Freight rates are a key element of trade costs. The Ukraine-Russia war is expected to lead even higher freight rates, which triggered a substantial surge in global consumer prices. Especially the prices of textiles, wearing apparel and leather products.
As the latest United Nations Conference on Trade and Development (UNCTAD) rapid assessment simulated that due to the war – textiles, wearing apparel and leather products will witness 10.2% higher container freight rates.
UNCTAD’s analysis suggested that the cut in commodity supplies from the Russia and Ukraine pointed to a massive drop in supply.
The soaring fuel prices and longer rerouting efforts will add worry to the already stressed container freight carrying capacity. This much is obvious from the current supply chain crisis and a likely shift from land to maritime transport (between Asia and Europe).
This swelling of crude oil and food prices will severely impact the textile and apparel industry – as it will lead to an increase in raw material and labor cost in the industry besides increased freight charges.
While limiting measures on airspace, contractor uncertainty and security concerns are muddying all trade routes going through Russia and Ukraine. As the two countries are a crucial geographic element of the Eurasian Land-Bridge.
While Russian airspace is shut to 36 countries and vice versa, some freight forwarders presently mention not booking overland shipments between Asia and Europe. The war will have an undesirable impact on global air freight capacity and raise air cargo prices as carriers are enforced to take longer routes and spend more on fuel.
At the same time, the already costly and overstrained maritime trade will find it tough to substitute these suddenly unrealistic land and air routes.
The major effect on sea freight from the war possibly has come from interruptions to flows to and from Russia. As some main shipping companies have stopped taking orders to and from Russia, which can upset total international trade to a certain extent.
Meaning the new increase poses a further test to the global economy as it fights to mend from the vilest global crisis since the Great Depression.
Nevertheless, so far, international container freight charges seem to have not increased, but rather sustained their most recent somewhat downward trend from earlier record highs.
The UNCTAD rapid assessment showed that the supply chain interruption has already been felt across smaller tankers, which are key for the Black Sea and Baltic Sea regional oil trade. For instance, two leading tanker companies’ earnings increased from about $10,000 per day on 18 February 2022, to over $170,000 per day on 25 February 2022. The primary freight costs enlarged by about 400 percent. And by mid-March 2022, tanker charges in the region remained stable, with some spillover into some but not all tanker sections.
These surges in freight rates can have substantial impacts on the economy. UNCTAD simulated that the container freight rate increase during the pandemic increased global consumer prices by 1.5 percent – with particularly oversized effects in vulnerable economies, such as small island developing States, landlocked developing countries and least developed countries (Figure 2).
These increases in freight rates can have significant impacts on the economy. UNCTAD simulated that the container freight rate increase during the pandemic increased global consumer prices by 1.5 percent – with particularly oversized effects in vulnerable economies, such as small island developing States, landlocked developing countries and least developed countries.
Rate hikes alongside financial disorder would be a double blow for developing economies, of ‘taper-tantrum like’ effects through interest rate rises and greater volatility in commodity futures and bond markets, leading to increased risk premiums on top of exchange rate pressures.
Impact on Asian apparel manufacturing countries
Asian apparel manufacturing giants like China, Bangladesh, Vietnam and India exported around $1-2 billion or more in export revenues from Russia and Ukraine. And month-wise, Russia imported $650-700 million of textile and apparel products from Asian countries. The most critical issue for these countries are the payment issues due to the US and NATO sanctions. So far, the uncertainty will continue depending on how long the sanction remains.
Country-wise, China is likely to see a much bigger effect as its textile and garments exports to Russia are the biggest, which are close to $400 million each month.
Bangladesh is the second major readymade garment (RMG) exporter to Russia, with monthly $90-100 million exports. While India exports around $18-20 million of textiles and apparel to Russia every month and will possibly see a drop in its exports revenues this sum in the coming months.
As the UNCTAD report showed above, the textile and apparel industry will see an overall surge in raw material and labor costs in major Asian RMG manufacturing countries.
And numerous Asian economies – these countries are also key textile and garment suppliers– are heavily reliant on Russian fuel, coal and Ukraine’s food supplies. UNCTAD update on the Russia-Ukraine conflict showed that China, Turkey, Egypt, and India are most dependent on food supplies from Russia and Ukraine.