International Shipping Costs During and After COVID-19

This 15-minute podcast was released May 11, 2022, as a part of the Timely Topics podcast series.

Fernando Leibovici, St. Louis Fed senior economist

“We’re experiencing relative scarcity of shipping capacity. So, it’s no surprise that we’ve been facing not just higher prices but also increased delays,” says Fernando Leibovici, senior economist at the Federal Reserve Bank of St. Louis. He talks with Maria Hasenstab, a media relations coordinator at the St. Louis Fed, about international shipping cost increases, how shipping costs and timeframes have been affected, and if we’ll see relief from costs and delays in the future.

Transcript

We’re experiencing relative scarcity of shipping capacity. So, it’s no surprise that we’ve been facing not just higher prices but also increased delays.

Maria Hasenstab: Welcome to the St. Louis Fed’s Timely Topics podcast series where we interview economists about their research. I’m Maria Hasenstab, your host. In this episode we’ll be discussing international shipping cost and supply disruptions with Fernando Leibovici, senior economist at the Federal Reserve Bank of St. Louis, thanks for joining me.

Fernando Leibovici: Thanks, great to be here.

Hasenstab: Today we’re going to talk about international shipping cost. Where are we now? How did we get here and where do we go moving forward?

Can you recap the current situation? What’s going on and how does it affect businesses and how does it affect consumers?

Leibovici: Yeah, so we’re living a world in which international shipping costs are now much higher than they used to be prior to COVID-19. But now, before we dig deeper into these recent developments, let me step back and try to discuss some basics about international shipping costs. So, the way in which most goods are shipped internationally in this day in age is through big ships that are filled with containers. So, what are these containers? Containers are those big, colorful, rectangular boxes that you must have run across in the economics related media over the past year. So, there’s tons of those sitting atop huge ships or waiting at the port.

So, goods are placed inside containers making it easier to ship goods of different types, shapes and sizes all in a standardized container. So, the great advantage of shipping stuff in this way is that both ships and ports are designed to efficiently handle containers, making it easy to load and offload them, easing international transactions. So, containers come in different sizes but one of the most popular sizes is the 40-foot container, in units in which shipping costs are typically quoted, okay?

So, to give you a sense of how much these container shipping costs have increased, consider the FBX Global Container Freight Index. It’s a measure of global shipping costs across major routes in the world. So, compared to February of 2020, this index increased by eight times, from about $1300 per container to a peak of around $11,000 in September of 2021. Remaining quite high to this day at about $9500. Now, bringing it closer to home, if we look at the cost of shipping a container from China, say, to the U.S. West Coast, costs have increased more than 12 times, from around $1300 in February of 2020 to close to $16,000 in the latest readings. This cost actually peaked at around $20,000 in September of 2021. So, note there’s other ways of shipping goods internationally, such as by plane when the type of goods shipped allows it or by truck if you’re dealing with countries that are connected by land. But the vast majority of goods that are shipped internationally is by sea.

Hasenstab: Wow, and when you talk about global shipping costs increasing by eight times or twelve times, that’s huge. If the price I paid for a gallon of gas, for example, increased eight-fold that would be almost unimaginable.

Leibovici: That’s right. So, as you might well now, from personal experience, these disruptions in international shipping are showing up everywhere. So, regular consumers and firms have been affected alike, starting in early 2021 but accelerating after midway through last year. So, we’ve tended to see the impact of these disruptions along two dimensions primarily. So, consumers and firms have been having to pay more for goods that are imported from overseas. Fortunately, because shipping costs are only a fraction of the total costs of goods imported, their prices have increased but not as much as shipping costs.

Now, the other effect is that it’s been taking longer to ship goods internationally, often leading to significant delays. So, it’s been increasingly common to be trying to purchase something online, as you might well have experienced, only to realize that once you place the order or your about to place it, the expected delivery time is months away. Okay, so these effects are the natural result of just the market mechanism. So, higher prices, what do they do? They signal relative scarcity. So, in this case, what’s happening is we’re experiencing relative scarcity of shipping capacity. So, it’s no surprise that we’ve been facing not just higher prices but also increased delays, so lower quantities. So, there’s only so many big ships to move goods around.

Hasenstab: Thanks, Fernando. Before we dig into how we got here, let’s take a quick break.

The Federal Reserve Bank of St. Louis brings you the Timely Topics podcast series. We talk to research economists and other experts from the Federal Reserve about their latest research and other topics in the news. You can find all our Timely Topics podcasts on stlouisfed.org or wherever you’re listening right now.

So, now I’d like to back up and discuss, how did we get to this place of delays in international shipping and higher prices? Is it purely the result of COVID-19 or could we have been headed here without an international pandemic?

Leibovici: Yeah, so that’s a great question. So, I would argue that the current situation has resulted from standard forces that are active during normal, non-pandemic times combined with other COVID-19 specific forces that resulted from the pandemic we’ve experienced.

So, let me elaborate starting with the standard forces. So, this is the focus of an article that I’ve written recently with Jason Dunn, a research analyst here at the Fed. Our goal in that article was to get a sense of how unprecedented is the recent spike of shipping costs? So, how much could we say is accounted by COVID-19 versus standard forces?

So, to address these questions we obtained historical data in international shipping costs and we processed this data to evaluate, how much do international shipping costs fluctuate during normal times outside of this crazy COVID-19 period.

Hasenstab: So, tell me what you found from that historical data.

Leibovici: So, we noted two interesting observations. The first one is that we found that international shipping costs are actually quite volatile, even outside a pandemic. So, the deviations from trend ranged from -26.8% to 19%. So, international shipping costs move around a lot even during normal times. Now, the second observation is that international shipping costs appeared to be procyclical. That is, they tend to increase during economic booms and they tend to be lower during recessions.

Hasenstab: So, they increase during economic booms and the costs usually lower during recessions.

Leibovici: That’s right. So, that led us to conclude that a fraction of those sort of spikes of international shipping costs might have been just expected and the normal feature of the rapid economic recovery from the pandemic that we’ve experienced in 2021.

Hasenstab: And how does Covid play into that?

Leibovici: Yeah, good question. So, we tried to address that question in our article. The way we answered that question is by doing a quick, back of the envelope calculation. So, what we do is we look at U.S. imports and we know that they increase by similar amounts after the COVID-19 recession as well as after the global financial crisis. So, what we do is we compare the dynamics of international shipping costs between these two episodes that look similar, at least according to the dynamics of U.S. imports. And then, we interpret any difference between them as accounted by COVID-19, OK?

So, in the global financial crisis what we’ve seen is that international shipping cost increased by 41 percentage points from a trough of minus close to 27% below trend in the third quarter of 2009 to a peak of 14.2% above trend in the third quarter of 2010. During COVID-19 what we observed is international shipping costs increased by 72 percentage points from a trough of -22% below trend in the first quarter of 2020, when the pandemic hit, to a peak of 50.3% above trend in the third quarter of 2021.

So, what we concluded is that slightly more than half of this 72.3 percentage-point increase of shipping costs in the aftermath of COVID-19 is the result of, you know, standard demand and supply forces that we’ve also seen in the aftermath of the global financial crisis. What remains after that, well, we think of this as the result of disruptions in international shipping, such as health containment policies due to COVID-19, which slows down the processing of goods at major ports. Now, there’s also a lot of COVID-19 specific stuff, also in the dynamics of demand and supply during this episode.

Hasenstab: So, it sounds like it’s going back to supply and demand, you can’t escape that basic economic model, right?

Leibovici: Right, and that’s the way it works. So, let’s begin with demand, during the pandemic we’ve experienced increased demand for durable goods, a lot of which are purchased from other countries and that’s been a key factor here. What accounted for this increase in the amount for durable goods? Well, there’s many factors. Partly because the pandemic let people and firms to adjust their needs, to work from home so we suddenly need desks and home offices. Partly because we couldn’t go out and spend as much as before in restaurants and bars. So, instead we go out and buy gym equipment or video games. Partly because the U.S. government responded with a big, fiscal stimulus package during COVID-19 that allowed people to purchase more stuff and offset the shock of COVID-19.

So, higher demand is one factor but what about supply? Well, if the supply of international shipping capacity is relatively rigid in the short term, then it’s hard to increase the capacity enough to fulfill this big increased demand that the economy experienced. And if there’s not enough ships available then rationing happens via higher prices and via delays.

Hasenstab: Finally, I’d like to look toward the future. Where do we go from here? Do you expect that we’ll see relief from these higher costs and these supply shortages? Or will we need to make changes to right the international shipping back to pre-pandemic cadence? You know, if so, how and when?

Leibovici: Yeah, so that’s another great question. So, while we obviously don’t know exactly where things will go what we can do, as economists, is think about the direction in which things are likely to evolve in the absence of new developments. So, let’s start with demand, again. The sharp increase in the demand for durable goods, driven by COVID-19, has been receding already for several months, we can see that directly in the data. This is partly accounted by the combination of reduced fiscal stimulus. So, fiscal stimulus has been cut back recently along with tighter monetary policy and expectation of tighter monetary policy which are likely further push demand in this direction. Now, lower demand means reduced pressure on international shipping capacity, which should push for a reversal of international shipping costs eventually.

Hasenstab: So, that’s the demand side. What about supply?

Leibovici: Yeah, so this is a mixed bag. So, as we discussed earlier, the extent to which international shipping supply can adjust in the short run might be important in determining the response of international shipping costs. So, in another article with Jason Dunn, what we did is we investigated the dynamics of international shipping supply and the speed to which it can adjust.

So, to explore these dynamics, what we did is we investigated the relation between new orders and deliveries of container ships. So, our first observation in that article was that new orders are positively correlated with price changes in the same and in previous years. So, when international shipping costs are higher, we see increased orders of new container ships.

The second observation is that the deliveries of new ships are negatively correlated with shipping prices in the same and in following years. So, increased shipping supply indeedappears likely to reduce international shipping costs. So, this is encouraging, we’re seeing, you know, higher shipping costs leading to more orders. And then when these orders arrive shipping costs decline.

Now, the question is, well how long does this process take? So, what we did finally is we investigated the speed at which the shipping supply typically adjusts. So, to do so what we did is we examined the lags involved between new orders and deliveries. We focused on one episode in 2003 where there was a spike in new container ship orders. There were 103 new orders compared with the previous years’ level of six. OK, so the level of container ship deliveries has not increased contemporaneously in the same year because production of these big ships takes time. But the delivery is gradually built over the following three to five years. So, this finding showed that the supply of ships is relatively rigid in the short run. And new orders placed in response to a shipping cost surge can take up to five years to materialize in increased shipping supply.

So, what happened with supply during COVID-19? Well, the good news is that we observed the spike of orders for new, big container ships at the level of 69 new ships ordered in March of 2021 compared with 29 in February and eight in January of that year. OK? But given our other findings we would expect these new orders to lead to an increase in the deliveries of container ships only, you know, three to five years into the future after the orders were placed. So, this expansion in the fleet supply of container ships should ease, eventually, the existing pressures in international shipping.

Hasenstab: Thanks for that look forward. What other surprises could affect the future of shipping?

Leibovici: OK, now of course, the exact path of shipping prices will depend on exactly which other surprises the world economy has in store for us. So, let me just say a couple of words on this. As we speak, COVID-19 cases in China have been increasing, leading to increased health containment measures. Now, if these developments continue and the virus continues to spread a shipping back loss will be farther exacerbated likely leading to even higher shipping costs.

On the other hand, we have the war between Russia and Ukraine which might also be impacting already international shipping. For one, some routes are having to redirect, potentially an impact on shipping prices and also on shipping times. To the extent that there’s other outbreaks that might happen in the future, that could also be impacting prices to the extent that those outbreaks are association with health containment measures that disrupt shipping capacity.

Hasenstab: Fernando, you have given us a lot to think about today about international shipping. We’ve discussed where we are, how we got here and even some things to think about moving forward.

To read more about Fernando’s research on international shipping visit stlouisfed.org. That’s where you can also find all our Timely Topics podcast episodes, where we feature conversations with research economists from the St. Louis Fed. You can also find Timely Topics on Apple Podcasts, Spotify or wherever you like to listen to podcasts.

Fernando, thank you so much for your time today.

Leibovici: Thank you.