Transporting goods by container was one of the most dramatic shapers of globalisation because it let businesses and consumers in North America and Europe benefit from far cheaper labour and production costs in other parts of the world. The development of the world’s major shipping routes, from East Asia to Europe, and from East Asia to the US, in turn enabled the rise in just in time.
The rise of shipping
After more than a decade of overcapacity pressures, the industry has gone through a radical consolidation through M&As and alliances in the period 2015-2019. Cooperation agreements are facilitated via the Consortia block exemption regulation (CBER) since 1995, revised in 2009 and in 2014. In March 2020 the European Commission (EC) has extended until 25 April 2024 the CBER and EC outlined the conditions under which liner shipping consortia can provide joint services without infringing EU antitrust rules that prohibit anticompetitive agreements between companies.
Special privileges were given for liner shipping in terms of capacity management, information exchange and joint negotiation. The clear goal was to pass to transport users the effects of a more reliable system, with better quality and more frequent services thanks also to economies of scale.
Economies of scale are at the base of containerized maritime transport model, which imply higher fixed costs on total costs. In fact, the cost of crew, administrative staff, insurances and in particular of bunker increases in a smaller proportion if compared to the size of the ship and this fact promotes a research for economies of scale on the routes where the demand is greater. Unit costs decrease when the ship’s size increases also due to important economies of scale in both construction and investment. This trend is more important on longer routes such as the one from China to Europe, where the average size of the vessels is around 20.000 TEU with a length overall of 400 meters. The consequences for the European ports were clear: huge investments for being able to accept ships coming from Asia.
Covid-19 has changed trade
Moreover, the economies of scale created a very inflexible system and reinforced the alliances among the shipping companies. In 2020 the three biggest alliances served around 85% of the US-China routes, compared to about 60% seven years ago, and almost all east Asia-Europe lanes. The container orderbook, as a percentage of existing fleet, is now at its lowest level: below the 10% - it was 57% in 2007.
In 2020 trade volume recovery was fuelled by a change in consumer spending habits during the pandemic - ordering more manufactured goods while saving by spending less on services, such as leisure and restaurants. It was further supported by inventory re-stocking by businesses that faced acute supply chain disruptions and increased demand for personal protective equipment. Total volumes shipped from Asia to North America exceeded 2019 levels by over 7% in 2020, according to Container Trade Statistics.
Starting from July 2020 a combination of rebounding demand for goods, container box shortages and port congestions due to pandemic-related operational disruptions have extended container ships' turnaround times, drove container freight rates up, starting on the routes from China to US.
The following two figures underlined the average box rate out China (China Containerized Freight index valid on worldwide routes) for the relatively stable period from 2014 to the end of October 2020 (Figure 1) and the last 12 months period (Figure 2), when the effects of supply chain disruptions and more strategic capacity management drove the CCFI from 800 to 2000.
Figure 1 - CCFI 2014-2020
Source: Danish Ship Finance 2020
Figure 2 - CCFI 2020-2021
Source: Shanghai Shipping Exchange
The effects of liners more strategic capacity management started from China to US West Coast in June 2020 as described by the following specific figures (Figures 3) that underlined that shipping one 20-foot container on this route now cost over 2.2 fold compared to a year ago, according to Shanghai (Export) Containerized Freight Index based on Settled Routes (USWC service).
Figure 3 - SCFI 2020-2021 (USWC Service)
Source: Shanghai Shipping Exchange
Shipping cost is rising
The effects of supply chains restrictions and liners more strategic capacity management are hitting in the most relevant problematic way the China-Europe route, although the route registered a restricted decline of 5% in terms of volume in 2020 if compared to 2019. This data indicates an important growth potential in 2021 as demand recovers and potential stronger consequences, considering the impressive role of the three shipping liners alliances. The following figure describes the abnormally high freight rates from China to Europe in the last months. Shipping one 20 foot container from China to Europe now costs over 5 fold compared to a year ago, according to Shanghai Export Containerized Freight Index based on Settled Rates (EUR service).
Figure 4 - SCFI 2020-2021 (EUR Service)
Source: Shanghai Shipping Exchange
The indirect operational consequence of this market context is that China, which has recovered faster from COVID-19, has revved up its export economy and is paying huge premiums for containers, making it far more profitable to send them back empty than to refill them, creating shortage of containers for exporting low value goods, especially for global food trade. If container freight rates will last for more than a year, the pressure towards reshoring and regionalization of the global supply chains triggered by the pandemic crisis might create further disruption of global value chains
Container freight rates are abnormally high if compared to all the others main routes on the 16 million TEU China-Europe route as the following figure indicates (Figure 5). If the three alliances will be able to earn 3.000 USD more compared to 2020 for each of the 16 million container, they will have 48 billion USD more profits in 2021 on this route, with the consequence of huge growth of investments ‘opportunities for vertical integration and diversification.
Figure 5 - Spot container freight rates on main routes
As European Commission Trade Policy review underlines, trade is one of the EU’s most powerful tools. It is at the centre of Europe’s economic prosperity and competitiveness, supporting a vibrant internal market and assertive external action. As a result of the openness of European trade regime, the EU is the world’s largest trader of agricultural and manufactured goods and services and ranks first in both inbound and outbound international investments. Therefore, consequences of the China-Europe freight rates bubble will not be limited to abnormally high profits for shipping lines, but rebound effects might hit also the other transport operators in the supply chains and could generate new costs to firms and families. These effects are expected to be disproportionally high for the European market compared to other world regions and could have a cascade effect on other routes than China to Europe.Shipping lines market power could increase 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.
Risks of high cost and low quality of shipping could also hit European manufacturing sector. A first signal arrived in February 2021 from German and Italian automotive firms. According to analyst of the Italian association of automotive companies (ANFIA), the current unavailability of containers, insufficient in numbers due to an unexpected upturn in trade in some countries, primarily China, and cancellations by logistics operators of new unit orders in the first half of 2020, the lockdown period, has also contributed to the problem of the abnormally high freight rates on the China-Europe route. Lack of strategic components from Chinese suppliers is leading to an alarming increase in delivery times, slowing down production flows and resulting in price increases especially on automotive components such as microprocessors, steel and plastic components.
Shipping sector remains subject to risks of geopolitical tensions and trade protectionism, uncertainty about economic recovery paths in different regions, as well as ESG-driven initiatives such as IMO 2020 and other emission regulations.
European Regulators (Antitrust authorities but also Port Authorities) should monitor the market from a legal clarity perspective (CBER exemption is still appropriate in a high rate and poor quality market?) and should verify if the impacts on level playing field in freight forwarding is preserved. European Regulators should avoid similar potential problems on other shipping sectors, starting fro Ro/Ro market where the phenomena of consolidation and naval gigantism are similar to container market.
European Commission Strategic Foresight Report and Trade Policy Review highlight resilience as a new compass for all EU policies as a result of the tragic coronavirus pandemic, but EC should also give the correct importance also to the role of European companies in the global production and distribution. EC should consider ports and shipping as a relevant component of policy agenda for strengthening the resilience and sustainability of the EU economy because European companies should rely on open supply chains, supported by stable, predictable, competitive and transparent trading context.
Baccelli, O., Bramanti A. “Le prospettive per la Lombardia nel contest delle nuove global value chains. Gli sviluppi attesi nel settore delle infrastrutture di trasporto”, Report per Confindustria Lombardia e Assolombarda, Ottobre, 2020
Baccelli O. Morino, P., “The role of Port Authorities in the promotion of logistics integration between ports and the railway system: the Italian experience" in Research in Transportation, Business and Management n° 1, 2020, Elsevier
Danish Ship Finance, “Shipping Market review” November 2020, Copenhagen
European Commission “Trade Policy Review - An Open, Sustainable and Assertive Trade Policy”, COM(2021) 66 final, 18.2.2021, Brussels
European Commission “Strategic Foresight Report –Charting the course towards a more resilient Europe”, September 2020
 China (Export) Containerized Freight Index (CCFI) sponsored by the Ministry of Transport and formulated by Shanghai Shipping Exchange was firstly publicized on April 13th 1998. CCFI took January 1, 1998 as the basic period with the basic index of 1,000 points.
 Bloomber news, 2nd February 2021 “It's a perfect storm': A shipping container crisis has upended the global food trade”
 UNCTAD, Review of Maritime Transport 2020. On the opposite route, from Europe to China, the volume are 6,9 million of TEU and is not affected by the freight rates bubble as the route from China to Europe as indicated in the Fitch Rating graph (Figure 5).
 ANFIA 10th February 2021 press release.
 European Commission “Strategic Foresight Report –Charting the course towards a more resilient Europe” September 2020
 European Commission “ Trade Policy Review - An Open, Sustainable and Assertive Trade Policy”, COM(2021) 66 final,8.2.2021, Brussels