India’s Exports Boom To A Record High But Face A Choke Point: Global Shipping Storage
Space shortage in global shipping industry is leading to sky-high ocean freight costs for Indian exporters.
Freight cost broke all records in the last three months. In key India-US routes, costs are now up by 500 per cent to $15,000 for a 40-foot container.
India's merchandise exports rose to a record high of $35.2 billion in July 2021. Leave alone Covid-hit 2020, the exports were nearly 34 per cent more than 2019.
Together with other indicators, it might mean that India is back on the V-shaped recovery path, which it was following since the dramatic contraction in June 2020 quarter.
However, the space shortage in global shipping leading to sky-high ocean freight cost and alleged opportunistic practices by the shipping lines may throw a fresh spanner in the wheel.
Freight cost was firming up since last year due to supply disruptions. But it broke all records in the last three months. In key India-US routes, costs are now up by 500 per cent to $15,000 for a 40-foot container.
Exporters need support
The worst part of the story is that such a high price doesn’t confirm timely lifting and delivery of cargo by the shipping lines. The Central government-run ports increased the window for free of cost waiting for cargo from 10-15 days, but that hardly solves the problem.
In the absence of a transshipment port in India, cargo is routed mostly through Colombo, Singapore etc; exporters are paying extra charges everywhere.
Some ports officially announced a longer waiting period.
Shipping liners are taking full advantage of the situation. Exporters are forced to take services for inland transfer at nearly double the rate (than offered by domestic transporters), failing which bookings will be cancelled.
Cancellation will cost $1,000 per box (40 foot). A fee of $1,000 per box is charged for priority treatment that doesn’t guarantee timely delivery.
It’s a mayhem that has no precedence. The debacle is impacting all, including China and the US. The US Federal Maritime Commission (FMC) just initiated a probe on congestion-related charges imposed by the top eight global liners, who are witnessing soaring profits.
Top liner A.P. Moller-Maersk reported a revenue growth of 58 per cent to $14.2 billion in the June quarter. The company’s EBIT (Earnings before interest and tax) increased almost five times to USD 4.1bn.
Ocean Network Express (ONE) ended 2020-21 with a record 1,432 per cent increase in profits. ONE is expecting even better results in the September quarter with a forecasted $6bn profit after tax for the first half of 2021-22.
Normally, logistics costs roughly 10 per cent of the landed price (in foreign shores) of exports. Of the total, half is attributed to sea freight. All calculations have now gone haywire. It means while exports rose, the exporters suffered. They entered into contracts a minimum of 90 to 120 days in advance.
It was impossible for them to anticipate such a situation and they didn’t.
The worst sufferers were the smaller players in textiles, garments, handicrafts, agri-produce etc. They wanted to tap the Christmas booking opportunity in the West. Their alacrity brought the country much-needed market penetration.
The space shortage in vessels and the high freight rates, however, may not sustain for long. But markets once lost will go to more competitive China or Vietnam.
For long-term national interests, India should compensate its exporters for the loss.
Costly logistics, getting costlier
Exporting is not an easy option in India. Leaving aside known hurdles before manufacturing, costly but unreliable logistics is a major cost escalator.
Together with the high cost of finance, it makes Indian exports uncompetitive in the global market.
The results are before our eyes. India is the world’s largest cotton producer but a laggard in textile exports. China meets part of its cotton requirements from India and holds the top position in textile exports.
Between 2011 and 2020, India’s total exports remained stagnant at around $300 billion. During the same period, Vietnam’s exports increased three-fold from $96 billion to $281 billion, higher than India’s $275 billion.
There is no quick remedy to this problem. The average speed of cargo movement in road or rail is behind China. The average size of trucks is smaller. Double stacking of containers is still a dream in both rail and road. There is no way you can do double-stacking, till the old overhead structures are replaced by new ones.
Leave aside developed economies like Australia; even a poor Myanmar, uses better trucks.
An inefficient monopoly, called Indian Railways, is making industrial development in the hinterlands difficult. From Varanasi or Kanpur, exporters send containers by truck to Nhava Sheva port, covering nearly 1,300 km.
Road freight is costlier. But it's more reliable. Rail doesn’t run scheduled services. They will wait for the pile to get bigger enough to fill a rake or other such considerations.
No one cares if the exporter ends up losing money for delayed delivery to the customer or ends up paying demurrages to the shipping liner for the slow turnaround of the container.
Business depends on trust and trust comes from reliability. In India, logistics is unreliable. The exporter tries to cover that up by making the schedule longer, holding more stock in transit, thereby blocking his working capital.
For a country where interest rates are higher than exporting nations like China, blocking working capital is exorbitantly costly. The disruptions in the shipping industry came as an added cost and the exporter is now out of breadth.
Logistics Policy needed
India doesn’t have any quick remedy to the space shortage in shipping. According to the grapevine, China is unofficially forcing its flag bearing vessels to pick up Chinese cargo.
India doesn’t even have that option as there are very few vessels with an Indian flag. The Narendra Modi government is pushing this agenda with all sincerity. Time will tell if it is successful.
The dependence on foreign transshipment ports is proving costly. Due to the rush in US-China traffic, mother vessels are calling on such ports less frequently. Given the growing Chinese dominance in Sri Lanka, the disruption is an eye-opener to potential strategic hurdles of the future.
India is now keen to have its own transshipment port, but once again, that’s a long-term affair and needs dogged persuasion.
The need of the hour is a long-term vision on logistics that will tie all loose ends. The government announced the move to draft the Logistics Policy in June last year.
However, the policy is still awaiting finalisation. Hopefully, it will now be taken up in right earnest. We cannot control global disruptions, but efficiency at home will give us an extra edge in such situations.
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