Escalating shipping charges hinder local manufacturers

Lockdowns have stunned global logistics, raising shipping costs significantly and causing container shortages, Photo: Le Toan

Nguyen Chanh Phuong, deputy chairman of the Handicraft and Wood Industry Association of Ho Chi Minh City, told VIR that in recent months shipping container rates have increased by 30 per cent to reach over $10,000. Most American importers will pay as shipping is done through the free-on-board model, however, Phuong said this increase will expand the retail price of Vietnamese-made furniture in the US market.

“Imported materials also rose by 40-60 per cent due to freight cost surges. If a company uses all imported materials to make furniture, it needs to increase its selling prices by 20-30 per cent. Local manufacturers still have large export orders until the year-end due to the strong demand in the US market but they have to suffer a lower profit margin due to the costly rates,” he said.

On the other hand, Phuong noted that local consumers prefer imported items. It means the rising shipping costs will result in higher construction expenses, which in turn delays the development of local property projects and raises concerns about bubbles.

The soaring freight cost is a global phenomenon. With upwards of 80 per cent of all goods transported by sea, freight cost surges are threatening to raise the price of everything from toys, furniture, and car parts to coffee, sugar, and anchovies, compounding concerns in global markets already bracing for accelerating inflation, according to Bloomberg.

Jola Pasku, senior economist at IHS Markit, told VIR that similar to other countries in the region, the outbound flow of Vietnamese goods has been squeezed by a shortage in containers. Representatives of shipping lines in Vietnam reported that they are facing a serious shortage in empty shipping containers, which has spiked rental prices of these containers and interfered with a lot of enterprises’ ability to export goods.

“Container rental prices have been on an accelerating trend since October 2020 with exporters complaining having to pay five times the regular price, as well as paying to import an empty container just to have it available for export,” Pasku explained.

“The key driver of this has obviously been the pandemic, which has slowed down the processing cycle of unpacking and rotating containers at various ports around the world, but the soaring demand for Vietnamese exports has exacerbated this issue even more,” Pasku said. “Many exporting factories are reporting having to make tough adjustments from this development from being forced to close or delaying orders, as skyrocketing rental prices are weighing on their profits.”

Apart from an outbreak in southern China, Vietnam has also been hit with a more intense resurgence of COVID-19 cases since late April. A number of industrial zones in the north were forced to close and Ho Chi Minh City has extended a city-wide lockdown. Depending on how severe the current outbreak proves and whether it prolongs closures, it is expected to see more disruptions in Vietnam’s manufacturing production activities in the coming months.

According to the Vietnam Logistics Association, transporting a 40-feet container of cargo by sea from Vietnam to the United States and the European Union now costs into five figures, wreaking havoc for businesses. Many ocean carriers attributed the high shipping costs to the critical shortage of empty containers, and so raised the rates to around $10,500 currently for a 40-feet container.

Pre-pandemic, freight only accounted for a small proportion of the cargo value such as 6-7 per cent for electronic products and 15-20 per cent for agri-products. Transport expenses from ports to import destinations are now equalling or even exceeding order values, and thus shipping bottlenecks are hurting the transport of Vietnamese products.

Andrew Harker, economics director of IHS Markit, said that higher freight charges were one of the key reasons given by Vietnamese manufacturers for increasing cost burdens during May, and has also contributed to surging input prices globally. In fact, a JP Morgan Global Manufacturing index has signalled the sharpest rise in input costs for a decade in May. Any further disruption is likely to exacerbate these trends.

“Rising charges have the potential to dissuade customers from committing to new orders, but so far the strength of the rebound in demand seen globally in manufacturing has meant that Vietnamese companies have continued to see new export business expand despite these price rises,” Harker said.

In terms of measures to help deal with higher costs and disruption to supply chains, he noted that one thing companies have started to mention is efforts to stockpile materials to guard against supply shortages. They have been ramping up their input buying in recent months and inventories of purchases have risen in the past quarter.