Red Sea crisis and spot rate hike

Transportation of merchandise by sea has become costlier as spot rates (of freight) for containershipping have seen unprecedented hike within the span of a month. Such rise in ocean freight has struck fear among Bangladeshi shippers as the development reminds them of the pandemic time when freight rates had gone up to even 300 per cent due to shortage of containers. Now, freight rates between Chattogram and China has increased by about 100 per cent. As a result, a twenty-foot container would cost around US$1,500 to transport to China, which is Bangladesh's largest trading partner. Similarly, the spot rate between Bangladesh and Singapore has gone up by 50 per cent raising the per twenty-foot unit (TEU) transport cost to US$300. Between Bangladesh and Colombo, the rate increased by 15 per cent, pushing up per TEU cargo carrying cost to US$230.The reason for the spot rate hike, according to shipping agents, is the crisis in the Red Sea, a major sea route connecting Asia and Europevia Suez Canal through the Mediterranean Sea. Severe congestions at the major transhipment ports like Singapore have also been shown as another reason for spot rate hike.

Now with the Houthi rebels of Yemen blocking entry of all kinds of ships through the Red Sea, the shipping operators have to reroute their cargo vessels around the Cape of Good Hope of South Africa, which adds 3,500 to 4,000 kilometres to the sea route or 14 to 15 extra days of travel time to European ports. Notably, Europe is a major destination of Bangladesh's chief export, apparel products. Against this backdrop, the Western buyers may like to pay lower rates for Bangladesh's apparel and other products because of higher freight charges. To adjust source cost, they may even prefer to look for alternative sources to cut costs. Unfortunately, the higher shipment cost has come at a time when the country's export sector is trying to adjust to the falling demand in the key markets. Despite this challenge, exporters are in a race to manufacture products with an eye to the upcoming summer markets of the West. In sum, as a result of the shipping cost hike, Bangladeshi exporters have found themselves in a tight corner as they will have to meet the supply orders placed by overseas buyers regardless of the risk of lower or even zero profit margin. They cannot under any circumstances afford to lose their overseas buyers.

That further strengthens the argument for widening the export market by adding more destinations. In that case, uncertainties of financial or political origin in any particular export market may not badly affect the overall export. However, export is not the only issue that spot rate hike has given rise to. In fact, the crisis has also impacted import cost of goods thereby driving up the inflationary pressure on Bangladesh economy further. However, as container freight hike is a global problem, the government will be required to keep close watch on the developments as well as maintain communication with its major trading partners in order to meet the emerging challenges.

At the same time, given the not-so-commendable track record of local traders, particularly those dealing in essential commodities, the common consumers have reason to be concerned. So, the government will have to mount its vigilance, so that traders may not take undue advantage of the rise in shipping cost to make the kitchen market further volatile.