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Will soaring shipping costs make Australian manufacturing more attractive?

The cost of shipping around the world has skyrocketed.  Until now most retailers have absorbed the costs, but with no end in sight to the shipping crisis, it’s possible the price of goods for consumers is going to rise. Some retailers have already announced they’re passing on these costs to their customers.

What caused shipping costs to surge?

In summary, a supply and demand story unfolded.

In 2019 ocean freight slumped. Then in 2020, the pandemic sparked an unprecedented surge in demand for goods resulting in a worldwide shortage of shipping containers.  Simultaneously, in Australia, the Government’s stimulus package, at a time when international travel was halted and restaurants etc closed meant that household disposable income increased (RBA). 

Spending shifted from services to goods, the demand for which is now at pre-pandemic levels.

Small retailers are disproportionately affected by the supply chain disruption. They have less ability to take mitigating action such as stockpiling inventory due to cashflow and warehousing costs. We’re hearing of large retailer’s stockpiling 8-12 months’ inventory!

Big companies lock in long term shipping contracts at agreed prices.

Retailers like Ecodownunder who are not big enough to enter long term shipping contracts have to buy the remaining space available on ships, on the spot market. It’s the cost of this space that has escalated.    The shortage of shipping containers and the inability to get empty shipping containers back to the source of the goods exacerbates the problem.

Australia imports more container ships than it exports, which means Australian retailers must often pay a surcharge just to get the ships to dock here.  This is all compounded by industrial action in local ports and a lack of passenger flights which pre-COVID carried significant quantities of freight.

Getting stock in time for Christmas is the biggest concern for many. Not only are manufacturers in Asia experiencing delays in production due to lockdowns, but products are taking more than twice as long to get here.  Ecodownunder used to receive goods 4 weeks after departing Mumbai.  It’s now taking at least 2-3 months and that’s if you can get a container! We’ve just been quoted US$9,500 for a 40-foot container, 7 times what we used to pay. Freight prices are going up weekly.

Soaring shipping costs increase the landed cost per unit of goods.  For bulky goods, the additional cost added per product is high.  We’re fortunate that our bulkier wool products, quilts and pillows etc are made in Australia and so don’t incur freight costs.  If prices continue to rise and shipping delays continue to grow, more businesses will start to look at sourcing products locally.  A win for Australian Made! We’re already seeing our competitors who import from China, looking to source from our Australian manufacturers.

Seasonality of stock has caught many retailers out with winter products arriving in Spring.   The new norm for us means planning and ordering inventory at least 6 months ahead instead of the three months that was required pre-COVID.

The RBA figures show the price for shipping containers quadrupled in the year to June 2021, reflecting the Ecodownunder experience.  With demand continuing to rise, bottlenecks in shipping are likely to persist into 2022 which will mean further price rises.  This will likely lead to tighter supply chains.  Concerns about the reliability and cost of imported goods will encourage more businesses to onshore to reduce shipping costs and time.  A win for Australian made!

And a reduction in international shipping will be a win for the environment with less carbon emissions contributing to global warming.

This story originally appeared in our sister publication, Inside Small Business.

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