Whilst seemingly oblivious to the chaos in supply chains, carriers continue “feasting” on rates boom.
BY Peter Raven, Editor-In-Chief, CargoNOW
The image used for this op-ed is meant to be a little tongue in cheek, but there is no denying that container shipping has been a great place to be for carriers and freight forwarders, while proving a headache for shippers.
The ongoing disruption to the global supply chain caused by a lack of containership capacity and port congestion has reached such epic proportions that it is now increasingly drawing the attention of regulators and government officials globally. The US National Retail Federation is so concerned about the worsening situation that they sent an open letter to President Joe Biden asking for a meeting to discuss the problems and their impact on the U.S. economic recovery, while two U.S. House of Representatives committees launched hearings into the issue.
“The supply chain disruption issues, especially the congestion affecting our key maritime ports, are causing significant challenges for America’s retailers,” wrote NRF President and CEO Matthew Shay in his letter addressed to President Biden. “The congestion issues have not only added days and weeks to our supply chains but have led to inventory shortages, impacting our ability to serve our customers.
In addition, these delays have added significant transportation and warehousing costs for retailers.”
Sky-high freight rates and poor service levels from ocean carriers could very much be the norm until early 2023, according to experts. Moreover, the forwarder is critical of the apparent disregard shown by carriers to the supply chain crisis. Some industry pundits are alleging that instead of working with their customers, many prefer to “feast” on the current elevated rates and are “blasé” about the fate of their customers.
Driven by the pandemic and stimulus-induced consumer spending on retail goods, container shipping has been seen stratospheric rate and volume growth.
The start of this year has been the busiest Q1 on record, with volumes reaching 42.9m twenty-foot equivalent unit (TEU), a 10.7% increase on Q1 2020 – and a 6.8% increase compared with Q1 2019 – though still a slowdown from Q4 2020 when 45.9m TEU were moved.
Despite the quarter-on-quarter slowdown, monthly volumes in March were the highest on record globally with 15.5m TEU being loaded onto ships. This breaks the previous record, set in October last year, when volumes reached 15.4m TEU. Prior to 2020, the highest volumes ever reached were 15.0m TEU in May 2019.
As we approach the post-pandemic world, hopefully in 2022, demand looks set to slow as stimulus measures and restrictions are eased, leaving consumer spending patterns to find a new balance and with rates eventually returning back to previous levels in 2023.
In today’s conditions, with equipment imbalance and port congestion compounded by accidents and mishaps such as the closure of the Suez Canal, high volumes sent freight rates soaring to new peaks and left carriers struggling to keep up as they booked huge profits in the first quarter.
Carriers have clearly had the upper hand in recent negotiations, but how they are choosing to play this varies, as some prioritise pleasing their high-value customers, lowering their potential short-term gains, while others are maxing out on the current conditions. The situation is so unprecedented and unique that just today we heard a report that an 800 TEU a year shipper is paying more favourable rates than a 400,000 TEU shipper on the same carrier.
On the losing side of this power battle are the shippers and some are even saying deserverdly so as many will still remember the days when shipping lines went belly-up or had to be sold off at a loss to form new groups , alliances or to be merged with other lines.
To add insult to injury though, these record-high freight rates, also come with poor service, as schedule reliability drops to new lows. The long-term fall-out of the specific carrier/shipper relationship will only be fully known once market conditions ease.
Outlook – A Tough Situation with Choppy Seas Ahead
If the high volumes we are currently seeing reflect importers’ frontloading their goods, then rates could soften significantly. After having had their fingers burned many times over the past year, and with the current delays and disruptions in supply chains around the world, getting their imports in now would insure them against not having sufficient stock when they need it.
In 2022, demand looks set to ease as pandemic-related stimulus packages start to dwindle or spending shifts away from securing consumer income and towards longer-term economic projects such as infrastructure investment. These will no doubt help the economy recover, by supporting consumer demand, but not to the same extent as has been the case with spending up to now.
The high contracting that has fuelled this market boom could lead to a repeat of the overcapacity problems the market has faced for many years once these ships are delivered. Issues of overcapacity have been forgotten in recent months but, once more normal market conditions return, carriers will again have to find the right balance between supply and demand. This will not be easy. Another looming threat is the high charter rates into which carriers have locked themselves, in some cases for several years. Though fine now, a future fall in the freight market would leave carriers paying for today’s high-price ship while freight income falls, hurting their bottom lines.
With long-term freight rates locked in for the many months yet, and short-term shippers more desperate to secure space on ships than negotiate a lower price. This pun that was first coined in International Shipping News, sums it up very well- 2021 may be the Chinese Year of the Metal Ox but, in shipping terms, it is more likely to be remembered as the Year of the Metal Box.