Sunday, February 9, 2014

Outlook on shipping in 2014

The price of international shipping has quadrupled in the past 15 years, mainly due to increases in oil prices. The soaring oil prices of over $100 a barrel referred to by McKinsey consultants in their "Time to Rethink Off-shoring" article, have remained fairly constant since then. A quick check of the crude oil market today shows barrel prices from $100-$109. If prices for shipping have increased so much, why haven't we seem bigger moves to bring supply chain networks geographically closer together? In fact, since 2000 (when oil prices started rising), I would bet there has been a large increase in the amount of global trade and off-shoring.

In my opinion, the rise of shipping costs has not resulted in a significant reduction in off-shoring because shipping costs are still a tiny percentage of total manufacturing costs. In other words, for the large majority of products, the cost saving from producing outside of the U.S. far outweigh the few cents extra per unit incurred from rising shipping rates. For example, Planet Money (an NPR program), recently designed and ordered a t-shirt for their radio show. They then reported on the complete supply chain process as the t-shirts were made. The women's t-shirts cost only $0.07 per shirt to travel from Columbia to Florida by ship and then Florida to New York by train. The total manufacturing costs of the shirt was $4.27. That means $0.07 was only 1.6% of the total manufacturing cost.

Shipping prices are mainly determined by three components. One component is the price of fuel and oil prices have remained between $90-$120 a barrel since 2010. Another is supply of shipping containers and ships. Last week the United Arab Shipping Company ordered six more new cargo vessels to add to their fleet. As major shipping companies recognize growing profits, their competitors are clearly taking steps to increase supply. The last component of shipping prices is demand. Although the cost of living is going up in developing countries, global trade spurred by specialization is also going up, increasing the amount of shipped goods. As an outsider with limited information and understanding, I am unable to tell if these components suggest if shipping prices will continue to rise or will find an equilibrium. How do you think shipping trends will change in the near future?


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