How can we forget the pandemic shortages when practically every grocery store shelf in Pasadena was emptied as consumers snapped up the limited supply of toilet paper, baby formula, and other essentials? Or the scarily scenic vista of shipping vessels lined up off the Long Beach shoreline, sitting for weeks with nowhere to go?
The consumer pricing hikes we experienced are still fresh in the minds of Pasadena residents. The crunch of an overloaded supply chain and a drop in COVID-affected available truckers placed a strain on the flow of goods across the world. Just when we thought there were signs of correction, the US (and allies) launched a series of strikes against Houthi rebels in Yemen, who have been attacking a vital international shipping route in the Red Sea for several weeks.
The Houthi attacks jeopardize trade, and more than 2000 ships have been forced to divert thousands of miles to avoid the Red Sea. Still, ocean shipping remains the heartbeat of global trade. In addition to the Red Sea, the Suez Canal is one of the major lanes and one of the quickest routes between Asia and Europe. An artery carrying 17,000 ships yearly is responsible for a trillion dollars’ worth of goods. That’s 12% of annual global trade, according to Lloyd’s list of international shipping news outlets.
When the attacks began, it cost $1,148 to ship a 40-foot container from Taiwan to the Netherlands. Prices are now at $4,406 per container, almost four times more expensive.
Diversions around the Red Sea route mean delays in consumer goods, log jams at ports and increased shipping costs, translating to longer wait times and higher consumer prices. The longer the issue remains, with other trade tumult on the horizon, the more adverse its effects will be. IKEA has already warned of product shortages. Companies like Tesla and Volvo have paused production in some of their factories to avoid having a backlog of supplies.
Knock-on Effects
At least six of the ten biggest shipping companies worldwide have either decreased the number of ships they send through the Red Sea or diverted their entire fleet from the area. The insurance costs to ship containers through that passage skyrocketed. When the attacks began, it cost $1,148 to ship a 40-foot container from Taiwan to the Netherlands. Prices are now at $4,406 per container, almost four times more expensive.
Jack Simpson of The Guardian explores this narrative in his recent article. “Traffic through the Red Sea has nosedived since the first Houthi attack on 17 November.” Analysis from the German economic institute IFW Kiel found that the number of containers traveling through the strait fell by 60 percent in December 2023.”
This impacts all types of commodities, from oil, wheat, and electronics to recycled goods and the ever-necessary home goods. Ships are opting for alternative routes, which, for those who want to avoid the Red Sea, can take the more protracted and more costly detours around the Cape of Good Hope on the southern tip of South Africa. A trip from Rotterdam to Singapore via the Cape of Good Hope is nearly 4,000 nautical miles longer than the Red Sea route and takes about ten days more. Xeneta, an ocean trade analytics platform, has estimated that this could cost up to $3 million more per ship, including $1 million in additional fuel and $300,000 in insurance and crew.
So why is this so concerning?
In a global context, routes through the Panama Canal have been drastically affected by drought. Greg Miller from freightwaves.com provided some shocking statistics.
“December 2023 transits fell 4.7 percent versus November 2023, a much lower rate of decline than in November when transits plunged 21.9 percent versus October. Panama’s dry season lasts until May, so no relief is in sight, leading to longer transit times in and out of the Pacific.
As no apparent option to bring in goods timely to shores is identified, this leaves the bulk of this redirect from Asia to all west-coast ports and rail yards. Pasadena consumers, be advised. This will inundate every port from San Diego to Seattle with freight as the major avenues continue to be strained.
Correlation between logistics and insurance with pricing
A deeper dive into the transportation industry signals how pricing is domestically determined. One of the best indicators of market changes is the change in rates for insurance. William Dessert, Transportation Practice Leader from Arroyo Insurance Services in Paso Robles, explained what happened to trucking companies during the pandemic and examined how insurance rates affect our higher consumer costs.
“Logistics – specifically intermodal trucking and long-haul transportation – is the backbone of every strong society and economy. Insurance is the bloodline that keeps fluid in the backbone. Property and Casualty Insurance premiums in the United States are approximately a $900B industry. Commercial Auto Premiums account for $65B of the $900B,” reports Dessert.
“There were long periods in 2021 where there were four loads to every one truck, which historically doesn’t occur except for the weeks leading up to national holidays such as Memorial Day, Independence Day, Labor Day, and peak season in Q4. It took the US population a week of panic buying ‘essentials’ to deplete nine months’ worth of inventory in March of 2020. Then it took our supply chain 18 months to replenish the inventory levels to pre-pandemic,” says Dessert.
Dessert continues about how this has affected consumers, “2021 was an awful year for commercial auto and personal auto insurers due to supply chain issues of replacement parts, artificially high used car prices due to limited production of new vehicles, etc. In early to mid-2022, many insurance carriers stopped writing new business in the state, and everyone began talking about entering the ‘hard market,’ which has resulted in limited insurance carrier capacity. Anyone with an automobile or a home has seen their insurance cost increase.”
Effect on Local Consumers in Pasadena
Perhaps one of the most marked cost increases in Pasadena has been for the City itself, with increased costs for its contracts and energy procurement due to Consumer Price Index rate hike adjustment clauses triggered by inflation and market fluctuations.
A recent analysis of current city contracts showed the City has 846 active contracts, of which 132 contracts totaling $81,225,815 in Fiscal Year 2023 include price adjustment clauses. Based on these clauses, the estimated annual increases range between 3 percent and 9.6 percent, an additional $9,893,198 for these contracts.
Three of the largest categories of procurements are trending up: gasoline prices averaged $5.03 a gallon in November 2022 in the Los Angeles area, an increase of $2.06 higher than in November 2020; construction costs have increased 9.3 percent over the past 12 months; and raw materials costs have risen 18 percent compared to a year ago.
A recent analysis of current city contracts showed the City has 846 active contracts, of which 132 contracts totaling $81,225,815 in Fiscal Year 2023 include price adjustment clauses. Based on these clauses, the estimated annual increases range between 3 percent and 9.6 percent, an additional $9,893,198 for these contracts.
When asked about the trickle-down effect on everyday consumers, Dessert replied that it had already occurred, especially in California.
“For example, three years ago, a new authority looking to stay within a 500-mile air radius of the Ports of Los Angeles and Long Beach who met all of the insurance carrier’s underwriting guidelines – 30 years old, three years of CDL, A experience, clean DMV/MVR history, clear DOT Medical Certificate – was quotes an annual cost of $10k-$14k,” reports Dessert. “In January 2024, this same venture is in the range of $16k-$20k.”
Within a five-mile radius of Pasadena, there are 437 active motor carriers, according to Carrier411.com. Within a 15-mile radius, there are over 5,000. Most large-sized freight brokerages boast networks of over 100,000 carriers in the US, Canada, and Mexico, most of whom are owner-operators and small fleets. Many of these owner-operators and small fleets tend to go out of business.
Dessert also echoed this when asked how many smaller ventures go under.
“Every day since the beginning of 2022, I have averaged one to two clients per quarter going out of business. Now that inflation has caught up on insurance premiums (I have seen a 45 percent increase since 2021), I expect fewer new ventures to enter the market in 2024 than in 2023,” said Dessert.
While other industry leaders expect a decisive turn for freight costs in Q2 in 2024, the concerns for the everyday consumer in Pasadena will ring true as these added costs are likely here to stay. The trifecta of increased shipping costs, supply vs demand, and soaring insurance rates can’t be overlooked when planning your budget.
Nearshoring Strategy – A Way to Mitigate Costs?
Delays and price hikes have knock-on effects on the local and global economies. The shipping industry today works on what’s called a “just in time” basis. Ships are meant to reach their ports exactly on schedule because space is limited, so even one late shipment can trigger a domino effect.
As we increasingly rely on our NAFTA partners, Mexico and Canada, nearshoring warehousing is a trend many import/export companies are exploring to limit commodity costs. Nearshoring is a strategy in which a company moves all or part of its production closer to the port of entry, reducing costs and avoiding logistical setbacks. In the last couple of years, many businesses worldwide have started to look at this as an alternative, primarily to prevent supply chain issues. However, this trend may not be enough to mitigate costs, as since 2019, according to Dessert, the USD has lost 21 percent of its purchasing power, which can be correlated and matched to the cost of shipping and fuel.
Is there a bright spot?
Some experts say this won’t be as bad as the impact of COVID-era supply chain issues because fleet capacity is higher. The shipping rates we’ve seen in recent weeks are still much lower than we realized in January of 2022 during the COVID-related supply chain issues.
Many analysts and transportation professionals will tell you that the transportation industry is cyclical, changing every two years and is typically a bear market during an election year. When supply is up, companies will tend to store more materials, leading to lower rates for transportation as the market is saturated. When demand is up, companies will often fall short and that places higher rates on available truckers. But when has anything been typical over the past three years?
Now that we have some unforeseen challenges in the supply chain, more delayed freight at a higher price in this election year is definitely possible.
