2020 - A year of “stormy” sea transport.
The coronavirus pandemic hit the global logistics market hard in 2020. Some effects have been felt for several months of this year, others - will be felt for several years. Supply chains may change, i.e. industrial production in the world may change.
In mid-January 2021, a record for the rental price of chartered cargo ships was broken. British Petroleum hired the LNG Abalamabie gas carrier under the flag of the Bermuda Islands (owned by the Bonny Gas Transport joint venture, owned by: Nigerian National Petroleum Corporation, Royal Dutch Shell, Total and Eni) to transport liquefied natural gas. They paid a rate of $ 350,000 per night.
Do such rates pay off? Yes, in the turbulent world of logistics. Who will pay for it? - of course the ultimate consumer. This is not the only example of an abnormal situation that continues to exist in the global freight transport market by sea, air and even rail.
Maritime transport
According to UNCTAD's "Review of Maritime Transport 2019" data, maritime transport in 2018 accounted for over 80% of the volume of transport in world trade in goods (11 billion tonnes) and over 70% of their values. The costs of this transport accounted for an average of 15% of the value of imported goods, although in countries with poor port infrastructure they amounted to 21%. Transported, among others 152 million TEU of general cargo (20-feet container) weighing approx. 1.6 billion tons.
UNCTAD estimated that in the period 2019–2024 international transport of goods by sea will grow at an average annual rate of 3.5%. This pace was sustained in January 2020.
Then there was a breakdown. The "factory of the world" stopped working, first due to the Chinese New Year (January 24-30), then affected by the COVID-19 pandemic. The previously ordered goods came to Europe almost throughout the first quarter of 2020, because sea transport has a 40- or 50-day inertia from the date of loading. But already in March both the lack of supply of goods (from China) and the freezing of demand after the administrative restrictions introduced in Europe and the closing of economies overlapped each other.
In maritime logistics, the impact was that in April and May, shipping lines suspended 1 out of every 6 container ship trips from Asia to Europe and North America. The empty runs of ships (or with empty containers) grew. In June, the consulting company Sea-Intelligence estimated the number at 82. In addition, shipowners anchored many ships. In May, from 11% of container ships (according to Clarksons Research) to 11.6% (Alphaliner estimates), i.e. nearly 200 units, were idle.
This had an impact on freight rates. Those listed by the Shanghai Containerised Freight Index (SCFI; for 13 main fixed routes departing from Shanghai) fell below $ 500 per TEU.
That is why analytical companies forecasted a tragedy for sea transport in May, including the worst annual loss of container shipping of up to $ 23 billion (Sea-Intelligence).
"The Stern turn"
And suddenly the situation turned 180 degrees. Already in May, commercial warehouses and industrial plants were cleared of goods. In many countries, trade moved from the real world (large stores closed) to the Internet, and it needed new supplies. Consumers deprived of the possibility of spending on many (also closed) services started shifting their money to buying various goods. Speculative demand started as well and increased orders from traders, who were afraid of rising commodity prices (which has become a fact).
Under conditions of limited supply of shipping services, a real pandemonium broke loose. There was a shortage of basic components in the supply chain: slots (places on the ship for containers), free loading and unloading capacity in many ports with container terminals, and in autumn also empty containers in Asia (especially in China) for loading further batches of goods, because there were they are held at reception ports. This is where the effects of the asymmetry in the trade of goods experienced by over 90% of countries with China made themselves felt.
As a result, there were two negative phenomena: congestion in ports, which in turn disrupted the schedules of permanent connections, because ships stayed on the roadways for up to a week (container ships travel several thousand miles and before that they usually called with an accuracy of almost an hour, which allowed for deliveries in the system Just in time) and an increase in freight rates.
Who is to blame?
To say that the cost of transport in spot (current) contracts has increased is not enough. It was price hyperinflation.
From the third decade of May 2020, freight increased at a double-digit pace. The average price level - according to the Shanghai Containerised Freight Index (SCFI; records transport costs for 13 main fixed sea routes from Shanghai) already in mid-June exceeded $ 1000 / TEU, which was much higher than in the same period of 2019. In mid-October, it was still it doubled, and in mid-January 2021 it tripled (to $ 2,870 / TEU) and stopped growing.
The problem is that SCFI (as well as other similar indicators) record only basic rates. In fact, they were almost doubled by the various surcharges. Traditional ones, e.g. BAF (bunker adjustment factor ie variable fuel additive), CAF (currency adjustment factor ie variable currency addition), PCS (Panama canal surcharge - for transport via the Panama Canal), but most of all dusted ones: additives for all types of cargo (FAK), for the peak season surcharge (PSS), for the lack of empty containers and equipment (EIS - equipment imbalance surcharge), for congestion in ports, for changing the position of the container on the ship, etc.
As a result, the transport of cargo in a 40-foot container (FEU) from China to such European ports that experienced congestion (eg Felixstowe, Genoa, periodically Rotterdam) at the end of 2020 cost a total of $ 10,000, three times more than the year before. For these reasons, shipping lines have been accused by cargo shippers and forwarders of "taking extra advantage of the pandemic" and speculating "to misfortune". Also because they were not hastily launching full transport capacity, and because although transport was so expensive, its quality deteriorated. The shipowners explained that they did not have free ships, while the leasing market did not have them either, and the rental rates for container ships had also doubled.
Ankush Kathuria, chief analyst at Drewry Maritime Financial Research, argued that the greater blame for the crisis in the container shipping market, especially port congestion, should be placed on cargo owners. They are the "ineffective link" in the supply chain. They are holding containers, increasing inventories above the norm and disrupting the return to stabilisation of services. So - they also have to bear "indirect costs".
Some analytical companies, when assessing the situation, indicated that the reason for the confusion was deeper. It is concentration in ocean transport. Shipowners from three alliances (Ocean Alliance, 2M, The Aliance) already handle 85-90% of shipments on two main lines - from Asia to North America and from Asia to Europe. As a result, the previously disturbed free competition, in the conditions of restrictions resulting from the COVID-19 pandemic, was used to the full, with obvious consequences.
The fact is, forecasts have changed over time - from huge shipping line losses to their profits. The aforementioned Sea-Intelligence withdrew in July from its forecast of an industry loss of approximately $ 14 billion throughout 2020, indicating that it could reach $ 9 billion, and Drewry estimated that the industry's EBIT will exceed $ 1.4 billion with a profit margin of this profit. 3.2%. Later it only got better.
It turned out (Sea-Intelligence data) that container shipping lines earned $ 2.7 billion in the second quarter, which was the best result since 2010. The highest profitability in the second quarter, $ 146.4 for the transport of one 20-foot container, was recorded by the German carrier Hapag-Lloyd, ahead of Danish Maersk ($ 129.3 / TEU) and South Korean HMM (Hyundai Merchant Marine), whose container shipment EBIT was $ 129.1 / TEU.
In the third quarter, seven of the top 12 shipping companies (which are quoted on financial exchanges and report data) reported extra profit. Some of them haven't seen them in three years (HMM in five).
For example, Maersk (No. 1 in freight volume) announced a net profit of $ 947 million compared to $ 520 million a year earlier and forecasted its 2020 EBITDA to be between $ 8 billion and $ 8.5 billion. Hapag-Lloyd (the fifth container carrier in the world) - recorded a net profit of $ 290 million, 73% higher than a year ago. The cumulative profit of this carrier for the first nine months was worth $ 605 million, which is almost twice as high as in 2019 ($ 333 million).
Summary
It can be concluded that in 2020 sea container transport turned out to be resistant to a deep regression in the transport performance, as indicated by the alarming media headlines from the spring.
Taking into account the data from December 2020, it can be stated that throughout 2020 the industry recorded a slight regression.
Among the 13 main container shipping routes, on the trans-Pacific line (Asia - North America), already after the first 11 months of 2020, the volume of transport was 1.1 million TEU higher (by 6.4%) than in the previous year. Intra-Asian container lines were close to breaking the downward trend. It probably did not work on the Asia-Europe route, because from January to the end of November 2020, 5.3 fewer loads in containers were transported by sea than in 2019.
At the beginning of 2021, several signs indicated that in the first quarter there may be a normalisation of the maritime transport of general cargo in containers, subject to the volume of demand for transport and the supply of container ships, but also to the behaviour of entrepreneurs in China during the three-week break on the occasion of lunar new year (CNY, February 11-17).
The suspension of production in China for more than a week is to cool the market (in previous years, supply decreased by about 2.4 million TEU), interrupting the implementation of new transport orders and favouring the transfer of empty containers from Europe and America to Asia. But the statements of shippers show that many plants in China do not want to stop production because they have arrears in contracts or want to take advantage of the boom in exports. The central government is also encouraging some factories to remain open to minimise the movement of people and the threat of spreading COVID-19.
As a result, the supply of cargo could only slightly slow down, which was a bad sign from the point of view of cargo senders. It is true that the freight rates in spot contracts in SCFI quotations stopped growing at the end of January 2021, and then decreased by 7 percentage points, but - according to analysts - this was not the basis for assessing that the trend changed permanently.
The development of the coronavirus pandemic was also a great unknown. Not only in Europe and the USA, but also in China. Therefore, analysts refrained from forecasting transport costs, which might as well have suddenly become cheaper than the long-term average, or only slightly cheaper compared to 2020 levels.
Reallocation?
An informal survey conducted in August 2020 by the American shipping company Flexport among the participants of the seminar showed that in the first half of 2020, more than half of them changed their source of supply, which were companies in China, and almost one in three moved more than 10% of their deliveries to other countries .
The reasons were turbulences in production and logistics, and the ongoing (then) US-Chinese tensions in economic cooperation and trade. In addition, a rational, mercantile approach was taken into account that excessive dependence on one source is always unfavourable, and fatal - in crisis conditions.
Already from the end of 2017, i.e. before the world heard about the coronavirus, some shippers and manufacturers in the US began to look for alternative sources of supply. The incentive was to avoid the higher import duties on Chinese goods, introduced by the administration of President Donald Trump.
And yet, Dominique von Orelli, head of ocean freight DHL Global Forwarding, assessed that the effects of such reallocation of orders to date have been moderate. “China will always be important because it is… China. But the time may come to end to be as heavily dependent on China as it has been so far, "Orelli noted.
According to specialists, however, China has an advantage over growing exporters - neighbours from the Southeast Asia region. It is simply a better logistics infrastructure, skills and capabilities that have been acquired over at least three decades of the ongoing impacts of economic globalisation. These items cannot be replaced in a short time.
According to a survey from the end of December 2020, conducted by The Economist Intelligence Unit on behalf of DP World (among 800 managers), already 83% of companies significantly reconfigure their supply chains by changing or adding suppliers or changing the location of production.
The study also found that, on average, companies shifted a third of their revenues from the first half of 2020 to rebuilding their supply chains. Almost two in three (65%) of respondents said the reconfiguration process would be completed within a year.
The authors of the study concluded that "the effects of the pandemic have accelerated the transformation of supply chains and prompted rapid adaptation to ensure resilience in international trade."
So the question is again how sustainable this trend is and how widespread it is. The answer may depend on how the volume of traffic on the main sea routes will change and how it may be affected by the pandemic.
21-01-2020