By Sourcing Journal
This article was published in Sourcing Journal February 17, 2021.
While increases in freight costs have been an ongoing concern, companies in the fourth quarter of 2020 saw charges for U.S. inbound routes rise to a nearly $10 billion shipping inflation problem.
For most of last year, supply chains have had a number of challenges ranging from manufacturing disruptions caused by the coronavirus pandemic, mass demand destruction from shelter-in-place mandates, uneven economic recovery, more recently, a nascent surge in demand.
“The latter is a high-quality problem but nonetheless has brought with it a wide range of rising costs, particularly for freight expenses,” said Christopher Rogers, supply chain analyst for Panjiva, an S&P Global Market Intelligence company.
Some firms have been noting the higher costs in their earnings conference calls, including Tapestry Inc., whose CEO Joanne Crevoiserat said the Coach parent generated strong operating income growth due, in part, to a reduction in promotional activity, higher average unit retail, and disciplined inventory and expense management. She also said the company delivered profit growth “in the face of unprecedented Covid-related external headwinds, including pressured bricks and mortar traffic, store closures and capacity limits, as well as higher freight costs and shipping constraints.”
Panjiva’s Rogers said so far there is “little evidence that companies have responded to the higher costs by cutting demand for goods, perhaps indicating that they will be passed through to consumers.”
So what’s accounting for soaring freight costs?
In a study by Panjiva, freight costs may have added $9.53 billion to corporate costs in the fourth quarter. In fact, Panjiva’s data shows that U.S. seaborne imports climbed 20 percent year-over-year in January, mostly likely because of the degree of congestion caused by vessel reduction that had been delayed in offloading as well as increased demand for goods. “Imports of consumer discretionary goods have been the biggest driver of that growth in the absolute number of containers, with growth in household appliances of 80.9 percent while consumer electronics and home furnishings grew by 17.2 percent and 34.4 percent, respectively,” Rogers said in the report.
Rogers also said that as of January, the cost of freight was higher than the cost of tariffs for the first time in the data series for July 2017.
“The cost of tariffs will likely increase [because] of section 301 duty exemptions being reversed in many instances,” he said. In addition, shipping rates will likely be driven by a mix of secular and cyclical factors. Secular factors include spending on environmental remediation to green container shipping fleets globally, as well as ongoing investment in expanded infrastructure, which may keep rates higher for a longer period of time. On the cyclical side, demand could decline once pandemic conditions are mitigated by the vaccine, and when current congestion levels clear up. But improved congestion wouldn’t necessarily translate to lower rates due to existing annual contracting for longer-term freight services.
Freight rates and shipping are not the only causes of price inflation facing supply chains, Rogers said. “Oil prices have returned to $58.6 per barrel (WTI) having dropped to a low of $11.6 per barrel and an average of $42.8 per barrel in the fourth quarter of 2020, S&P Capital IQ data shows,” he wrote in the report. WTI is West Texas Intermediate crude oil, a specific grade of crude oil and a main benchmark, along with Brent and Dubai Crude, for oil pricing. Higher labor costs and enhanced worker safety requirements related to the pandemic also factor into the rising expenses.
For now, Rogers doesn’t believe that companies are wiling to commit to pass higher costs to customers through price hikes, either because of competitive pressure or negative publicity around higher prices.