Shipping is in crisis, and it will take time to recover
9 min read . Updated: 22 Nov 2021, 12:42 AM IST
Premium- The cost of transporting a container from India to major global ports has shot up by 300-800% since March 2020
- Worse, the global logistics crunch is likely to persist well into the next year. The CEO of Danish shipping giant Maersk reportedly said that ‘nothing’ in the data shows the situation will ease this year
NEW DELHI : These days, even the rare snippet of good news on the economic front ends up getting tempered with caveats rather swiftly. Preliminary data for October saw Indian goods exports grow by 42% compared to the same period a year ago. For this financial year, India’s goods exports have jumped 54% over the same period last year. Global trade is booming, as countries, consumers and industries begin a slow return to normalcy. Even assuming 2020 to be an anomaly due to the covid-induced lockdowns, India’s jump in exports still remains impressive when compared to similar periods in 2019.
The flip side, though, is a historic jump in the cost of shipping goods from India to destinations abroad. According to data compiled by the website Indian Transport and Logistics News, the cost of shipping a ‘container’ from Kochi to Europe’s Rotterdam port has increased by 873% between March 2020 and August 2021. A container is a metal box, either 20 feet or 40 feet long, and is the standard way to ship goods across the globe.
Freight rates have jumped by equally eye-watering amounts on other routes: Mundra-Hamburg by 759%, Kochi-New York by 650% and Mundra-Baltimore by 311% (see Chart 1). The boom in India’s exports has come amid a global logistics crunch, manifest via soaring freight rates, a massive shortage of containers to ship goods in, and long waiting times to unload ships at ports.
The mismatches and logjams are causing shortages across sectors. Data for April-September 2021 shows a 23% drop in consumer electronics imports by India (in value terms) over the year-ago period, a 28% drop in the import of automobile tyres and tubes, and a 47% drop in imports of auto components. In the case of electronics goods and auto components, a global chip shortage is also a major reason behind the fall.
Worse, the global logistics crunch is expected to persist well into the next year. The chief executive of Danish shipping giant Maersk told Reuters that, “nothing" in the data shows that the situation will ease this year. Some analysts expect the shortage to ease only after the Chinese New Year in February 2022. Such are the mounting implications that the president of the Federation of Indian Export Organisations (FIEO), Dr A Sakthivel, while welcoming the October trade data, called on the government to establish a regulatory authority for freight. He also asked the government to provide freight support to all exporters till March 2022, “as freight rates have skyrocketed."
Demand surge
In the initial covid-19 months, from about March 2020, major shipping lines actually anticipated surplus capacity following a sudden fall in demand due to lockdowns. They adjusted their operations accordingly, and re-routed vessels or simply parked them some place. By August 2020, freight rates started taking off (see Chart 2). At the heart of the crisis was a surge in demand, from consumers stuck in lockdown and driven by panic buying in the initial stages in some countries. Consumers, unable to spend on travel or eating out or entertainment outside the home, spent more on buying goods online. Online retailer Amazon, for example, saw its sales and net profit increase by 37% and 84%, respectively, in 2020.
This surge in demand was only half the story. Accompanying this was a global shortage of containers and ships to move those containers. There is a global imbalance in trade, under which ‘developed’ countries are net importers of consumer and consumer durable goods and Asian countries such as China and Vietnam are net exporters of such goods. This means that containers are filled up at Asian ports and shipped to big consumption centres like Europe and the US. They are unloaded there and then shipped back empty to Asian ports, to be refilled again.
At all steps, bottlenecks have arisen. Ports at the heart of the global trading system, such as Los Angeles and Shanghai, have moved in and out of lockdown over the past year. This has affected the speed with which containers were loaded or unloaded from container ships. Even as of October 2020, the port of Los Angeles-Long Beach saw no more than a few container ships waiting at any given time to offload their cargo. By February 2021, that number had soared to 40. By mid-October 2021, that had crossed 60.
At the other end of the world, countries like China, which are major suppliers of consumer goods to the world economy, implemented one of the strictest set of covid-19 protocols in the world. Even a single covid-19 case or two ended up disrupting services at critical Chinese ports. Thus, even if factories in China came out of the lockdown and started manufacturing goods, there was no guarantee they would be shipped out of China.
In an explainer on the global logistics crisis, Freightos, a digital booking platform for international shipping, said that by the last quarter of 2020, it had become clear that cargo rates were unlikely to come down soon. It said: “Logistics is global. So a backlog of ships off the coast of California means fewer empty containers heading back to Asia, which means fewer ships and containers available for exports, raising the cost to ship a container from Asia to Europe by 400% in November and December 2020. That same backlog has also caused record-high delays."
One-off shipping events made the problem worse. This March, Ever Given, a giant container ship, got stuck in the Suez Canal, effectively blocking off one of the world’s major shipping routes for days. Ships were forced to take longer routes, increasing the shortage of available containers. Coming at a time when global shipping was already at capacity, freight rates on all other routes, not just the Suez route, increased.
In major consumption centres like the US and Europe, the crisis has been compounded by a shortage of trucks and labour at crucial points in the supply chain. Amid these shortages, global container shipping companies such as Maersk have done extremely well. In 2020, Maersk reported average quarterly revenues of $9.9 billion. For the first three quarters of 2021, it has averaged $14.4 billion. Its net profit has increased from $3 billion in all of 2020 to $11.9 billion in three quarters of 2021.
Disadvantage India
The global shortage in containers and ships has had serious effects on countries and ports that are not at the centre of the global supply chain, which includes India. Given the serious crunch in container capacity, global shipping companies have shifted focus to easing shortages along major routes.
As Transport Intelligence, a consultancy, pointed out: “Much of the capacity which formerly served developing markets has been allocated to the major trade lanes i.e. the trans-Pacific trades and the Asia to Europe market. The increase in rates has made it economical for shipping lines to deploy much smaller ships on these lanes. Many shipping lines have started to miss out calls to smaller ports in developing markets, preferring to consolidate their services around ‘mega ports’ for reasons of customer demand and speed…The disruption to shipping schedules has reduced many smaller countries’ export capacity, resulting in containers being left in port." It added that small and medium-sized enterprises (SMEs) in the developing world are “among the worst affected".
Indian exporters have not been spared this problem, especially in recent months. According to Container xChange, a global platform for buying and selling containers, between May and August, the cost of shipping a 20-foot container from India to the US had increased by 19% and that of a 40-foot container by 38%. Back in June, Sakthivel of FIEO, noting this increase, said: “While freight increase is a global phenomenon, we may be suffering more as we have a fairly large MSME (segment) in exports who have very little negotiating power."
Pointing out that Indian exporters remain at the “mercy of foreign shipping lines", he called for greater focus on a shipping line that could serve the Indian industry. So-called ‘blank sailings’, under which ships simply skip ports on their routes because it is uneconomical (or other more lucrative ports are available), have increased dramatically.
Thus, containers are piling up at Indian ports. Ships run for the most part by global shipping lines can end up skipping Indian ports altogether. In instances where an Indian exporter does manage to place a container on board a ship, the cost involved can be astronomical. Container xChange pointed out that inbound containers at Chennai port are about four times the number of containers being shipped out, indicating that containers are piling up at the port.
While acknowledging the record jumps in Indian exports, Johannes Schlingmeier, co-founder and CEO, Container xChange, pointed out that the imbalance was because “exporters are facing hurdles to export their goods from India." At such high freight costs, many smaller exporters find it simply uneconomical to ship goods out. In the scheme of global trade, India is a less important destination than China or Europe or the US. Further, handicapped by the relatively smaller size of its state-run shipping line, Shipping Corporation of India, exporters are reliant on foreign shipping lines to trade.
Time to pass
Thus, a report in April by the United Nations Conference on Trade and Development (UNCTAD), an inter-governmental organization to promote the interests of developing countries in trade, observed the surge in freight rates in developing regions such as Africa and Latin America outpaced the surge on the main East-West routes (China-US or China-Europe). As carriers started exercising their discretion and skipping ports of relatively less importance, it added, “a mismatch between supply and demand for empty containers was exacerbated, as empty containers were left behind and failed to be repositioned (transported to where they could be filled)."
The UNCTAD report concludes: “Carriers, ports and shippers were all taken by surprise by the pandemic. The subsequent shortage of empty containers observed since late-2020 is unprecedented. No contingency plans were in place to preempt the lack of availability or to mitigate its negative impacts. Given current trends, several months will likely pass before this disruption can be absorbed across the maritime supply chain and before the system resumes smoother operations."
Further, global shipping is an oligopoly, with a few companies controlling the bulk of the sea trade. This has prompted numerous traders, including Indian exporters, to accuse such companies of cartelization and unfair trade practices.
This crisis, serious though it is, will ease, most probably by early next year. Already, Chinese manufacturers have dramatically expanded the production of new containers, while makers of ships are seeing a surge in orders. But longer-term questions about the ability of the global trading system to withstand sudden shocks like the covid-19 crisis remains. Meanwhile, Indian authorities will again have to take a hard look at how the country’s export infrastructure and shipping capacity can be augmented to better withstand such shocks.
Avinash Celestine is with howindialives.com, a search engine for public data.
