Global shipping lines face a number of significant challenges, such as market stagnation in the wake of Brexit and the outbreak of Covid-19.
This stagnation has led to a shipping crisis. Freight ships with growing load capacities and the merging of shipping line alliances have led to a decrease in container transport prices while the industry is under pressure to drastically reduce its carbon footprint. This has left many freight carriers struggling to cover their costs, increased fears of empty shelves in the lead up to Christmas, and paralysed key industries from construction to manufacturing.
Worldwide trade is conducted in US dollars, which makes long-term forecasting of exchange rate fluctuations challenging at best. This causes shipping line issues, affects the demand and supply forces in foreign exchange rates and drives away investors. The fuel shortages and supply chain crisis suffered by the UK in September 2021, for example, has led to serious concerns about the resilience of the British economy and resulted in the pound weakening against the US dollar. The pound fell below $1.35, an eight-month low, in September amid concerns amongst investors about the fuel crisis – a significant decrease from its value of above $1.42 in June.
Read on to learn about the risks affecting the shipping industry and how they can be successfully mitigated.
Threats affecting the shipping industry
Shipping companies have numerous expenses to foot, including the payment of crews, purchase of bunker fuel, maintenance work, port duties and more besides. All of these payments are made in a variety of currencies for international shippers, which naturally require conversion to the required local currencies.
As world trade and the bulk of international shipping business is conducted in USD, any fluctuations in USD can put substantial financial strain on shipping companies. For example, a European shipping company paying duties in USD during a time when the dollar has strengthened against the euro may face inflated expenses and reduced profit margins as a result.
Furthermore, fuel costs account for as much as 50-60% of a ship's operating expenses. This is impacted by the price of marine diesel and the types of sea freight rates that are used. Every ship ride’s profit margin is highly dependent on this price, so international freight forwarders are often forced to make short-term fleet line-up adjustments to compensate when fuel prices are high.
If diesel prices are high, many shipping lines will consider using smaller, ‘slow steaming’, energy-efficient freight ships instead of larger, faster models. However, due to the financial pressure and economic fluctuations caused by Covid-19, shipping companies no longer have the funds for these short-term investments. They therefore have no option but to take approaches that keep their profits and investment capital pools low, even when diesel prices are cheap.
Shortage of containers
A global shortage of shipping containers is driving up shipping costs and delaying the delivery of goods. Container prices surged by more than 700%, and the number of containers produced fell by 40% in the second quarter of 2020.
The pandemic and unequal international economic recovery are fuelling the crisis, which is forcing desperate shippers to wait weeks and pay premium rates for shipping containers.
These factors are all causing shipping costs to soar, and consumers are bearing the brunt of this in the form of higher costs.
This has significantly affected British businesses’ revenue streams and the way that they ship and sell imported goods. Some businesses have compensated by increasing their inventories in anticipation of future sales, whilst others have reduced their inventories considerably.
The influence of exchange rates on shipping
Many world currencies, including the USD, GBP and EUR, have fluctuated significantly since 2020. If, for example, the USD is strengthening against the EUR at a certain time, this would cause an increase in North American imports and a drop in exports.
It would also mean more air freight and sea freight at current ocean freight rates on North American lanes. For European shippers, having to pay freight duties in USD when the dollar is strong would eat away at their profits and drive up their expenses considerably. Conversely, as current ocean freight rates tend to be paid in US dollars, the weaker the USD is in relation to the country of import, the more affordable the import ocean freight rates become.
How might the risk posed by FX fluctuations be managed?
Shipping companies can manage the risks posed by exchange rate fluctuations by implementing effective currency risk management strategies. One of the most popular strategies is currency hedging, which can protect against losses that occur as the result of significant exchange rate changes after the time of import/export contract signing.
Forward contracts can be used to lock in exchange rates and purchases for a fixed period from the time of signing. Future contracts provide the option to purchase currency in the future at a locked price, preventing price unpredictability and helping to preserve shippers’ profits. Bear in mind that forwards can be booked for 2-3 years and may require a deposit.