When will supply chain and shipping pressure ease?
Shipping goods is an increasingly costly business and new plastic packaging taxes are adding to the regulatory burden. Baker Tilly’s experts look at what 2022 holds, and how importers and exporters can mitigate risk.
Off the coast of California last month, container vessels waiting in the queue to unload hit 93 and the wait time for a berth at port reached a new high of 18.6 days.
In China, shipping bottlenecks are being compounded by ongoing electricity problems in key manufacturing districts, which is slowing production and delaying product movements.
The global average cost of a standard 40-foot shipping container sits at US$9425, coming off its peaks in September at US$11,109. For routes such as China to North America’s east coast, shippers faced highs of $22,000 and even at the start of December, there is little change from US$17,000.
Los Angeles expects to handle a record 10.8 million containers by the end of 2021, yet the United States is ‘decades behind’ foreign ports in getting carriers, terminals and shippers to provide each other access to commercial data for planning purposes.
Brexit refuses to disappear from the shipping lexicon, with issues still dominating markets as goods are shifted between the United Kingdom and the European Union.
For those pleading for some sort of normality to return in the new year, the outlook appears bleak.
The freight industry around the world is under such immense pressure, it’s almost time for importers to start thinking about placing orders for Christmas 2022, says Darryl Daisley, a Director at Baker Tilly network firm Pitcher Partners.
“Unfortunately, 2022 just going to be another really, really challenging year from a cross border perspective,” he says.
“I would want to be putting orders in March, April, May to ensure items will arrive in October and November, to be on the shelves or on the shop floor for the weeks leading up to Christmas.”
Mitigating risk in an unpredictable world
Black swan events, unpredictable happenings that have a major consequence, are by definition rare. Yet in the world of freight, there were two in a matter of months.
The fallout from the Ever Given grounding in March, which locked up the Suez Canal for six days and held up almost 400 cargo ships at a cost of US$9.6 billion per day, was still being felt months later.
As the shockwaves from that mess began to subside, a COVID-19 outbreak led to the world’s third-busiest port, Ningbo-Zhoushan in eastern China, to be shut in August.
Ships were forced to divert to other ports, but the situation wasn’t much better anywhere else, with most of China’s ports running at well below normal capacity.
These two events, the rise in demand for goods on the back of the e-commerce boom and long-neglected infrastructure networks collapsing, has left freight charges and delays hitting previously unimaginable heights.
Global shipping events are largely out of the control of firms moving goods and the strategy revolves around managing and minimising risk.
“We’re making our clients aware that the environment is challenging, which means there’s risk, so how are they going to manage that risk?” Mr Daisley says.
“Just in time has been struck off and everyone is now thinking about just in case. On the inbound side, they’re buying more stock so they have got larger quantities closer to the market or for outbound, an exporter might move more product up to Singapore and use that as a regional facility to sell into Asia.
“That might include a regional storage facility closer to the market, so they can respond in a reasonable timeframe. But then, of course, there’s an added cost to suddenly having two warehouses instead of one.”
How to avoid double-duty hits
Supply chain issues have not eluded the UK and Europe, with a wide range of issues from the unavailability of items to increased shipping costs and delayed shipping times.
In addition, regulations have changed rapidly in the 12 months, with new processes around Brexit trade and the EU’s value-added tax that have left companies struggling to prepare and adapt.
Marisa Hut, senior manager VAT & Customs with Baker Tilly Netherlands, says ignoring or not being abreast of the new rules can be a costly way of doing business, as many are discovering.
“There are clients who have been importing everything into the UK, then shipping it onwards to the EU and then importing it again, so you then you could have a 24% duty hit, a double duty hit,” she says.
“We’re trying to change the supply chain but that is a challenge. For example, if everything is coming from the US and you could split the shipments, or you need to start working with customs warehousing in one of the territories, and to make sure that you’re at least not importing everything at the same time of twice!”
New rules that apply to all businesses involved in cross-border sales of goods to consumers in the EU came into effect on July 1.
“The Netherlands is one of is one of the most important access points for the EU and the new VAT regulation makes it very easy for companies to do this business into the EU,” she says.
“That’s one of the reasons why companies are moving stock to a country like the Netherlands, to have their stock ready for selling to consumers.”
Businesses are compounding the problems by importing stock into multiple European countries, which goes against best practice for cost efficiency.
“Our advice to clients at the beginning of this year was to centralize imports into one EU country – choose a country, be it France, or Belgium, or the Netherlands,” Mrs Hut says.
“In principle it doesn’t matter which but choose one EU country and supply everything from there. Of course there are differences in other factors such as reporting, requirements and the like, which could make one country more attractive than the other. Rethinking supply chains is a learning curve for businesses, they need to realise that things have really changed and that they need to manage their processes.”
Mr Daisley and Mrs Hut have jointly worked with a client in their efforts to centralize their distribution in one country, in this case the Netherlands, creating what Mrs Hut calls a ‘gateway to Europe’.
“We assist them in appointing a third-party logistics company and from that warehouse location in the Netherlands, stock can be distributed to a private individual in, say, France,” she says.
“That makes business much easier for these clients and it can be done easily. They still have Customs VAT obligations, of course, but as long as they comply, they will be fine and the business will run smoothly.
Alison Horner, UK Indirect Tax Partner at MHA Macintyre Hudson, says there is a common misunderstanding with VAT among business leaders.
“With VAT, a lot of businesses thought okay, I can claim that VAT back either on my VAT return in the UK or in Europe, or I can claim it back via this overseas VAT refund service,” she says.
“That’s just not right in most cases and it’s bitten a lot of people. There are only a few countries for UK businesses in Europe where they can’t register for VAT, because they’re an overseas business, so they could claim it back that way. But everywhere else, they need to be registered for VAT and they are finding that they’ve got hundreds of thousands of pounds to claim back thinking that they can, and factoring that into their cash flow, but they can’t. That’s a harsh message to receive at the end of the first year.”
Ms Hut says the new e-commerce VAT regulations have simplified the process, but online retailers should not take shortcuts with registration.
“Think before you start selling and importing goods, make sure that you are completely correctly set up before you start,” she says.
“If you are ready and if you have already started selling, but you haven’t implemented the correct procedures and you haven’t registered for the special scheme, immediately you have a major and very expensive problem. All businesses need to register and comply with the VAT regulations because there is no threshold in place for non-EU established businesses. It isn’t that complicated, it isn’t that difficult, the only thing that you need to do is get on one call and we can help you.”
Ms Horner says under the Brexit deal, authorities have overseen the rules of origin issue with something of a light touch this year, but she expects a crackdown in 2022.
“Rules of origin are really, really important and to get that 0% duty under the trade agreement between the EU and the UK, you need to prove that the goods are either manufactured in Europe or manufactured in the UK,” she says.
“They’re complex rules and now, I think in this past 12 months, some people might have been getting away with more, but I suspect the authorities will be a lot tougher on that next year. Customs duty is a big income earner for the authorities, which obviously they’re very interested in at the moment.”
Freeports in the UK were supposed to cut out the double taxing element, but Ms Horner says there has been little movement around them since they were introduced.
“There was a fuss about them being introduced but there are only eight of them in the UK, including one at Felixstowe which would be good for deep sea shipping. But I still see a lot of the problems that Marisa is talking about, where people just want to ship their goods into the UK or into Europe and they’re not using customs warehousing.
“That will be because their businesses are nowhere near a freeport. They’ve got a warehouse already set up and they’re not going to move their warehousing facilities to a free port, because it’s nowhere near where their businesses.”
Playing the long game with shipping
NCI Trade Credit Solutions (Australia) maintains a quarterly trade credit risk index score, based on an aggregate of claims data, collection activity, credit limit decisions and overdue accounts.
Its latest data shows that risk has stabilised in the third quarter, although between August and September 2021, the number of claims lodged rose by 68%.
Mr Daisley says importers and exporters need to have better working capital at their fingertips to deal with the increased level of risk around these contracts.
“I’ve heard of companies exporting and not getting paid until the product gets sold, as if it’s being sold on consignment, so trade finance now becomes critical, insurance coverage around those sales becomes critical,” Mr Daisley says.
Shippers will need to balance volumes to secure capacity, he says, but not overpay for that privilege.
“At the moment, if you go to a freight forwarder, he says this quote is good for two days, whereas normally it might have been for a couple of weeks,” he says.
“The implications are that if you don’t make a firm decision in the next couple of days, they will have to requote, and let’s face it, in this market the price isn’t going to be requoted lower. I might normally be sending six containers a month but with these prices I need to ask, ‘what is the bare minimum I can get away with?’
“I might just send three this month, or I might send four over a month and a half, rather than six in a month. The point is that businesses need to take time to think about how quickly stock needs to move.”
Mr Daisley says prices will eventually come down and businesses moving goods need to factor the possibility of price drops into their planning.
“One of the risks is locking in record high freight rates in their long-term contracts,” he says.
“At some stage, prices will start to come down, and shippers must be sure they have sufficient contract clauses so that if there is a drop, the rates come down for them. Rather than just sign on the dotted line and pay what they’ve got to pay today, shippers will want to make sure they have got a contract clause that allows them to renegotiate down if the rates are cut in half in three- or six-months’ time. So, they are certainly seeing trading terms of changing shifting longer, which means importers exporters are going to have better working capital at their fingertips to deal with, the increased level of risk around these contracts.”
Do you want to discuss this article more talk about the impact of the supply chain and shipping issues on your business? Then contact us:
Frank Groenewegen
groenewegen@bakertillycuracao.com
Caroline da Silva de Jesus
dasilva@bakertillycuracao.com