- Early October 2021, news reports said freight rates were showing signs of plateauing despite an overheated container shipping market.
- Spot rates appeared to stabilise, although trends for the long term remained high.
- Similar to people awaiting the peak of a pandemic’s wave for relief thereafter, this update on freight rates was a ray of hope after a period that inconvenienced customers.
A recent news article published in the Rediff by Shyam G Menon is a Mumbai-based columnist reveals What A380’s failure can teach the shipping industry.
Massive and vulnerable
The situation was so bad that, in the days preceding the news of container spot rates beginning to calm, there was worry that the record transport charges would contribute to the rising inflation.
Shipping, in many ways, is a ghost industry. It is always in the background, spoken of little but having a finger in many things indispensable for modern life.
Thousands of finished products and raw materials travel on ships.
Perhaps the only time that shipping got highlighted in recent decades — aside from oil prices being periodically affected by the dangers to shipping from simmering tensions in the Persian Gulf — was when the giant container ship Ever Given got wedged in the Suez Canal.
As the maritime canal linking Asia, Europe and the US East Coast got blocked in March 2021, a pile-up of ships awaiting transit commenced.
Laden with commerce, each ship delayed meant supply chains upset.
However, the Ever Given episode and what it represents is only a portion of the vulnerability that has come to characterise container shipping.
According to a UNCTAD report from April 2021, container shipping slowed down as COVID-19 took hold but then bounced back
‘Changes in consumption and shopping patterns triggered by the pandemic, including a surge in electronic commerce, as well as lockdown measures, have in fact led to increased import demand for manufactured consumer goods, a large part of which is moved in shipping containers,’ UNCTAD said.
The initial rise in freight rates was already underway when the Ever Given incident happened, causing a further upswing in transport cost.
Increased consumption during the pandemic, lockdown and relaxed lockdown has triggered trade between the US and China. But that is immaterial; what matters is how an existing equilibrium crumbled.
At the heart of the present crisis lies the shipping container.
First introduced in the US in the 1950s, the modern intermodal shipping container brought ease of movement, cheaper handling and a standardised process to maritime transport.
It spawned a whole industry featuring ships and shoreside equipment specifically built for containerised cargo.
As global trade grew and cost competitiveness became important, the pursuit of economies of scale in transport set in.
Giant container ships were born (the largest on order will carry over 24,000 containers) and large terminals designed to load and unload such ships emerged.
With it, container shipping settled into a hub-and-spoke style of operation with select ports designated as load aggregators and others feeding into them.
The magnificence of such logistics is how the separate parts work harmoniously to meet transport schedules.
But what if the clockwork is upset significantly?
The clockwork stumbles
That’s what happened in 2020-2021.
Through the lockdown period (when e-commerce flourished) and when lockdowns were relaxed, important consumer markets placed major orders for goods, enhancing the demand for containers and ocean transport.
At the same time, the pandemic strained the efficiency of landside operations at some terminals and container turnaround times inland lengthened (remember, the container being an all-weather package, travels considerably inland on trucks and trains).
Add to it another trait of our times — manufacturing is heavily concentrated in China; it isn’t evenly distributed worldwide.
As in the Suez Canal incident, where a ship jammed across the waterway caused traffic behind it to pile up, poor port efficiency at critical locations saw ships take longer to discharge/load.
Some of these ships can’t go to another port because not all ports are equipped to handle them.
The wait meant consignments onboard were delayed.
It also meant that the subsequent schedules of container availability were affected. There was cascading impact. That wasn’t all.
If you want a container, there has to be one readily available in the local inventory or it has to come from elsewhere. If it is the latter (as is usually the norm during times of container shortage), it helps if that box arrived bearing cargo and was then freed up for the next person’s use.
Otherwise, for a given carrier, it is an empty box occupying precious space on a ship and being transported at a cost. When empties are so repositioned, the cost is factored into the freight rate.
Then there are trade imbalances; not all markets export as much as they import.
In certain sectors, the rise in imports meant the importer was paying both the increased freight rates and the cost of holding containers in inventory.
‘By early 2021, for example, freight rates from China to South America had jumped 443 per cent compared with 63 per cent on the route between Asia and North America’s eastern coast. Part of the explanation lies in the fact that routes from China to countries in South America and Africa are often longer. More ships are required for weekly service on these routes, meaning many containers are also ‘stuck’ on these routes,’ UNCTAD said in April.
The Shanghai Containerised Freight Index represents container freight rates to and from Chinese ports. In mid-July 2021, after staying below 1,000 points for much of the past decade, it breached the 4,000 mark.
According to a late August report in Bloomberg-Quint, the SCFI rose further to 4,281.5, a rise of 318.6 per cent since January 2020 and 49.2 per cent since January 2021.
Acceptable, yet bizarre
Is all this market economics? The answer is yes.
But sample some of the underlying bizarreness.
Major ports on the US west coast have been among those reporting long waits at anchorage.
In late September, Splash247.com reported that container rates were up 329 per cent year-on-year while end-to-end ocean shipments on the China-US sector took 83 per cent longer to complete than in September 2019. This is bad.
What is also noteworthy is how the high freight rate scenario was perceived.
Cyclical businesses like shipping rarely see anything abnormal in extraordinary crests because it is in their wiring to make money when the sun shines.
Container lines reported high profits and the matter would have stayed there had it not been for worries of the situation potentially causing inflation, faster sailings threatening the shipping industry’s efforts to reduce carbon emissions and ships waiting long in anchorage creating their own problems like enhanced biofouling.
Not to mention an industry risks losing customers if it stays high-priced for too long (one of the potential results/alternatives of unaffordable transport is greater local sourcing).
Reports appeared of retailers like Costco and Target chartering their own ships and Coca Cola, unable to get shipping containers, resorting to bulk carriers and less congested ports as an alternative.
In mid-September, CMA CGM SA, the world’s third-largest container shipping line, said that notwithstanding market trends, it is freezing its spot rates for the next five months. German carrier, Hapag Lloyd followed suit.
While freight rates may be pressured to correct, the shipping industry does not transform quickly at a structural level.
Ships take time to be built. The order book for container ships continues to feature big ships and massive octopus-like landside terminals with distribution arms reaching inland.
It is not a flexible architecture. The currently volatile container based-supply chain may calm only over a period of time.
For now, we must endure it and remember the lesson — big is impressive but also vulnerable.
The Ever Given incident is an ideal metaphor. A massive ship executing a delicate sail through a canal is impressive. But as several reports said, its giant size (including stacked containers) acted like a sail in windy conditions and may have partly contributed to the mishap.
A parallel from aviation
It isn’t possible to sign off without remembering a development — similar as regards to pursuit of size — from the aviation industry.
The A380 is the biggest passenger airliner built so far.
If size means economies of scale, then the A380 should have been a commercially successful product. It wasn’t.
In 2019, Airbus announced that it would cease manufacturing the aircraft in 2021.
Later, as COVID-19 took a toll on air travel, some of the existing operators of the A380 stopped using it.
As a model of transport, the A380 strikes a parallel — a shared fragility — with giant container ships.
Designed for massive loads, the A380 required traffic-aggregating airports to operate from.
It was based on the hub-and-spoke model. Being a huge aircraft, it serviced airports with matching technical capabilities.
Wikipedia’s page on the A380 had this to say about the aircraft: ‘One reason that the A380 did not achieve commercial viability for Airbus has been attributed to its extremely large capacity being optimised for a hub-and-spoke system, which was projected by Airbus to be thriving when the programme was conceived. However, airlines underwent a fundamental transition to a point-to-point system, which gets customers to their destination in one flight instead of two or three.
‘The massive scale of the A380 design was able to achieve a very low cost for passenger seat-distance, but efficiency within the hub-and-spoke paradigm was not able to overcome the efficiency of fewer flights required in the point-to-point system.’
Is there something for the shipping industry to learn from the A380?
Did you subscribe to our daily newsletter?
It’s Free! Click here to Subscribe!
Source: Rediff
