortages impact supply and it is something we are constantly looking to manage as much as possible.

Sources in others shipping companies have attributed the increase to consolidation among shipping companies globally, which lead to a drop in the number of fleets, which in turn increased demand for slots. The other factor is container shortage, partly due to a drop in import volumes from China after trade restrictions were imposed by the government.

The other factor is due to the use of clean fuels and the increase in costs. Last year, the cost was about $450 now it is between $1200 and $1300. 

Tirupur Exporters Association (TEA's) President Raja  M Shanmugham said that freight rates almost doubled year on year to $3,500-4,000 per TEU to the US and nearly $1500-1600 per TEU to the European markets for garments. TEA's members account for around 90 per cent of exports from Tirupur, which is estimated to be around Rs 25,000 crore annually.

"Recently freight rates got hiked to abnormal levels particularly to the US destinations. Which alone made our Textile products unviable, because Textile products are dealt with a very thin margins only," said Shanmugham adding that textile industry is operating at around 5-6 per cent and the freight component used to account around five per cent of total cost of a product, which now increased to around 7-8 per cent.

Milind Mungikar, Director, Zen Linen International P Ltd with units in SEZs at Sricity and Chennai said that freight rates for imports rose by 180 per cent since January to touch $1400 per container from $500 in January. His company manufactures and exports Pillows and Quilts - Textile items and does lots of imports from Indonesia, Vietnam, Taiwan, Thailand and China. 

The increase is mainly due to non availability of containers as China holds back all the empties. This is also putting pressure on exporters as customers are not ready to share the cost increase since contracts are signed every six months. "The other major problem since we are not able to deliver the goods on time to the customers, we end up facing penalties and it is also sending a negative image for not meeting the deadline," said Mungikar.

Non-Availability of Containers for the Export Sector is posing a serious concern for meeting delivery commitments of foreign buyers, added Sharad Kumar Saraf, President, Federation of Indian Export Organisations (FIEO0.  

He said that from the last couple of months, in spite of offering space for three to four weeks ahead, shipping lines are shutting out the containers abruptly giving reasons that the vessels are full.  

"Sea freights have started increasing gradually since July and all the shipping lines have increased the freights by 20% to 40% depending on the destinations. There is a need for a regulatory agency for the shipping sector and we expect that the proposed National Logistics Efficiency Advancement Predictability and Safety (NLEAPS) Act would be formulated and implemented soon to protect the exim sector from such sudden and abrupt changes," said Saraf.

He urged for a Government order to pay Terminal Handling Charges to Ports directly, may be implemented across ports as it will bring down logistics costs for the export sector and make them more competitive.

The other factor pushing the spot container freight rates was driven by shipping companies’ supply discipline, despite a decline in demand at the start of the coronavirus pandemic, Fitch Ratings says.

The largest companies reduced available shipping capacity by more than 13% during 2Q20 to meet a 11% decline in global demand, according to Hapag Lloyd. As a result, freight rates have been growing since June 2020, accelerating in August as demand improved and reaching record levels in October despite an initial decline in spot rates at the start of the pandemic.