Higher sea freight charges may dampen economic recovery

Higher goods prices will dampen consumer spending, this may hurt spending on big-ticket items

by NUR HANANI AZMAN / pic by MUHD AMIN NAHARUL

A BIG surge in sea freight charges will likely mean more expensive goods as businesses are preparing to pass on part or all of the costs to consumers, analysts said.

A shortage of everything from containers to ships to port facilities, as the shipping industry falls behind demand in capacity after experiencing Covid-19 slowdown, has boosted sea freight charges by as much as 700% in some places.

An analyst said businesses will transfer at least 80% of the increase to consumers to protect margins and if the situation is prolonged, they could pass all of the increased costs.

This would be bad for the post-Covid economic recovery.

“Higher goods prices will dampen consumer spending, given that the minimum wage is not about to rise anytime soon, this may hurt spending on big-ticket items,” said the analyst who did not want to be identified.

“I believe this situation also will hinder the economic situation as when consumers spend less, businesses will invest less too. The point is, it’s all connected,” the analyst told The Malaysian Reserve (TMR).

A recent survey by the Malaysian National Shippers’ Council (MNSC) from Oct 7-10 showed sea freight is now at an all-time high, having increased between 100% and 700% of pre-pandemic levels.

MNSC chairman Datuk Andy Seo said this has led to high transportation costs, causing companies to make transport-driven adjustments in their supply chain strategies.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said obviously this will increase the cost of doing business, which could be passed on to consumers at some point.

“While some quarters would, this could be a transitory phenomenon but prices are generally sticky downwards. Meaning, once the price goes up, it will be very difficult to come down.

Judging from the recent data between January to August this year, 55% of total exports of goods have been transported via sea, 31% and 14% will go via air and land transport respectively.

“Similarly, for imports, 58% of total import goods have been transported through sea and 30% and 12% via air and land. In light of the excess capacity in the aviation sector, perhaps having a higher share in air transport could help to mitigate the prevailing condition,” he told TMR.

Meanwhile, Malaysia University of Science and Technology professor Dr Geoffrey Williams said futures contracts may lock-in higher costs so the increases could last for some time, but actually past futures contracts had lower costs so these are already built in.

“Hence, we may not see the high costs hit immediately for that reason.”

Williams, who is also the founder and director of Williams Business Consultancy Sdn Bhd, said inflation is often cited as a concern if higher shipping costs are passed-through to consumers.

However, he doesn’t see this as a big issue because shipping costs are only a small part of final prices, around 1%, and since the inflation environment is quite subdued, he thinks there would be no real impact.

“We may see shortages of certain products, for example bulky items which cannot be packed in large numbers into containers and also low-cost items which would be uneconomic to ship at higher costs.

“But there are plenty of substitutes, so for consumers and most manufacturers this will not be a problem. For those that are already locked-in to orders or rely on specific components or parts, then there will be some restrictions if stocks-in-hand are low,” he told TMR.

Williams believes the main impact is on logistics and supply-chain slowdowns, which may in turn slow down the recovery in trade.

“There are also some positive effects because the higher costs will make domestic goods more price competitive against imports. There might also be a shift to other transport options such as airfreight, which will help that industry but only for smaller less bulking items,” he added.

MIDF Research VP and head of research Imran Yassin Md Yusof said firstly, we have to understand the reason for the increase in freight rates.

“We understand that this is due to supply chain bottlenecks that are appearing across the globe. For example, there is congestion at the US ports in California.

Hence, to estimate the effect of the high freight rates will depend on the length of time to clear the supply chain bottleneck.

“We foresee that the rates will start normalising in 2022. However, the short-term immediate effect could be higher prices for consumer products. We have observed inflation creeping up across major economies such as the US. Therefore, short-term inflation (whether to consumers or businesses) in Malaysia may follow suit,” he told TMR.

However, he does not believe that the higher freight rates will make Malaysian exports less competitive as this is a global phenomenon and should be considered on a relative basis as well.

“It will have affected other countries’ exports as well,” he added.