Logistical Nightmare: Why Indian Exporters Are Putting Ocean Freight Contracts On Hold

Japanese tyre maker Yokohama Rubber Company’s Indian arm hasn’t yet renewed its ocean freight contract due in April. 

“We want to see how the price fluctuates going forward, whether the shipping lines would bring in blank sailings and whether there will be any equipment shortage because of this long route of trading,” Aparna Naik, associate director, supply chain and logistics of Yokohama told The Core.

Yokohama exports off-highway tyres used for agriculture, forestry and mining to Europe and the US, its biggest markets. With no end in sight for the Red Sea crisis, skyrocketing shipping costs have thrown exporters’ annual plans out of gear. While shipping costs have increased worldwide, the Asia to Europe route has been one of the most affected with prices increasing five-fold,  research published by JP Morgan in February showed. 

Things aren’t better on the transpacific routes either. According to the April DHL Ocean Freight Market Report, contract rate negotiations for May 2024 have been unsettled for a month due to a significant discrepancy between asking prices and what shippers are prepared to pay.

The freight rate for Yokohama before the Red Sea crisis was around US $500 per container for Europe and about US $1500 for the US, which went up to US $2800 per container for Europe and US $3800 for the US. The company ships 99.9% of its products through containerised ocean freight.  

The Red Sea crisis is only part of the problem. Alarmingly low water levels in the Panama Canal, another major freight route, backlog in the Suez Canal from July 2021 and some exporters choosing air freight over the ocean are all contributing to global shipping uncertainty. 

Yokohama and many exporters like it are understandably hesitant as this logistical nightmare plays out, with no solution on the horizon. 

A Series Of Unfortunate Events 

Global shipping has been buffeted by a series of crises in the past few years, the Red Sea attacks by Houthi rebels being the latest. The pandemic brought the entire logistics business to a standstill in 2020. Lockdowns, labour shortages and slow port operations exacerbated the situation, leading to significant shipping delays and mounting challenges for exporters. Essential exports moved from ocean to air freight despite the high prices. Several airlines also quickly converted passenger planes to freighters. 

Then came another blow. Ever Given, a mammoth container ship blocked the Suez Canal, one of the most important trading routes, for six days. Not only did it cause shipping backlogs for days, but it also sent shockwaves through international markets and sent oil prices surging. 

As the industry struggled to regain its footing, two major events in 2023 further disrupted maritime operations. The Panama Canal, which carries about 5% of the global trade, grappled with severe drought conditions, leading to restrictions on vessel traffic and draft depth. This forced ships to reduce their cargo loads, resulting in increased transit times and delivery delays, adding strain on supply chains.

Khalid Khan, director of Geco Trading Corporation, told The Core that the issue is acute for large volume cargo. Companies that ship goods that do not take up too much space are able to find deals with buyers. “Because buyers need the goods, they are often willing to arrive at an arrangement, usually splitting the higher freight cost with exporters,” Khan said.

Meanwhile, attacks on commercial ships in the Red Sea by Yemen-based Houthi rebels prompted re-routing of vessels, transit delays and price hikes. Unwilling to risk attacks, several companies and business groups opted to steer clear of the Red Sea. Between December 2023 and February 2024, container tonnage crossing the Suez Canal dropped by 82%. Meanwhile, tonnage rounding the cape of Good Hope rose 60%, according to an Unctad report. Rerouting extends turnaround times and requirements of vessels. A round trip between India and Europe takes 56 days and eight vessels but around Africa takes 63 days and an extra ship to move the same number of containers. 

To Sign Or Not To Sign 

Contracts between shipping lines and exporters are often renewed on an annual, quarterly, or monthly basis. Now, exporters are unable to decide for how long to renew their contracts. While a yearly contract is ideal, this isn’t the right time to settle on one. 

“If the market is going down, for example, you sign a contract of US $1,000 and the market is crashing to US $600 or US $800, then you are losing those US $200 benefits of the market. So whenever we sign the contract, there is a clause added that says ‘this contract is subject to post-major situations’ to make sure if the prices have gone down, we get the benefit,” Naik said.  

According to Statista, the ports of Los Angeles and Long Beach witnessed a staggering increase in container ship congestion, with the number of vessels waiting outside these ports between 2020 and 2022 increasing. Import destination ports, particularly those along the California coast, have also experienced a surge in congestion, with container backlogs continuing to mount since July 2021. Vessels arriving from Asian manufacturing hubs have borne the brunt of the delays, with some waiting for weeks to offload their cargo. 

Joy John, a logistics industry veteran, told The Core that whenever rates go up, exporters will ship only the bare minimum and the surplus inventory is normally kept on hold.

“The ocean rates to the US are now down-trending by more than 20% from what it was in the last quarter of 2023. The trade is still sceptical about going into long-term US contracts now, because of the downtrending rates,” said John.

Yokohama was also charged extra for containers that were already at sea since the Houthi attacks. It endured a price blow for a few weeks before passing on around 50% of the costs to customers.

“Although the contracts are based on the MQCs (minimum quantity commitment) and the volume sharing is yearly, we are also negotiating monthly contracts. We will want to be opportunists in the market because we are already taking a hit on the prices for the last five months,” said Naik.

On the other hand, some exporters are choosing air freight to avoid hassles. 

“Buyers with a limited inventory are more keen to transport the cargo by air rather than ship. Contracts are materialising on some of the routes where freight rates are still very high as people are hoping that it will soften in time,” said Ajay Sahai, director general and CEO of the Federation of Indian Exports Organisations.

For Indian exporters, this isn’t easy either. Air freight rates too have surged because of the Red Sea crisis. There is also a congestion problem at the Delhi airport as it now serves as a trans-shipment hub for clothing exporters from Bangladesh.

John hinted that a new marine cargo service called WIN, a collaboration between ONE, Cosco Lines and Hyundai, could also be a reason why exporters are waiting it out. The shipping service to the US is still in the pipeline. 

“We will see most contracts being finalised by shippers by the end of May or latest by mid-June,” John added.