Rising shipping costs are companies’ latest inflation puzzle

Clothing and crafts retailer Jo-Ann Stores LLC said it has spent more than 10 times its historical cost to transport products from one point to another in some cases.

“Sometimes sea freight is now more expensive than the cost of the product,” Chief Executive Officer Wade Miquelon said in a recent interview. The company has not increased any base price and expects the additional supply-chain spend to be temporary. “I think they probably are, but does transient mean six months or 24 months?” he said.

The COVID-19 pandemic has prompted a long-lasting rise in transportation costs, leaving many businesses already facing high wages and raw material prices. Some CEOs are saying they expect freight costs to rise by 2023.

The cost of transporting goods is a component at every stage of a company’s supply chain. Everything from iron ore, steel, parts and finished products has to move as raw materials are processed into global manufacturing. Shipping containers across the ocean cost more, truckers are in short supply, and gasoline is more expensive than expected earlier this year.

“We’re not counting on material improvements in 2022, especially in the first half of the year,” Michael Wittensky, CEO of discount retailer Dollar Tree Inc., said last month. He said experts expect ocean shipping capacity to return to normal. no later than 2023.

According to the Fretos Baltic Index, spot container shipping rates from Asia to the US West Coast were five times higher last week than in the same period last year. Those rates are 14 times higher than at the same time in 2019.

“It just grew so fast that it is now becoming part of the narrative of this supply-chain-driven price shock that is proving to be much more intense and much more durable than we initially thought in the spring, Brian Coulton, chief economist at Fitch Ratings, said.

Mondelez International Inc said last week that global inflation was higher than expected, citing commodity and transportation costs. Molson Coors Beverage Co. said most of its cost inflation came from transportation growth. On Monday, the 3M company said it was seeing “a lot of pressure” on logistics costs.

French tire maker Michelin has spent tens of millions of dollars in additional costs to move natural rubber from the tropics to its production facilities to meet customer demand.

A double shortage of truck drivers and shipping containers raised the cost of moving the company’s products, which for months were also shipped by plane. The company has recently been cutting back on its use of more expensive airfreight, saying its supply-chain team is constantly tinkering with shipping and transportation companies to keep things moving.

“That’s why we had to raise the prices of tires,” Michelin chief executive Florent Menegoux said in a recent interview.

The Procter & Gamble Company has announced a number of price increases this year for products including Pampers diapers, but executives caution that the pace and scope of freight- and commodity-cost increases are too large to offset initially . The company is estimating $1.9 billion in additional after-tax costs in its current fiscal year, which ends in June 2022.

“The demand for trucks for home delivery continues to grow at each stage of the chain,” said John Moller, the company’s visiting CEO at the June investor conference. “Diesel fuel costs up 25% compared to April 2020.”

Dollar Tree warned investors last month that goods-market conditions continued to deteriorate and that costs would be “significantly higher than originally anticipated.” The company previously expected that its regular freighters would meet 85% of their contractual commitments, with the remainder being shipped on time. market rate.

“However, we now project that our regular carriers will meet only 60% to 65% of their commitments, and spot-market rates will be much higher than previously estimated,” Wittensky said in late August.

Dollar Tree said the problems stem from equipment shortages, backlogs, port blockages, labor shortages and complications related to COVID-19. A charter ship was recently denied entry into China after a crew member tested positive for Covid-19, leading to a two-month delay as the ship retreated to replace its crew. Gaya. In response, the company is using more domestic suppliers for freight, making seasonal purchases a month earlier than usual, being flexible with arrival and departure ports, and using dedicated space on chartered cargo ships, including Including one for a period of three years.

After a decade of consolidation among ocean shipping lines, a handful of companies dominate the major routes. This means there are generally smaller and fewer ships between ports, forcing cargo owners to pay a premium to find space. Walmart Inc. and Home Depot Inc. The two have decided to rent their boat to carry the cargo this year.

Additional costs and adjustments in which companies are warning investors and working to maintain their profit margins are prompting some economists to shrink. The rebounding economy, he said, has come with increased demand for goods, leading to a short-term supply crisis that will work on its own over time as higher prices suppress demand.

“There is no higher floating price than transportation as capacity can expand and shrink,” said Steven Blitz, chief US economist at TS Lombard. Trains could become longer, more ships could be built, and truckers could be hired to meet demand. For things to move, but it takes a while for that to happen. Like many economists, Mr. Blitz expects inflationary pressure to ease.

If the economy does the same, inflation can also calm down. The spread of the delta version of COVID-19 has businesses and consumers adjusting to renewed mask mandates, travel restrictions, event cancellations and delays in office reopenings. Consumers are holding back on purchases, and employers have slowed hiring.

Mark Zandi, chief economist at Moody’s Analytics, said: “I think the increase in transportation costs is driving inflationary pressures. Using rough estimates, he said consumer prices increased 5.3% last year and transportation The cost has contributed about 10% of that increase.

“If everyone has to pay more to ship to the next producer down the chain, when you get to the end user, that’s a fair bit of change,” he said.

The JM Smucker Company recently flagged higher commodity costs as well as transportation costs as a major reason for declining profitability. Chief Financial Officer Tucker Marshall said in late August that transportation costs were a challenge in the last fiscal year that continued into the current year.

“As you bring in material, as you produce and you ship out material, right now the whole network is affected from a transportation standpoint,” said Mr. Marshall. “And that’s the material.”

This story has been published without modification to the text from a wire agency feed