The ocean transport market has been confronted with a worldwide prolonged disruption since August 2020. Consequently, date shippers have been trying to bring order to their procurement and carrier management processes , yet failing to do so, in part because maritime problematics concern both ports and hinterland connections. Public interventions to smooth out international supply bottlenecks have been implemented in many countries, including the worst hit such as China, the US, and the UK, but their power to influence what is almost entirely a private sector problem has been limited.
The “boom” of maritime freight rates
The container market has seen extraordinarily high freight rates and second-hand prices during the last fourteen months. However, the biggest contributor to global supply chains disruptions are infrastructural bottlenecks, which have resulted in port congestions and a reduction of the available capacity by as much as 10% during the first ten months of 2021. The result is the highest level of vessel utilisations in the sixty-year-long history of the maritime container industry and, therefore, the highest level of freight spot rates.
From the 1st of January 2019 to mid-October 2021, the World Container Index assessed by Drewry rose from 2.000 USD to 10.000 USD, as shown in the following graph.
In mid-October 2021, the spot freight rates on the routes from Shanghai to Rotterdam reached 14.605 USD (a 565% increase from the previous 12 months), while the Shanghai-Genoa route reached 13.650 USD (a 404% increase). The spot freight rates on the route from Rotterdam to Shanghai are completely different in the amount (1.590 USD) and in the trend (+46%), because the main driver of severe problem in maritime sector has been the strong growth of Asian exports since August 2020, which is increasing the complexity of already historically unbalanced flows of goods and equipment. The same phenomenon is occurring across all major routes: the Shanghai – Los Angeles spot rate is 10.890 USD, while it is only 1.307 USD for the opposite route. Over the last months, Asian trade has shown little sign of slowing down despite concerns that global growth is weakening, with South Korean, Taiwanese, and Chinese exports hitting records in September and with equally strong outlooks for the coming months and 2022.
Why these bottlenecks?
The high cost of trading is not the only problem for global value chains, because uncertainties and delays contribute to the disruption. Reduced ports productivity, due to long queues of ships waiting outside ports, slower ship turnaround when they are finally berthed, extended container equipment turnaround timings, reduced availability, and disrupted sailing schedules (blank sailing and vessel slides) are the other weaknesses of the global container industry. For example, according to the Marine Exchange of Southern California, there were 79 containerships at anchor or in holding areas on theWest cost’s two main container ports as of the 21st of October, a new, all-time record. The Biden administration has worked to get ports working 24/7 in an effort to clear these backlogs; however, severe congestion is currently running throughout the supply chain.
Moreover, reduced capacity has induced shipping lines and forwarders to focus on the most profitable trades, starving other lanes especially in Latin America and Africa; thus contributing to the marginalisation of those regions in global value chains. As an example, Alphaliner reported that the share of the global cellular fleet deployed in the Asia-Europe and Asia-North America trades increased from 34.6% on the 1st of July 2020 to 41.4% on the 1st of July 2021.
Overwhelming volume generated by record, pandemic-induced consumer demand in the US and Europe is swamping a system that was already creaking under the weight of high demand, low investment, labour shortages, and regulatory battles.
Southeast Asian, Californian, and UK ports are the main bottlenecks. US and UK ports are registering record imports but are suffering from labour shortage, with the unprecedent results that ports are full of goods, yards and warehouses are also packed with goods, but hardly anyone wants to drive a truck to pick up and deliver those goods, while those who do have to sit waiting in lines, often unpaid. The results of the UK government’s analysis of the shortfall in UK truck drivers that is causing widespread disruption to trade underlined that the phenomenon is mainly caused by British workers leaving the industry rather than foreigners being unable to join. Moreover, it is very difficult to find a new generation of truck drivers as the pandemic shuttered training programs over the last eighteen months.
Moreover, some manufacturers have been forced out of the business by high costs and the lack of affordable transport options, while others are reconsidering their sourcing options. Distributors are facing higher costs and in some cases claiming to revise the import tariffs schemes in order to reduce the price for final customers, like the American association of building materials or Footwear Distributors and Retailers of America did at the beginning of October.
Losers… and winners of this situation
While market losers are clearly manufacturers and consumers, market winners are certainly container shipping lines.
A Deutsche Bank September 2021 forecast argues that container shipping has entered a “super cycle” and ocean carriers will actually rake in more money in 2022 than they will this year due to the fact that the high amount of port congestion and lingering nature of COVID-19 will not be quickly resolved.
In mid-September, Maersk — the container industry’s market leader — claimed it expects 2021 EBITDA of $22 -23 billion. The new midpoint is 137% higher than the February midpoint. Drewry’s analysts underlined that in 2021 the shipping lines profits (approx. USD 150 billion) will be much higher than the total from the past twenty years (approx. USD 109 billion).
Chart: American Shipper based on disclosures by Maersk
Thanks to their record profits shipping lines will be able to increase even more their market power through the new investment capacity for vertical integration (terminal, intermodal) creating risks of product bundling, predatory pricing, or forcing of own services promoting carrier haulage instead of merchant haulage.
The positive aspect is that the sector of container ports and terminals is witnessing increased adoption of innovative technologies to increase the reliability and lower their per unit handling costs through an increase role of digitalisation and automation. Moreover, there is a record in asset investments in new container vessels and equipment. In mid-September 2021, total year-to-date new vessel orders stood at 3.9 million teu, which with more than three months of year remaining, has already surpassed the previous annual record of 3.3m teu set in 2007.
Over the last few months, global value chain disruptions underlined the importance of better forecast predictions and tools to anticipate bottlenecks and enhance supply chain transparency, introduce flexibility and adapt infrastructure and operations accordingly. Anticipating and preparing to face future disruptions through better collaboration among public and private operators are key to improving risk management and resilience building.