Shipping costs soar

Oil-fired transportation cost may put brakes on long-distance trade

May 28, 2008 04:30 AM
Julian Beltrame
THE CANADIAN PRESS

OTTAWA–The high price of energy is undercutting the advantages of globalization by raising transportation costs so much that they could force businesses to look closer to home, says a CIBC World Markets report.

“Globalization is reversible,” Jeff Rubin, the bank’s chief economist, wrote in the study released yesterday.

“In a world of triple-digit oil prices, distance costs money. And while trade liberalization and technology may have flattened the world, rising transportation prices will once again make it rounder.”

Rubin and co-author Benjamin Tal say the cost of moving goods – particularly heavy materials such as steel – not the burden of tariffs, is the largest barrier to global trade today.

They calculate that every $1 (U.S.) increase in the price of a barrel of oil has translated into a 1 per cent increase in transportation costs.

In fact, the report says, the explosion in transport costs caused by the record price of oil has effectively offset all the trade liberalization efforts of the past three decades.

In 2000, when oil was $20 a barrel, the cost of transportation was the equivalent of a 3 per cent U.S. tariff rate, the report states.

Now, transportation costs are equivalent to a 9 per cent tariff, and at $150 a barrel for oil they would amount to an 11 per cent tariff – about the average of tariff rates in the 1970s.

Given the costs of moving raw materials and finished goods, distance to market is becoming an increasingly important factor in business decisions, the report says.

The cost of shipping a standard 40-foot container from Shanghai to North America’s east coast has jumped to $8,000 from $3,000 in 2000 when oil was $20 a barrel, the report says.

Nobody is predicting any sudden breakdown of Asia’s exporting machine. After all, labour costs remain far lower in Asia, while shipping costs spread out over a container full of consumer electronics, clothing, sporting goods or the like may result in only a modest increase in per-unit costs.

But the higher shipping costs are already affecting products with a high ratio of freight costs to final sale price, such as steel, the report says. It says China’s steel shipments to the United States are down by 20 per cent from a year ago, the worst performance in a decade, while U.S. domestic steel production has risen 10 per cent. Eventually, some production could return to North America.

“Are we seeing a major inflow of jobs back to the manufacturing sector? Not yet,” he said. “But if oil prices continue to rise and transport prices even double from the current rate, you will see more and more jobs coming back.”

United Steelworkers economist Erin Weir said the CIBC paper makes sense in theory, since globalization is partially made possible by cheap transportation costs.

Weir said he cannot point to any sudden increase in steel production in Canada, but noted that the country’s steel industry has been acquired by foreign interests in the past few years, “so they must believe they are good investments.”

High energy prices will have a minimum impact on Canadian exports, Tal said, since the vast majority are bound for the nearby U.S. market, and many are in commodities, for which markets have few alternative sources.

CIBC’s Rubin last month gained attention for predicting oil would surge to $225 a barrel by 2012. Some of his past calls, on real estate and currency, for example, have hit the mark, while other calls have been off base, such as saying in 2000 the Canadian dollar was “on a path to extinction.”