2020, a year that everyone is tired of hearing about. Me included. But unfortunately, the turmoil of 2020 hasn't ended and we are still living with many ramifications today...and will do for months to come. With everything that has happened in the past 12 months, we've seen the entire global infrastructure take a right hook to the face. I touched on this topic briefly in our last post on a more micro level and how it's impacted our company. Now, I am going to examine in more detail about the impacts of COVID-19 on container shipping on a macro scale and our predictions for this year.
(Image by Steve Allen | Dreamstime.com)
Let's start with a fact.
11% of sailings were canceled in May 2020 on all the mainline trades.
This was due to a dramatic increase in perishable goods which caused a major impact on global container shipping capacity. Virus related equipment prioritized global shipping and a surge in middle-class disposable purchases occupied higher capacities than usual. It was the burst of a bubble. Leading up to this, for the past decade, the containerization of commodities has grown considerably. Although the freight industry has handled it respectfully, even with gradual exponential demand, the sudden impact of COVID pushed the boat too far (pardon the pun).
Recently, Chinese ports have been hit the hardest with severe equipment shortages. In particular, Xiamen, Ningbo, and Shanghai. These shortages have also impacted our business with several orders currently waiting to ship from Ningbo to our customers in Canada. A lack of empty containers have caused momentary setbacks which we are working hard to rectify.
Port Ningbo-Zhoushan (Image by Cruise Mapper)
As a result of such equipment shortages, some vessels are leaving Asia without full loads because they simply cannot source enough empty containers to transfer all the purchased commodities. Almost every carrier has reported severe shortages of 40HC (40 ft high-cube) containers at their depots and 20 ft containers have also experienced inventory challenges. To mitigate this serious equipment imbalance, ocean carriers have started an aggressive strategy for European and U.S. exports, temporarily suspending bookings, preferring to fill backhaul ships with as much empty equipment as possible.
40" vs 40HC Container (Image by Container Discounts)
However! There is some hope. China dominates the world market for container production. Not only has it become the world's booming global exporter, it has also become one of the largest manufacturers of steel. Due to low labor costs and it's abundance of steel materials, major shipping liners like like China Shipping, Maersk, Hapag-Lloyd, Evergreen, OOCL, Cronos, and Hyundai, use containers made in China. This means we expect China to increase their container production to account for a portion of the increased demand without overpopulating the market once the curve plateaus.
Currently, ocean freight rates have sky-rocketed. For example, a 40HC container from Shanghai to USWC (US West Coast) has tripled from an average of $1,500/40HC to $4,500+. Even with these increases, Drop-Ship Packaging is still able to provide our clients with extremely competitive pricing. This bodes well when costs start to scale back to industry standards. The equipment shortage is not only impacting Asia-American trade, but it is also contributing to spiking rates on other lanes as Asia-Mediterranean rates climbed 12% and Asia-Europe rates climbed 8%. This is multi-year highs of more than $2,400/FEU for both trade lanes.
3 Main Chinese Shipping Routes (Image by China Shipping Routes)
Following the impacts of 2020, we can now look to see how these trends will affect 2021. Here are our top 6 expectations:
1. Global Vaccination Infrastructure
The latest vaccine news is definitely good news, but it will test the strength of supply chains once more as some vaccines require extremely low temperatures to keep them effective. This will be a huge challenge for developing countries. These tests could pose as a very beneficial project towards a more advanced container system for years to come.
2. Trade Negotiations
U.S.-China trade tensions still cast a big shadow of uncertainty. The Trump Administration took aim at the global trading system, primarily accusing China of going against U.S. interests and responsible for large trade deficits, declining U.S. manufacturing, and offshoring American jobs. Although Biden has slammed Trump's go-it-alone approach, he has suggested to chart a course somewhere between Trump's trade wars and an uncritical acceptance of free trade. Perhaps the Biden Administration could provide remedies to these negotiations previously set forth by the Trump Administration and pave a way to a "somewhat" harmonious future.
(Image by Aljazeera.com)
3. Regulations
We may see more regulatory involvements from the FMC (Federal Maritime Commission) as volumes grow and importers and all other stakeholders suffer from the consequences of extraordinary volume increases. Recent applications to the FMC regarding port demurrage and detention charges may be the start of broader regulatory interventions including recent carrier pricing practices. China’s Ministry of Transportation and Communications has also got involved in order to prevent further price hikes from carriers and has asked carriers to try to increase capacity rather than freight rates from China.
4. Service Improvements
Maersk, who is considered to be one of the largest shipping liners in the world, have made a revolutionary decision to offer end-to-end logistics solutions with more value-added services. This could lead to more differentiated service offerings from other carriers, broadening the supply chain efficiency within ports and between distribution intersections. Guaranteed loadings, early and faster discharge with a specific area to pick up the chassis in ports, and increased customer service support for premium services have been tested and are already in place. Although it is not working perfectly now, it will be more widespread and eventually will lead to other more value-added services in an industry where change happens very slow and rarely. What normally takes several days to unload a container ship and separate cargo for ongoing journeys should be accelerated.
5. Technology Advancements
One positive effect of the pandemic was the push to embrace technology within ocean shipping. Slowly but surely the industry has embraced technological advancements which we expect to see further accelerate in 2021. Digitization across all areas of the supply chain and more reliable platforms which provide real-time tracking are a given at the moment. Instead, we will start to see discussions about the implementation of blockchain, Big Data and AI in the shipping industry. New advanced technologies will increase efficiency and also give an extremely competitive edge to those that embrace these developments.
6. Sustainability
Sustainability is a driving factor in every industry right now, and the same goes from container shipping. Carriers are forced to address sustainability and it will be an important driver eventually similar to cost-cutting, profits, and market share increases. Greenhouse gas emissions from international shipping are still one of the top contributors of global pollution. The IMO (International Maritime Organization) has put ambitious goals in place to reduce total greenhouse gas emissions by at least 50% by 2050 compared with 2008 levels and become less dependent on traditional energy sources. The IMO 2020 low sulphur fuel usage regulation was one of the major initiatives towards this goal and over the next years, sustainability will be one of the major discussion points in the industry. Although it may increase the costs short term, it will be unbelievably valuable in years to come when advancements continually improve to sustain the the future.
(Image by DNV.GL)
In conclusion, we expect the majority of 2021 to be a continuation of 2020 with high rates and longer loading/unloading turnaround times. However, we do predict that these outweighing factors will stabilize towards late Q3. With volumes reverting to a more organized manner now that the panic of COVID-19 is beginning to offset, importers and all industry stakeholders are more prepared than ever. Once the vaccine is in widespread use, we will see commodities become readily available again.
Thanks for reading!
Stay Tuned. Stay Safe.
(Sources: MoreThanShipping, Mordor Intelligence, Council on Foreign Relations)
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