At least once a month, Bobby Garg, the president and CEO of SG Worldwide Inc., pays for a shipment of high-end whiskey and gin from India. A distillery in Uttar Pradesh makes the liquor. Dockworkers load the alcohol into a 20-foot crate, then place the crate on a ship in Mumbai. 21 days later, the ship arrives off the coast of Long Island, New York.
In normal times, the ship pulls into the dock for unloading, and Garg’s liquor is sitting in his New Jersey warehouse a few days later, ready to sell. But not right now.
In February, Garg’s shipment sat off the New York coast for three weeks before unloading, leaving him without any product to sell. To make matters worse, he paid $16,000 for the shipment, more than five times the typical pre-Covid cost of about $3,000.
“Right now, you have to beg for a container, actually. They might have it for $14,000. So you tell them, I’ll give you $16,000,” Garg said. “It’s a major hit to my bottom line.”
Businesses across the US have struggled with skyrocketing shipping expenses and lengthy delays for much of the last year, forcing them to make a decision: raise prices or swallow the increased costs. Contract rates to ship containers to the US have nearly tripled in the past year, while one-off spot rates rose as much as 1000%.
A dip in demand or surge in supply would bring down prices, but that realignment will likely be a multi-year process. In the meantime, elevated prices will especially hurt small businesses like Garg’s that don’t have the leverage to negotiate lower rates with shipping companies.
Shipping companies began charging higher prices after a series of Covid-related changes in supply and demand.
With Covid’s onset in early 2020, shipping companies reduced the number of cargo ships in operation, expecting global trade to plummet. However, in mid-2020, American consumers began to purchase more goods than ever, eventually leading to clogged ports across the country. Strict Covid policies in China also led to a backup of US imports, as many of China’s largest ports shut down for weeks on end.
Altogether, the increased demand for goods, reduced supply of ships and containers, and backups at ports led to a spike in prices.
The surge in prices led to record earnings for shipping carriers in 2021, with industry-wide profits surpassing $150 billion for the year. The shipping industry has earned more profits in the last two years than in the rest of its history combined, according to John McCown, a veteran executive at various maritime shipping companies.
The most likely scenario for reduced prices is an increase in supply, which could come from two sources. First, the astronomical profits could attract new firms to the market, leading to more competition and supply. But, that isn’t likely to happen in the short term. It could take years for younger companies to purchase the ships and containers necessary to compete with the current industry leaders.
Second, shipping companies could reinvest revenues into more containers and ships, reducing pressure on their current capital. But, shipping firms could be wary about investing in new equipment if they believe it’ll drive down costs too much.
“The industry doesn’t want to shoot itself in the foot and order too many vessels,” McCown said. “The carriers aren’t going to be adding capacity themselves because they like the dynamic.”
If ports are able to reduce congestion, companies may respond by reducing the number of trips their ships make each year, McCown said. That manufactured reduction in supply would also keep prices up.
Most economists agree that a change in supply is most likely to bring shipping costs down, but some believe a drop in demand for goods could drive the shift.
Since Covid began, Americans have spent less of their income on services and more on goods, many of which are shipped from overseas. Consumers have begun to redirect more spending to services like restaurants and theater tickets over the past six months, but that transition has been slower than some expected for several reasons.
Some service companies have struggled to hire employees in a tight labor market, especially after Covid forced many of those companies to close for extended periods. The recent Omicron wave also likely slowed the shift back to spending on things like vacations and other services.
A tighter money supply, caused by rising interest rates and reduced stimulus, could lead consumers and businesses to gradually taper off spending on goods over the next year, according to Chris Low, a chief economist at FHN Financial. If that reduced demand is met with an increase in supply, then shipping prices are likely to fall.
Increased costs impact all businesses, but smaller companies tend to get hit the hardest. That’s because many of the largest importers in the country—massive corporations like Walmart, Target, and Home Depot—have long-term contracts with shipping companies. Long-term contract rates have gone up by two to three times the pre-Covid rate, but renting a single 40-foot container can cost eight to ten times as much today as it did two years ago.
Smaller companies that ship fewer containers don’t have the leverage to negotiate lower rates, according to Stephen Lamar, the CEO of the American Apparel and Footwear Association. Lamar consults with both large and small clothing importers on how to manage increased shipping costs. Many of the companies he works with, especially smaller businesses, have raised their retail prices to make up for the costs.
“People are going to try to stay competitive, but they also want to stay in business,” Lamar said. “They end up passing those costs along to customers.”
For Bobby Garg, the increased shipping costs have eaten at his profits, but so far he has resisted the temptation to raise his prices to make up for the cost.
“I’ve been told by the distillery that I should raise prices, but I am trying to keep it down,” Garg said. “We try our best not to hurt the consumer’s pocket.”
