No respite to the shipping crisis and that’s bad news for Indian SMEs – The Economic Times

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In India, October is the onset of the holiday season, similar to that in the US. Hence, it is usually the time when demand for certain manufactured goods like electronics and garments rises. This hike in demand plays a critical factor in the rising prices of containers.

With two-thirds of the world being covered in water and the rapid growth of globalization, the shipping industry has become a pivotal support system to commerce and trade all around the globe. According to the United Nations Conference Trade and Development (UNCTAD) report, around 80% of global trade by volume and over 70% of international trade by value are carried by sea, thus earning it the title of the backbone of the industry.

In today’s world, while the entire human populace continues to grapple with the COVID-19 pandemic, its human, economic, and social effects worldwide have been colossal. Amidst the pandemic-induced global recession, no industry or sector of the economy has been spared. Even the Maritime domain is facing its share of significant repercussions.

To contain the spread of the virus, countries and governments started imposing restrictions resulting in heavily reduced economic activity and global trade. Due to its various mutations and variants, the coronavirus has hit countries in different magnitudes, and the ease of restrictions in each nation now differs. The existential shipping crisis is essentially a consequence of unbalanced economic recoveries in different importing and exporting countries.

It may be safe to assume and state that small and medium-sized enterprises (SMEs) have seen the worst of the pandemic. According to Drip Capital’s internal analysis, SMEs worldwide contribute over 25% to the massive $ 18 trillion maritime trades, and this imbalance in trade has affected them significantly.

Shipping Crisis
China is the largest exporter globally, and, in 2019, 16.1% of overall global exports were done by the country. At the start of the pandemic, manufacturing came to a standstill due to strict lockdowns. Many Chinese companies forfeited on their purchase contracts causing a considerable decline in the import of raw material.

According to the Drewry Port throughput indices, owing to a shortage of workers to unload, handle and transport them to the factories, many containers were diverted to other ports, which incurred substantial congestion surcharges. Simultaneously, manufactured and finished goods were lying at various Chinese ports but were not being shipped and transported worldwide. This caused hardly any freight movement in and out of China.

Multiple shipping liners worldwide started seeing a decline in their monthly revenues, forecasting a further reduction in the coming months. As a result of allayed trade activity, empty containers in places like America, being one of the largest importers, were not getting picked up despite being much needed in Asia. With the decline in cases in China, the country recovered quickly, and China resumed its exports in March and started shipping its filled containers. However, once these containers reached their destinations, social distancing and covid restrictions amongst dockworkers caused slower shipping processing time. As a result, there was a backlog of claimed cargo at the ports in the import nations like Europe and North America, further aggravating the container shortage issue.

Owing to the pandemic, work from home has become the new norm, as has education and exercising. This increased the demand for desks, chairs, electronic equipment, fitness equipment, etc. Despite the skyrocketing prices, many companies were willing to export their products. This led to shipping costs escalating, and Drewry’s composite World Container Index (WCI) increased from $ 2628 at the start of November 2020 to $ 5340 in January 2021. This competitive environment affected many but especially all the SME exporters who were burdened by these towering costs. These challenges were only heightened in March 2021, when the Suez Canal got blocked by the grounding of the Ever Given shipping vessel. This blockage added to the entire supply chain disruption as it caused major traffic jams and delays, blocking over 300 ships. As a result, many shipping liners started re-routing their vessels around the Cape of Good Hope, the southern tip of Africa, anticipating long delays in movement.

The Indian Effect
In India, October is the onset of the holiday season, similar to that in the US. Hence, it is usually the time when demand for certain manufactured goods like electronics and garments rises. This hike in demand plays a critical factor in the rising prices of containers. This shipping crisis has escalated by 300%, worsening the situation for Indian SMEs who are navigating their businesses amidst the pandemic. The lack of containers increases the logistics costs and affects the SME’s capabilities to complete the orders, causing a delay in the payment. If things continue the way they are, economies are likely to survey other options with shorter trade routes to reduce their losses.

This could severely harm SMEs that are already battling with the economic impasse brought on by the pandemic. Moreover, suppose transport cost keeps increasing like this. In that case, there might come a time when local US distributors may re-think their decision to import from India and prefer domestic manufacturers, which could cause further problems for Indian SMEs exporting to the US.

The aforestated Suez Canal crisis has exacerbated the challenges faced by Indian ports. As a result, Indian cargo deliveries will be delayed both ways. Even if the Suez Canal operates entirely, the backlog that has already been created will take a substantial amount of time to clear up. Owing to this catastrophe,12 major ports in India witnessed a considerable dip in cargo traffic, thereby massively affecting MSMEs.

Way Forward
As countries continue to roll out gargantuan vaccination drives and pandemic restrictions are eased globally, consumers are more likely to spend on travel, entertainment, and hospitality. This would bring some relief to merchandise exporters. The shipping industry, however, will not see any respite until its container-related challenges are dealt with. Therefore, the sector needs to take a holistic look at the container industry, which is a means of transportation of goods and a key enabler of globalization.

(The writer is Co-Founder and CEO, Drip Capital)

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