Tea buyers insist on free on board (FOB) terms as the logistics crisis worsens. © Alena2909 | Dreamstime.com
According to logistics analysts, Sea-Intelligence, the likelihood of a ship arriving on time is now “hovering around 40%” compared to 2019 when reliability was greater than 80%. Add port and trucking delays, and buyers this fall through the new year will experience delivery times extended by four to six weeks.
The overseas buyer historically bears variations in freight rates, but a four-fold increase in ocean freight rates since 2019 shifts the burden up the chain.
Sobhanadri Jonnalagadda at Spisys Ltd. in Telangana, India, reports that the cost of booking a container destined for Hamburg from Hyderabad increased from $4,150 to $12,500 (£3,000 to £9,000) since last summer. Consignments of tea shipped from Shanghai to Rotterdam increased 659% to $13,698 in August. The World Container Index for eight east-west routes rose to a composite cost of $9,613 for the week of August 19 – up 360% compared to the same period last year.
Exporters largely bear these additional costs as few buyers will share the burden. Most terms of sale are now cost and freight (CNF) contracts signed for one/two-year periods. Exporters say it’s impossible to negotiate price revisions. Buyers now insist on free on board (FOB) terms.
Tony Laurent, a supply-chain and logistics consultant and owner of Melbourne-headquartered Bespoke Tea Company, explains that, “Tea and other commodities are now procured by generic buying teams, in many instances, whose major objectives are captured by agnostic acronyms such as PPV and COG. They are not imbued, or steeped, in tea or the impact that their actions have on those up the supply chain. It's shameful and cynical upper management that builds this culture, allowing [the pandemic], definitively a force majeure situation, to be handed back up the supply chain," he writes.
Government subsidies subside
The appeal of foreign exchange dollars led many governments in the tea lands to subsidize tea exports. Since the great recession, Indian exporters relied on government subsidies initiated to ease transport costs, but duty credits are declining. In 2009 tea exporters qualified for a transferrable duty credit of 5% of FOB value for bulk tea and 7% for value-added teas.
India’s VKGUY credits for commodity food products were designed to promote exports, but subsidies are changing. In 2015, the Merchandise Exports from India (MEIS) program replaced VKGUY and reduced the benefit from 5% to 3% for bulk tea and value-added tea, respectively. This program ended in 2020 by RoDTEP subsidies which launched this year. RoDTEP is an acronym for (Remission of Duties and Taxes on Export Products). Subsidies are now 1% of FOB value to comply with World Trade Organization (WTO) rules. Exporters say the new effective rate of 1.7% is negligible.
Workarounds
Traders from the 1680s to as recently as the 1980s hired ships, not containers, to transport large quantities of tea. As the disruption of global supply chains worsens, prices rise, and container vessel reliability for tea shipments continues to decline, the cost of hiring a freighter begins to make financial sense.
Port congestion, backlogs at container terminals locked down to prevent the spread of the coronavirus, and rapidly increased volume dashed hopes for a return to normalcy until next spring. Logistics costs considered manageable by tea wholesalers early this year are now seen as out of control. Inflation is a growing concern, but the unpredictability of delivery dates is causing far greater problems.
Green tea exporter Zhejiang Tea Group’s US operation, Firsd Tea advises tea buyers to calculate projected inventory needs for at least six months and consider adding 20% to projected volumes to avoid out-of-stock conditions and transportation delays.
In August, there were a record 44 container vessels trying to offload at Southern California ports, an all-time high. And ports are getting busier as the holidays grow near. Imports in TEUs approach 550,000 per month at Los Angeles area ports, far exceeding totals for the same January through July period during the past four years.
On arrival, shortages of dockworkers, crane operators, warehouse staff, and qualified truckers cause further delays. Driver shortages are at all-time highs forcing companies to offer incentives. Qualified drivers now earn $27 per hour. FreightWaves reports that refrigerated carrier J.S. Helwig & Son increased pay 4 cents to 62-cents per mile for experienced drivers – that’s $1,240 for a 2,000-mile round trip. New hires earn 50 cents per mile and a $1,000 signing bonus.