Estimated Reading Time: 5 Minutes
COVID-19 exposed the vulnerabilities humankind faces, not just in the case of health but also in terms of trade, as the global supply chain almost ground to a halt at the peak of the pandemic. Starting from the world’s factory, China, country after country implemented lockdowns on businesses, trade, schools, shops, and transport.
The lockdowns severely impacted consumer consumption and industrial production which in turn created waves across other components of global trade dependent upon these industries. Fuels, mining and manufacturing products, and medical supplies were among several of the cargoes affected by the zig-zagging of the pandemic across various supply lines around the world.
Although maritime transport has remained largely functional since the beginning of the pandemic, many countries had to change protocols within their ports in terms of cargo handling, timings, port closures and crew changes. Changes in documentation, cargo inspection and sanitisation requirements created additional disruptions and delays to the movement of cargo.
During the periods of lockdown at the height of the pandemic, the shipping industry had to reduce its sailing capacity to manage the lower demand and with a view to prevent freight rates from collapsing completely.
Capacity Cut-Downs Over-Corrected Ocean Freight
Based on high levels of uncertainty on the course of the pandemic and the number of containers stuck at various transhipment points during the pandemic, carriers had to drastically reduce their sailings especially on long haul routes necessitating services closures, loop mergers and blank sailings.
Then came the relaxation of lockdown in certain countries, starting with China.
This gave rise to a demand in consumer consumption, mostly seemingly stoked by fears of shortages, and the need to stock up on inventories irrespective of the industry to avoid a repeat of what happened during lockdown.
Due to this sudden and unprecedented spike in demand, carriers started to selectively resume their suspended services and, in some cases, added on extra loops to the service effectively lapping up the surplus capacity.
The aftermath of COVID-19 created a hugely increased demand for containers which is said to be due to a combination of the market playing catch up on what they missed out during the lockdown, increased demand for medical and hygienic products and an unprecedented increase in e-commerce business, ostensibly due to the inability of people to travel to other countries for shopping.
A rise in demand is now causing extreme container shortages especially on the Asia/Pacific trade lanes. That shortage is causing a practice of deadheading shipping containers in favor of getting them back to Asia where the demand is high and carriers command a premium for shipments.
Supply Remains Low While Demand Climbs Higher
This phenomenon has forced several global shipping lines to reposition empty containers from various parts of the world to the Asian markets as quickly as they can. Carriers are even going to the extent of restricting exports from other markets like Africa, South America and Europe and recalling those empty containers to be repositioned back to China and certain South East Asian countries to cater for the demand from USA and in spite of demand, some of the ships are even said to be sailing light due to lack of equipment.
This increase in demand for space and decrease in supply of containers has driven up freight rates drastically with the China-US West Coast rates going up around 174% higher than the same period in 2019 hovering around the $3,879/FEU range and the China-US East Coast rates going up around 85% higher than the same period in 2019 to $4,750/FEU, according to data gathered from the Freightos Baltic Index (FBX).
The demand for empty containers and surge in freight rates are also impacting other trade lanes like Asia-North Europe where the rates have gone up by 8% to $2,443/FEU as shown in FBX which is almost 50% higher compared to the same period in 2019.
The inactive empty container fleet is said to have dropped to around 430,000 TEU (1.8% of the world fleet) as of Oct 2020 compared to around 2.7 million TEUs May (11.6% of the world fleet) at the end of May 2020 at the height of the pandemic.
The ubiquitous container – that mundane, innocuous box of steel is showing global trade what it is worth, especially in 2020.
What Does the Future Hold for Ocean Freight?
So where to, now?
Possibly bearing in mind that the increase in freight rates will not assist in alleviating the shortage of equipment, shipping lines have not imposed any mid-month rate increase on the main lanes and are rather focusing on getting the empties back to Asia as quickly as possible.
This action could also be because they are aware that the Chinese, USA and Korean regulators are keeping an eye on the increasing freight rates closely. A spurt in volumes especially into the West Coast of the US has caused significant congestion and a counter productive delay in repositioning of the much-required empties into China resulting in a vicious cycle.
Carriers seem to be working on a multi-pronged strategy of restricting full exports from various countries into Asia, reduction in free days for containers in order to facilitate quicker turn around, strict implementation of demurrage and detention fees to discourage importers from keeping boxes too long with them.
The FMC is also investigating (again) requests from customers regarding demurrage and detention, this time requesting FMC to ask carriers to suspend it altogether and also to investigate carriers for giving priority to turnaround of empty containers back to China sacrificing full loads.
These container shortage conditions and increased freight rates is expected to continue at least till the Chinese New Year in February 2021.