China to India: Best Time to Book Freight Is Now!

We anticipate that freight rates will continue to rise and lead to an increase in import price levels as well as in consumer prices. This has major implications for importers in India, especially those who import from China, as a number of China-specific events, like the Chinese New Year, Winter Olympics, and China’s power rationing measures, are likely to impact further demand and shipping capacity on the China-India maritime route and push up freight prices over the coming months.

Global import price could increase by 11%

On December 6, 2021, the Baltic Exchange’s bulk sea freight index rose to a 30-day high as a result of rising freight rates. A composite of three-sub indices that measures rates across three different sizes of dry bulk carriers operating on 23 shipping routes, the Baltic Dry Index is benchmark of the price of transporting goods by sea. This rise is indicative of a consensus among industry experts that freight rates will continue to increase soon. The UNCTAD’s recent Review of Maritime Report 2021 too warns that the current surge in container freight rates will continue into the coming months.

According to the UNCTAD, if rates continue to rise at current levels, global import price levels could increase by 11% and consumer price levels by 1.5% between now and 2023. Since, freight rates are intrinsically enmeshed with global value chains, this rise in prices will continue to affect players across the world – everyone from small to large manufacturers, importers, and exporters, as well as the end consumer will face the heat. As a result, this will impact socio-economic recovery across countries. However, the negative impact of this surge is not equally distributed. UNCTAD that small island developing states and least estimates developed countries will face a greater negative impact, since their consumption and production is highly dependent on trade. Moreover, small economies producing items with low-value addition might witness a degradation of their comparative advantages.

Factors that will lead to increased freight rates from China to India

These global trends will also affect India, especially the China-India trade route. Moreover, India and China are entering a period of increased trade as evidenced by the rise in imports over the last few months. Over 15% of India’s total imports come from China and in 2021, India has already imported goods worth $51,0004 million from China. Moreover, imports from China in value terms have increased from $6480 million in August 2021 to $8672 million in October 2021, an increase of 33.8%. This growth is likely to continue in light of increased consumer spending during the upcoming festive season.

This rise, coupled with current factors like service suspensions in China, delays caused by the upcoming Chinese New Year holiday, restrictions imposed because of the Omicron breakout, and backlog caused by power rationing, will affect the availability of shipping capacity and freight prices between India and China in the short to medium-term.

In the current scenario, where capacity is already strained, increases in trade volume are likely to result in a further increase in freight prices. A number of shipping lines have also diverted capacity that served developing markets to major trade routes (i.e. trans-Pacific and Asia to Europe routes), by either deploying smaller vessels or completely skipping smaller ports. This has further constrained shipping capacity between China and India and this lowered capacity will affect import of raw materials/inputs from China as well as export of finished products from India.

Chinese new year and the suspension of port operations: Feeder operators (those that ply goods between major and minor ports in China) are expected to suspend services for six weeks over the Chinese New Year holiday because of China’s strict quarantine measures for seafarers – crew disembarking at ports in North China are expected to quarantine for 21 days, while those disembarking at southern ports are expected to quarantine for 14 days. Before the pandemic, holiday-related suspensions lasted just two to three weeks. While the suspension does not directly affect major ports in China, experts expect it to have ripple effects across China’s supply chain. Because of this service suspension, goods from smaller ports will need to be transported to major ports via road, which may result in capacity constraints and delays for all exports. Goods scheduled to arrive at smaller ports may be redirected to the major ports, increasing traffic.  While port congestion in Asia has eased as compared to ports in North America, the easing is not uniform. For instance, recently, the ratio of ships waiting to those docked in port rose by 25% over the median in Tianjin. This volatility in port congestion, in addition to increases in traffic at major ports is likely to result in delays. The upcoming holiday will also affect overall availability of staff and crew, which may lead to congestion and delays which will further strain shipping capacity and impact prices.

Winter Olympics 2022: Beijing is hosting the 2022 Winter Olympics in February and exporters, in all likelihood, will attempt to ship goods before the New Year holiday and the games, causing an increase in volume and in turn, freight rates. Moreover, research suggests that hosting a mega-event like the Olympics boosts trade, especially exports. An increase in the volume of exports from China without a commensurate expansion of shipping capacity is likely to push up shipping rates because of a demand surge.

Power Rationing: China has also implemented power rationing measures across key manufacturing areas such as Guangdong, Jiangsu and Zhejiang. These rationing measures have been undertaken due to several reasons – high coal prices, unpredictable weather patterns and obligations to meet energy and emission goals. These rationing measures are expected to affect manufacturing and therefore supply and delivery of goods. While the extent of disruption depends on how much electricity is diverted away from manufacturing, the rationing is likely to drive up the price of goods as well as result in delays in the global supply chain. In fact, the rationing has already caused factories to hold back cargo – clearing this backlog will be an added strain on shipping capacity.  

Restrictions related to new strains of the Covid-19 virus: The Omicron strain breakout may also affect supply of goods as well as port and container capacity. According to Lars Jensen, CEO of Vespucci Maritime, “There is still a significant risk of port impact from COVID outbreaks especially in China, there is risk of more cargo surge putting pressure on the supply chain as shippers already now begin to push cargo through rather than wait for the traditional rush before the Chinese New Year.”

Together, these factors point towards unpredictable port congestion, increasing strain on container capacity, and a likely increase in freight rates while importing goods from China across the next few months. Global giant DHL in its October2021 Ocean Freight Market update states, “For IPBC, India, Pakistan, Bangladesh and Sri Lanka, with multiple blank sailings in September, shipments remain stuck at origin and transshipment port. Waiting time for shipments at transshipment port is about 6-8 weeks. Advanced booking of at least 4 weeks remains as a guideline for FAK bookings to secure space early.”

Small and medium enterprises are already facing the brunt of the record-high prices that have characterized trade over 2020 and 2021. Some are barely able to keep themselves in business. Additional price pressures will only worsen business conditions. While concerted actions is required to control this expected increase in freight rates, we advise our clients to book freight containers from China as early as possible to avoid getting caught up in the upcoming cycle of capacity squeezes and price hikes.