Pepper exporters face the risk of losing market share because of logistics costs

Logistics costs are the main cause of many difficulties and serious damage to pepper exporters in the first half of this year. Source: Internet

Shipping costs increase rapidly

According to the Vietnam Pepper Association (VPA), in the first six months of 2021, pepper exports were estimated at 155,000 tons, worth US$500 million, down 7% in volume but up 41% in value over the same period last year.

In addition to the decrease in output in 2021 due to the Covid-19 pandemic, logistics costs are the main cause of many difficulties and losses for exporters, leading to a decrease in pepper exports.

Logistics costs include two main parts: wharf fees, loading and unloading fees, and administrative procedures at exporting ports, and costs related to shipping containers by sea.

According to businesses, the freight rates to key pepper import markets from January to June 2021 were strongly upward. The main reason, according to carriers, was the consequences of the Covid-19 pandemic leading to a shortage of containers.

For Vietnamese pepper, the US has been the main market with export volume accounting for 20-25% per year, and stable purchasing power. Besides, the EU has been a key target market for most businesses in the context of Free Trade Agreements (FTAs). This further increases the purchasing power of this market.

However, these are the two sea freight routes with the most unusual increase in rates with a growth of about US$1,500-2,000 for a 40-foot container every two weeks.

In fact, the US market always buys goods on the condition that all risks of shipping costs are borne by Vietnamese business. The term of the delivery contract ranges from one month or more. Businesses can be proactive about the source of goods, except for transportation.

Sometimes, businesses cannot find a booking confirmation within a month to deliver goods. And by the time they receive the booking confirmation, the shipping price had increased by more than US$1,500/40-foot container.

Shipping costs to the US and EU increase continuously every two weeks with an unexpected rate; including increased costs from forwarders. All of these factors created a bias in the price increases.

The VPA said the increase was unreasonable and unusual because the price of oil – the core cost to make up the cost in sea transport – was at a much lower price than before.

This also leads to another question as to whether or not shipping lines deliberately "hold" containers and space on ships to create a scarcity of space and empty containers to push the freight rates up rapidly.

Risk of losing key markets

The increase in sea freight rates is a serious issue negatively affecting pepper exports. High freight rates will cause exporters to lose their market to their direct competitors.

In fact, according to the VPA, the US and EU have bought pepper from Brazil because its quality is not too different from that of Vietnam. Most importantly, the delivery cost from Brazil to the US is only one-third of that from Vietnam and from Brazil to the EU is only 1/10 of the delivery cost from Vietnam.

Exporters are forced to accept all risks to retain these two important markets by minimizing profits or even accepting losses. However, the increase in freight rates, without a downward trend, causes businesses to struggle.

Facing these difficulties, the VPA requested the Ministry of Industry and Trade, the Ministry of Transport, the Ministry of Agriculture and Rural Development, the General Department of Vietnam Customs, and the Vietnam Logistics Business Association to report to the Prime Minister to work with shipping lines and find solutions for the lack of containers and space, bringing the shipping rates back to previous levels.

Simultaneously, the association wants the Government, ministries, and sectors to require carriers to clearly publicize freight rates and fees on their official website.

It is recommended that the authorities have direct dialogues with major shipping lines, request them to apply a common increase to avoid current tariff disturbances and to stop the phenomenon of forwarders abusing their power to coerce businesses.

According to VPA, in 2020, the freight to the EU was stable at US$800-1,200 for a 40-foot container, but now it has increased to more than US$11,000, which is 12-13 times higher than the price at the beginning of 2020. The freight to the US at the beginning of 2020 was US$2,000-3,000 for a 40-foot container, now it has increased 5-6 times, reaching US$13,500.