Freight fluctuation and currency devaluation: What are they and why do they matter?

Freight rate fluctuations present a rather troublesome issue for companies across the world. Higher shipping costs result in a higher cost of acquiring goods. Consumers are less flexible at absorbing short-term price increases, which puts pressure on the supplier to somehow make a profit whilst keeping prices low in the face of rising goods prices. Ultimately something has to give, and it’s usually the supplier’s margins. The smaller the company, the more sensitive they are to changes in freight rates and exchange rates, and the more volatile the prices become for its customers.

In the current economic climate, how do you operate a business when your customer is unforgiving and inflexible to price increases, yet you can’t predict prices from day to day?

The global economy has been running hot; with strong demand for goods. However, there’s a finite number of ships available to move goods around the globe. To make matters worse, a large number of ships became unavailable due to lockdowns around the world. The lack of ships created a bottleneck on the supply side of the equation, and this was compounded by a surge in demand. In 2021 it resulted in freight rates peaking at $20,000, compared to $2,000 a year earlier. Much to the relief of import companies, the rates are back on the decline, but these extreme fluctuations in rates result in extreme fluctuations in the price of goods. And we’re not out of the woods yet!

At the same time, currency fluctuations across the globe are also affecting the prices of goods. If you’re buying with USD, goods are getting cheaper as the dollar strengthens. But if you’re buying in GBP, goods are getting more expensive as the currency slides, further squeezing margins.

Such instability in prices gives rise to a phenomenon in which local importers are made to compete against large brands that can purchase a large number of goods at a cheaper exchange rate given that they placed the order earlier when the currency had more value.

In just four months from April 2022 onwards, the exchange rate has dwindled from $1.25: £1 to $1.06: £1, and now it's back at $1.13: £1, again creating mayhem as different importers can avail different landed costs based on the time of their purchase.

Effects of freight fluctuations and Currency Devaluation on lighting and Electrical product prices

Freight rates combined with currency fluctuations have created the perfect storm of price instability for lighting and electrical products. Different light suppliers are forced to sell their goods at different prices – not to extort consumers, but purely out of necessity. 

It hurts the consumer in the form of higher prices, it hurts the distributor in the form of squeezed margins, and it hurts the light manufacturer in the form of demand reduction and subsequently, negative price pressure. All sides experience trust erosion due to price instability because light suppliers and manufacturers are perpetually unsure if they are purchasing at the right prices. It is why light manufacturers often choose not to keep an inventory of goods on hand and instead choose to follow the just-in-time production approach. However, this has its downsides, such as a substantially greater lag time between order and delivery.

Bigger is better

The economic market is a stubborn mechanism. Consumers take time to adjust their spending patterns to sudden changes in prices, subsequently putting pressure on the margins of suppliers and manufacturers. Therefore, it has become increasingly important to choose large suppliers that can be able to adjust to such changes, hedge their investments, and have the capability to absorb margins during times of crises. Staying loyal to smaller companies puts you at risk of significant losses about volume and prices, due to their exposure to the price volatility.

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