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What it really took to bring shipping out of the shadows was shockingly poor reliability and record-high costs, driven by the stop and then start nature of trade during the pandemic
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Other contributors to the container shipping chaos included pandemic-related port closures, disruption to hinterland connections, and ships flocking to the Far East-to-US trade to serve high demand that pushed up freight rates to record highs
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The current situation can’t be explained by “simple” market fundamentals as it also involves onshore bottlenecks and long waiting times at ports that reduce the number of trips a ship can make
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The tumult of the past year has further shown that when the supply of goods is threatened, price becomes secondary to ensuring the timely delivery of goods
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Xeneta advises shippers to develop a good relationship with carriers as a strategic partnership to insulate them from some of the risks and black swan events waiting in 2022
The importance of container shipping, rarely acknowledged outside the shipping bubble, was highlighted in 2021 as the pandemic revealed the staggering impact of the disruption of the industry on global trade, according to a new report from Xeneta.
Xeneta said the chaos in container shipping last year was captured in the remarkable pictures of the Ever Given stuck in the Suez Canal and later the line of ships waiting in the San Pedro Bay in the US.
“However, what it really took to bring shipping out of the shadows was shockingly poor reliability and record-high costs, driven by the stop and then start nature of trade during the pandemic,” the leading online ocean and airfreight rate benchmarking platform said.
The disruption in container shipping disrupted non-logistics departments and consumers due to delays, shortages, and spiraling costs. On the latter, UNCTAD (United Nations Conference on Trade and Development) estimates that increasing freight rates will lead to an average increase of 1.5% in consumer prices globally.
One key outcome of shipping disruptions is the public realizing how global and interconnected the world and container shipping are, said the report.
“Summing it up on a very high level, record-high US container imports, driven by US consumers buying Asian-produced goods at an unprecedented level, explain much of the extraordinary situation in container shipping.”
The report also pointed to other contributors to the container chaos, including pandemic-related port closures, disruption to hinterland connections, and ships flocking to the Far East to US trade to serve high demand that pushed up freight rates to record highs.
Adding to all this is the phenomenon of reverse cascading, in which smaller ships, which had in past years been pushed down to secondary trades when larger ships were delivered, were deployed on the lucrative trans-pacific trade lane.
This, in turn, reduced the capacity on their previous trade lane, driving freight rates up here while doing little to help solve the trans-pacific problems. The extra ships got stuck at anchorages, some of which set sail without the necessary agreements with terminals.
Lastly, a delay at destination ports means that ships are often late to start their next scheduled (origin) departure, leaving carriers with a blank sailing option or having to find another available ship. This left everyone scrambling to get hold of the spare capacity available on the charter market or taking ships out from another trade.
Not that straightforward
But Xeneta said the current situation in the freight market can’t be explained by “simple” market fundamentals. There are also the onshore bottlenecks and the resulting long waiting times at ports, which have soaked up a considerable amount of capacity and reduced the number of trips a ship can make.
“Many new ships, ordered this year, will be delivered from 2023 onwards and will add capacity on the sea. However, unless ports and hinterland connections can ensure the free flow of cargo, end-to-end, these extra ships will instead just join the queues outside the ports—just as we have seen with the extra loaders added on the transpacific in the past few months,” said the report.
“The directly pandemic-related disruption such as port closures in China will remain a threat as long as the virus circulates and—perhaps more importantly—if China sticks to its zero-COVID strategy. The more significant problem that needs tackling is that the infrastructure can’t cope with the higher volumes coming through, such as in the US.”
Said Xeneta: “Large-scale spending into the whole onshore part of the supply chain is needed to tackle the above challenge, but it won’t solve the problem overnight. The fact that capacity on the sea hasn’t been the limiting factor this year means the new ships being delivered in 2023 won’t solve the underlying problems brought to light this year.”
Time beats price
The tumult of the past year has further shown that when the supply of goods is threatened, price becomes secondary to the timely delivery of goods, the paper continued.
“Reliability will be key to navigating 2022. Consider those shippers who fixed long-term contracts for this year at the end of 2020 or the start of 2021. Rates fixed at that time were high compared to historical rates but far from today’s rates,” it said.
So long as these shippers kept to the number of contracted boxes, they were still enjoying relatively low rates. Their problem came when they had extra volumes, Xeneta noted.
“In the past, carriers were flexible on this, allowing the extra boxes onboard, but that flexibility was gone [last] year, leaving these shippers to fight for space on the spot market and swallow the higher rates. The more exposed you were to the spot market, the harder the past year has been.”
Xeneta advises shippers to developing a good relationship with carriers, saying that “viewing it more as a strategic partnership than a game that can be won by securing the lowest price will insulate shippers from some of the risks and black swan events that 2022 doubtless holds in store.”
Stability and predictability can also be achieved by signing multi-year deals that few carriers are currently pushing for, as it guarantees the capacity. However, to avoid paying today’s rates after the market softens, these contracts must include some adjustment mechanism to reflect future market conditions, suggests Xeneta.
