When most businesses ground to a halt in the spring of 2020, Kerrygold butter saw a massive hike in demand.
With millions stuck at home looking to stock up on household goods and prepare for a year’s worth of home-cooked meals, the world-famous butter brand and one of Ireland’s largest export had its work cut out for it.
Supply chain staff rushed to get shipments out to the 110 countries Kerrygold exports to, but there was only one problem – the world had run out of containers.
With the pandemic shutting down ports worldwide, the international shipping industry was beached, resulting in a global shortage of shipping containers.
Even since shipping restarted, the backlog of supply has caused container prices to skyrocket in the past year, creating a significant challenge for Irish exporters forced to pay the inflated rates.
“40-foot containers of cargo shipped by sea from Shanghai to Rotterdam now cost 10,542 US dollars [per container], 540 per cent higher than the average of the past five years,” said Simon McKeever, CEO of the Irish Exporters Association (IEA), a member-based organisation that works with companies to develop their exporting prowess.
“The main impacts have been costs. It’s costing more to bring stuff in and ship stuff out, which is testing companies’ margins,” McKeever said.
Dublin-based freight logistics and supply chain management company Wells Cargo has dealt extensively with the issue over the past year.
“A furniture company we deal with, who was shipping 40 suites in a container at a cost of about 50 US dollars per suite, now faces a cost of 250 US dollars per suite.,” said Tom Thornton, managing director of Wells Cargo.
“Exporters involved in price-sensitive or lower-margin businesses are those most affected by these increases in delay and cost,” he added.
With shipping costs now multiplied by six, some companies’ margins are in danger of dipping below sustainable profitability thresholds.
“Lots of companies are facing margin compressions that may make it unprofitable to continue to produce,” said Gerard Brady, chief economist at the Irish Business and Employers Confederation (IBEC).
“It’s a huge challenge if it continues. Companies are already coming out of a crisis where they have been losing money for a long time, the last thing they need is to be caught in this situation.”
The impact of the hikes in shipping costs have infiltrated virtually every industry, Brady said. Still, they have had the most impact on companies that rely on exports as the lifeblood of their business model.
“We’ve looked into buying individual containers outside of freight contracts, but that’s three times the rate and doesn’t solve any problems.”Bernard Condon, Ornua
Ornua, the manufacturer of Kerrygold, is one of those.
The largest single dairy exporter in the country, Ornua ships around 400,000 tonnes of product annually using about 30,000 containers, or just over 500 per week.
Over 99 per cent of the company’s profit comes from exports, according to Bernard Condon, managing director of Ornua’s ingredients division.
The sky-high shipping prices have forced the company to explore other means of continuing its supply chain both in and out of the country.
“We’re getting slower access to containers than we’d like, so we’ve looked into buying individual containers outside of freight contracts, but that’s three times the rate and doesn’t solve any problems,” he said. “We’ve also looked into making better use of the [UK] land bridge, but the reality is that our products are usually shipped so far away that it just isn’t feasible.”
Condon said that despite the logistical challenges, the business is not struggling, thanks largely to the increased demand that has persisted since the onset of the pandemic.
Combilift, a Monaghan-based industrial machinery company, hasn’t been so fortunate.
Known for designing and manufacturing forklifts, the company sees 97 per cent of its production exported, mainly to the United States, according to CEO Martin McVicar.
With many of the company’s machines designed and shipped custom to a client for a specific project, which often relies on Combilift’s products arriving on a strict deadline, the uncertainty in the global exporting process has caused severe disruption to the company’s ability to follow through with its clients.
“The biggest challenge has been the availability of empty containers, but even if you get containers, it is the availability of ships which has caused quite significant delays,” McVicar said.
“We can have a container packed, strapped, and have it loaded, but it can end up sitting in Dublin Port for two to three weeks waiting for confirmation of space on a ship.”
Combilift recently finished building a custom lift for a company based in the US but has been sitting on it for over six weeks waiting for room on a vessel to ship it out.
“We try to plan and book ahead as much as we can, but you don’t get commitments [on shipping routes] until that ship is docked and ready to go. It’s the uncertainty as to when it’s going to go that’s killing us,” McVicar said.
The shipping delays are not just costing the company time, either.
When Combilift organises a shipment to an international client, the two parties must sign off on a letter of credit: A contract that outlines what the client will pay Combilift for the exported goods.
These letters of credit have an expiration date that specifies when the goods must arrive in the client’s hands in order for Combilift to get paid.
With virtually every shipment the company sends out now delayed, Combilift has been forced to re-issue several of their letters of credit to ensure financial security, at an additional cost on top of the inflated rates it is already paying for shipments.
“We export to over 85 countries, so you can imagine the stress that puts on us, not to mention all of our clients who are relying on our equipment for their projects,” McVicar said.
Although the initial shock to the shipping supply chain was due to large quantities of containers stuck in Chinese ports during the onset of the pandemic, the subsequent scarcity and cost inflation of the containers would not have reached the point it has without several other factors at play, according to the IEA.
One of those factors is Covid-19 outbreaks among staff at major global ports, which has caused many to shut down or drastically reduce capacity unexpectedly.
“We have seen reduced capacity at several ports around the world, particularly in China,” the IEA’s McKeever said. “Even if a port is open and is getting traffic through, it doesn’t mean it’s getting through what it needs, and what the world needs it to.”
McKeever said it is also no help that China is particularly conservative when dealing with Covid-19 outbreaks, often shutting down or reducing the capacity of major global shipping hubs for fewer than ten cases.
Wells Cargo dealt directly with one of these ports.
“We recently saw the closure of Yantian Port in China due to a Covid 19 outbreak,” Wells’ Thornton said. “There was an estimate at one point that 160,000 40-foot containers were awaiting export from Yantian. It is the world’s fourth-largest port, and a huge volume of consumer electronics moves through the port to export to Europe and USA.”
Ornua’s Condon also expressed frustration with the repetitive closures of Chinese ports.
“We saw one of our major ports in China that deals with 80 million containers a year shut down completely for an outbreak,” Condon said. “They operated for a week at zero per cent capacity, then the next week at 30 per cent, then the next week at 70, and finally, four weeks later, they were back to 100 per cent capacity. In that case, we just lost four weeks of proper traffic through that port. That’s an eternity.”
Labour unrest and strikes at ports
Ports closing due to outbreaks haven’t been as much of an issue outside of China, but western ports are experiencing a separate, equally harmful problem.
“We have also seen a lack of labour in ports, particularly in America and a little bit in Europe too,” McKeever said. “There has been lots of labour unrest and strikes from workers, and the containers are not getting unloaded.”
The labour shortages mean that even when exporters can get their hands on containers at a premium, and find space for them on a ship, their goods may still get held up once they reach their destination.
Ireland’s unique placement on the global shipping playing field has put the island nation at a particular disadvantage with this issue, according to the IEA.
“Ireland is what’s known as a peripheral trading nation,” said the IEA’s McKeever. “Any large shipment coming from a major port somewhere in the world, either in China or the US, goes through another major European port, usually Rotterdam. By the time it gets to Ireland, [the cargo] has been put on another, smaller vessel.”
This extra step along the route creates more opportunities for shipments to be held up in port.
Although most countries in Europe don’t receive major shipments direct to their ports, most countries don’t deal with the volume of imports and exports that Ireland does, he said, making Ireland absorb a harsher economic blow than others.
This added uncertainty has forced the nation’s exporters to devote significantly more attention to the progress of their shipment.
“Usually when our container gets on a vessel, that’s the end of it for us, but now we’ve really had to babysit our shipment the whole way,” Ornua’s Condon said. “We have to make sure it gets onto our feeder vessel, then make sure it gets to the port, then that it gets on the ocean vessel, then that it makes it to the destination, and then that it gets off the ocean vessel and into road freight.”
Condon said there is even a shortage of truckers, which has resulted in some of Ornua’s shipments making it all the way to their destination just to sit in a port waiting for a truck to carry it through the final leg.
All of these causes for global shipping delays and subsequent price hikes are exacerbated by economies around the world rebooting at virtually the same time, creating an unprecedented surge in demand for goods that even an unimpeded supply chain would struggle with, according to IBEC’s Brady.
“It’s all effectively down to the global economy restarting, and the demand coming back very quickly,” he said. “Throughout the pandemic, we saw demand continue with people ordering lots of items online, but the full force of global trade demand has come back quicker than many were expecting.
Adding strain to the already ruptured global supply chain is the shutdown of air travel.
“50 per cent of air freight usually travels in the belly of passenger planes, and that is challenging because that won’t recover any time soon,” Brady said. “Now that freight has to find new room, so it goes to containers, it goes to ships.”
The loss of passenger aircraft as a means of shipping has tacked on an added 20 per cent of global shipping volume onto ships, Brady said.
The burden of the strained shipping industry in Ireland doesn’t just affect the nation’s exporters, but also importers.
“It’s been particularly challenging for those who rely on imported parts for their business,” Brady said. “Construction is a good example, timber and structural steel prices have been up 30 per cent this year, and whoever is exporting these goods to Ireland can’t get them in, so construction companies can’t do business.”
Brady added that the pharmaceutical industry is perhaps the industry hit the hardest, as it gets burned on both the import and export ends.
Pharma and medical device companies often rely on rare materials to manufacture their products, and due to stunted supply lines, they have struggled to import them. This, in turn, jeopardises their entire production ability, which eventually ends up in the companies having less product to export back out of Ireland.
Keenan, a Carlow-based farm equipment manufacturer, is experiencing similar trouble with import prices.
“The cost coming in is the big part, our import costs have doubled in the past year, it’s been absolutely huge,” said Matt Higgins, general manager of Keenan.
Most of Keenan’s exports are through land freight, departing Ireland from ferries into the UK and then travelling to the rest of Europe via truck. This allows Keenan to avoid paying the inflated price of shipping containers, but it doesn’t protect them from the delays of importing supplies or having to fork out the inflated cost of steel.
“We have been forced to do two fairly substantial price increases in our products to compensate for the increased cost of production, and we expect to do a third one by the end of the year,” Higgins said.
A Brexit silver lining
Although the impact of global shipping shortages and container prices have reached all corners of Irish trade, the nation may have been better prepared for the ordeal than most.
Almost all Irish companies involved in international trade invested extensively in supply chain logistics and adaptability over the past two years in preparation for Brexit, according to Giles O’Neil, Brexit unit manager for Enterprise Ireland’s (EI) export development division.
“We haven’t seen many [companies] go out of business because of this yet, and that’s a testament to the fact that companies prepared hard for that January 1st Brexit deadline,” he said.
EI’s export development division works with companies to expand and develop their global exporting footprint. In the past two years, the division has focused heavily on helping companies plan and prepare for a new trade relationship with the UK.
“We have invested so much time and energy to get as many companies as ready [for Brexit] as possible that when a second and unexpected global trading event happened, they were already equipped to handle it,” O’Neil said.
Wells Cargo’s Thornton agreed, saying, “the new routines are better understood now by importers and exporters in Ireland, and they are adjusting to the changes required in transit time and cost.”
For Ireland’s largest dairy exporter, Ornua, Brexit preparations explain why the company’s exports are still functioning.
“We certainly put an awful lot of effort into managing Brexit from our business,” Ornua’s Condon said. “We invested in our internal supply chain capacity and capability in advance of Brexit, and we are lucky we did because that capability was absolutely required.”
Brexit trade preparation has been particularly beneficial for small exporters that otherwise wouldn’t have an extensive investment in their supply chain, according to IBEC’s Brady.
“It’s not easy for small companies to pour resources into realigning their supply chains, they are usually at the mercy of the easiest, cheapest option available,” Brady said. “But they have learned their lesson from Brexit on how to source better, how to change sourcing, and most of all, the importance of being adaptive.”
Brexit hasn’t been all good news for exporting companies, though, particularly for companies like Keenan, which rely on trucking shipments through the UK to reach the rest of Europe.
Irish companies shipping through the UK landbridge now require a transit document, which costs the exporting companies 150 euro per shipment.
“For a company that does virtually 100 per cent of their exports through the UK, the number adds up,” Higgins said.
“We’re at a crossroads right now where companies don’t know if it’s worth investing in blowing it up if it’s just going to last a couple more months.”Gerard Brady, IBEC
The sustainability of many companies’ current exporting models will depend on how long the price of containers remains high, and the global supply line remains clogged.
“Is it worth investing in changing the supply chain? That is the question lots of our members are asking,” IBEC’s Brady said.
“If it’s a flash in the pan, you’ll see businesses just have to swallow it in lower margins for that period, but if it continues for a longer period, a couple of years, then there is going to be serious challenges. We’re at a crossroads right now where companies don’t know if it’s worth investing in blowing it up if it’s just going to last a couple more months.”
Ornua’s Condon is optimistic that the shipping issues will resolve in time to prevent any lasting damage. “Things will persist certainly for the medium term, we don’t see any immediate changes, but we don’t see long-lasting effects either,” he said.
“Inflated demand from Covid will unwind, that will happen eventually, and the supply will catch up. These are not things that happen quickly, but it will happen over time, not this year, but maybe the middle of next year. Until then, the whole industry will have to learn to deal with the increased prices.”
The IEA’s McKeever agreed, saying the supply issues won’t lower the country’s GDP, but more vulnerable companies will take hits to their bottom line. “Everyone is dealing with the same costs, but the impact will have to do with how those costs carry through the company and if they can handle them,” he said.
Keenan’s Higgins is not as optimistic that things will return to normal any time soon.
“The indication was it would end mid-year, and we saw that corrected to the second half of the year, but that hasn’t happened,” Higgins said. “Q3 has maintained the same prices and in Q4 we project further increases. Logic will tell you that it will change at some stage, but I just think it will find a new normal.”
Higgins said he expects Keenan to maintain its marked-up prices in the long term as well.
If the hiked container costs and supply chain issues last longer than 18 months, Irish companies may be forced to invest millions in reevaluating their long-term exporting schemes, according to IBEC.
“These cost issues could definitely result in a nationwide change to supply chains were it to last a long time,” IBEC’s Brady said.
Regardless of the longevity of the shipping crisis, many businesses are confident they will weather the storm.
“I’ve been in business 25 years, we’ve kind of seen it all and been able to manage it all,” Ornua’s Condon said.
EI’s O’Neil agreed, saying, “Irish businesses are resilient beasts. We are a small nation, but we are an international, outlooking nation. We do business in every corner of the world, and we will continue to, no matter what.”