Cambodia’s export-import challenged by staggering ocean freight rates

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Rice inventories are at risk of expanding if exports are pressured by high ocean freight rates. Heng Chivoan

Global surge in container shipping rates are pressing shippers who have had to absorb 25 to 30 per cent of costs at a time when every penny matters

‘Crazy world,” Song Saran, president of Cambodia Rice Federation (CRF), exclaimed in the company of industry players on the sharp uptick of ocean freight rates.

The rates, which have been rising since the second half of 2020, are now five to 10 times more than a year ago, resulting in a 30 to 35 per cent additional cost on import-export trade in Cambodia.

It has pushed up rice and other food produce inventories bound for export, as well as production cost because of expensive raw material imports.

What used to be two-thirds lower, ocean freight rates in Cambodia now range between $4,500 and $5,000 for 20-foot containers and $10,000 and $12,000 for 40-foot containers.

The surge is widely attributed to a dichotomy of reduced vessels and containers due to plunging declines in overall retail demand in the West, and robust exports off China. Ocean freight rates are dictated by supply and demand, so it is not subjected to controls by any jurisdiction.

Due to antitrust immunity in the EU and US, allegations of collusion among shipping lines and profiteering have cropped up. Shippers and business communities are convinced that ocean transport consortiums are monopolising the situation.

“The rates that are being imposed on the industry are unprecedented,” opined Gary Wilcox, CEO of UK-based specialists logistics firm JAG UFS International Ltd, who has been in the industry for over 37 years.

He said the shipping lines are justifying the surge due to the lack of equipment at origin station in the Far East and South East Asia.

“They are stating that this is down to empties [containers] not being returned quick enough at destination and the large majority of empty equipment sitting in Europe, UK and the US.

“All of which I totally understand, but what I find hard [to comprehend] is the fact that the rates have increased over 500 per cent [since last October]. I cannot find any other explanation [apart from] the shipping lines profiteering,” he told The Post via email.

Rising rice stock

Back home, Saran said they are struggling to find container space for their rice shipment. The increasing freight rates and lack of available space to ship rice affected exports last December and this month.

It is anticipated to get worse. In a letter addressed to the Ministry of Agriculture, Forestry and Fisheries sighted by The Post last week, CRF said due to Covid-19 and ocean freight fares up five times, it expects a 30 per cent drop in export from January to May this year.

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Import export trade is challenged by high freight rates and a myriad of other costs. Photo supplied

The current predicament opens up another complex issue for the sector involving the quality of export rice using Cambodian logo.

It is understood that the shipment conundrum and the pandemic will inadvertently bump up informal paddy rice exports as producers sell off the produce to resolve cash flow problems.

Last year, out of 10.9 million tonnes of rice produced, up 11 per cent year-on-year, nearly three million tonnes of paddy rice, otherwise known as unmilled rice, found its way to Vietnam.

Official data revealed that 690,800 tonnes of milled rice was exported to 60 countries for a total value of $539 million.

China absorbed 290,000 tonnes or 42 per cent of the export, followed by 24 countries in the EU (30 per cent) and six Asian nations (12.6 per cent).

The remaining 16 per cent was shipped to 29 countries, MAFF said.

Declining to elaborate, Saran instead said: “Surely, when you have paddy in stock and export is stressed, paddy will flow to Vietnam to relieve some cash flow issues.”

The letter, which has not been delivered, requested the ministry to set up a mechanism similar to the management of milled rice to ensure fair competition.

In the meantime, the stress is widespread in both export and import-based sectors, even more so because over 65 per cent of shipments out of Cambodia is via sea.

Comparatively, air freight is the most expensive and has grown 10-fold in the past few months while rail transport costs three times more.

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Source: Cambodia rice federation MT - Metric Tonne

All this has made freight forwarding more challenging, said Sin Chanthy, president of Cambodia Freight Forwarders Association (CFFA), whose sector has a lot to lose.

Commonly, forwarders extend credit to customers for 30 to 45 days, at times longer depending on circumstances whereas airline companies and shipping lines only accord one-week credit terms.

“With the situation now, repayments by customers are slow while shipping lines are pushing for faster payback,” he said.

In some developing markets, shipping lines have allegedly revoked credit terms to forwarders. Along with the freight rates, some shippers have resorted to cancelling or delaying shipments.

The same scenario unfolds here, and together with fees like container imbalance charges (CIC) due to empty containers in the US and Europe, upfront costs have surged.

“It is very difficult [for us] and we have no choice [but to accept the situation].How can we drop the price? It depends on the shipping lines,” he said.

Logistics specialist Wilcox said the rates would impact everyone in the supply chain all the way through to the end customer.

As a result, ocean freight bookings have dropped as shippers are advised to either wait for rates to dip or find local manufacturers of the same product.

“Previously, European and UK manufacturers have been too expensive in comparison to importing the goods from Asia [but] this is now driving local [UK] companies to look closer to home for a solution and product,” he said.

‘Buyers pay sea freight’

Packaged snacks manufacturer Ly Ly Food Industry Co Ltd, who counts PepsiCo Australia Holdings Pty Ltd as one of her customers, said her company has experienced delayed shipment in the past month as some countries blocked imports.

“This is a problem because higher inventory takes up more storage and longer delays can affect the shelf life of the product,” said CEO Keo Mom, whose Phnom Penh factory makes rice crackers and dehydrated fruit and vegetable chips.

Increased freight rates have pushed up the cost of raw material imports from China, Thailand and Vietnam by five per cent, forcing her to revise the cost of her overseas products upwards.

The products priced 10 per cent more are exported to 13 countries including the US and South Korea.

The garment, textile and footwear (GTF) sector also recorded an uptick in cost of production due to higher import costs, Garment Manufacturers Association in Cambodia (GMAC) secretary-general Ken Loo confirmed, although he did not supply an estimate.

Having said that, exports from this sector, which enjoy tariff-free preference in the EU and US, is not hugely affected by the ocean freight rates as it is shipped free-on-board (FOB).

“We don’t pay for the sea freight. Our buyers are responsible for paying the freight,” Loo said, agreeing that global container shortage and the resulting freight charges would have an impact on the garment industry.

“[But] we also need to understand that this is a global issue and not peculiar to Cambodia,” he asserted.

‘Instigating void sailings’

Cambodia’s total export figures stayed buoyed last year, up 12.7 per cent year-on-year at $14.5 billion although overall trade slipped to $32 billion from $36 billion in 2019.

Imports climbed 18.6 per cent to $22.2 billion in 2020.

Cambodia’s trade growth somewhat mimicked regional economic growth coming off the pandemic as governments worked to contain the spread.

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source: macrobond, uob global economics & market research

A consensus among analysts is that China, the only major economy that expanded 2.3 per cent in 2020, is likely to lead global recovery as most of Europe and the US remain battered by the virus.

For instance, China’s purchasing managers index began trending above 50 from July onwards last year, marking an improvement as factories charged up amid a control over the contagion

This prompted a robust kick-off in exports and imports, ending the year 1.5 per cent and 3.6 per cent stronger than 2019, respectively.

This gave rise to a trade surplus that widened to about $535 billion in 2020 from $421.1 billion a year ago, said Singapore-based UOB Group economist Ho Woei Chen in a note on January 14 this year.

She expects recovery to continue in 2021 with both China’s export and import expected to rise five to eight per cent.

Definitely a soothing prospect because a win for China means a win for a myriad of developing nations that depend on its trade and investments.

But, ultimately what this means is that ocean freight rates are not likely to moderate any time soon.

While acknowledging the big role Chinese manufacturing played in demand, Wilcox alleged that shipping lines caused a demand by “instigating void sailings”.

“[It was then followed by] not having enough capacity to cover demand on the ensuing sailing,” he said.

This, he charged, has resulted in badly affected trade where many companies have decided that it is no longer viable to either ship or even remain open as a business.

It is happening predominantly in the West but will surely have an impact on the Asian market when western companies stop purchasing from Asian suppliers.

“I think what is being forgotten is that ocean freight is [mainly] a transport method used for the lower value, bulky goods where other modes would not be cost effective.

“The impact on suppliers, buyers and end consumers will be like a domino effect. Each affecting the marketplace and the cost of living will go up in many countries or force companies out of business,” Wilcox said.

No way to stop surge

Interestingly, the phenomenal rates are not reflected by the Shanghai Containerised Freight Index and the China Forwarders Freight Index.

While they do indicate a bump since 2019, the indexes, which track spot rates on export sea freight market,show slightly subdued rates.

Economist Dr Chheng Kimlong puts this down to misreporting by officials in charge.“The main reason is due to the hidden or unreported charges involved.”

He felt that developing countries lack data management and control or are ineffective in that they do not have a proper system in place to ensure accuracy and quality.

Owing to that, data is fragmented or uncoordinated, causing discrepancy and inaccuracy.

“That is why the mirror data is normally not consistent,” said Chheng, who is also vice president of independent think tank Asian Vision Institute.

But efforts are being made by China to introduce some measures to raise shipping capacity and stabilise freights, according to a Chinese ministry official who was quoted by Lloyd’s List, a London-based shipping news portal, two weeks ago.

Although, similar attempts made by the government last September ended abruptly in the face of the pandemic, the portal wrote.

In the meantime, CFFA’s Chanthy thinks there is no way of stopping the surge in freight rates.

“We can’t, because of the situation in Europe and US [where] products are [imported] from China. The containers [are] empty in US and Europe, so ocean freight is stuck there. That is why the shipping lines increased their rates,” he lamented.

To make matters worse, terminal handling charges (THC) as well as CIC at Sihanoukville Autonomous Port and Phnom Penh Autonomous Port, though revised slightly lower two years ago, remain at the top-end.

The THC of $180 to $220 for 20-foot containers and $220 to $240 for 40-foot containers, and the CIC fee is from $180 to $240, are apparently higher than Vietnam and Thailand.

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Source: General Department of Customs and Excise (Economic and Monetary Statistics September 2020 - National Bank of Cambodia)

That said, what bothers Chanthy and CRF’s Saran now is the ocean freight rates.

“Yes, THC is going up . . . but the pandemic has [put a pause] on further discussion [with the government]. Now it is not just about THC. It is ocean freight rates. It is all up, hugely up. So, it is more than THC now,” Saran countered.

Likely to ease in March?

Over at Ministry of Commerce,undersecretary of state Penn Sovicheat confessed he did not have concrete evidence of ocean freight rates being five times more.

However, he understood that the interruption to logistic trade due to Covid-19 contributed to an increase in internal and external rates.

Yet, the government does not expect the situation to worsen in Cambodia.

“We respond to this kind of situation by trying to mitigate internal costs by streamlining certain procedures to facilitate trade or export and introduce relief measures to support industries,” Sovicheat told The Post.

“For me, I am still optimistic. I feel that the rising freight cost is temporary [and] will need to be [addressed] with temporary measures,” he said.

When asked what the government could do to lower THC and CIC, Sovicheat explained that both the state-owned ports are trying their best to cut costs in response to Covid-19.

However, as both ports are autonomous and public-listed, decisions have to be made carefully and gradually with shareholders’ consideration, he said.

Going forward, GMAC’s Loo thinks that as ocean freight is a global issue, it affects everyone.

“Customers have to bear such increased costs regardless of where they choose to purchase from, so I don’t think this [rates] alone will hinder exports,” he said, when asked if garment exports would be impacted.

Discussions in logistic groups reveal that the situation is likely to let up in March on the heels of the Chinese New Year celebration in February.

But despite mild certainty, the overarching frustration remains.

“I was asked by someone – isn’t this just good business sense to increase margins and profitability of an industry that has struggled?

“My response was that every businessperson should have a moral compass, which I believe is missing from the market at the moment.

“I totally understand that everyone in business is there to make money, make a living, but how long can this go on and will people see that the level of increases are damaging, if not crippling businesses and peoples livelihoods? When does that moral compass kick in?” Wilcox asked.