In a period of intense volatility, shippers, shipping lines, ports, freight forwarders and other players in the market are urgently attempting to assess the outlook for sea freight rates in 2022 and beyond. Indeed, congestion and rates have now become such a pressing political problem that governments around the world are coming under pressure to intervene although, as they are finding out, devising solutions to fix dysfunctional maritime supply chains are far from straightforward. In its new whitepaper, Ocean Freight Rate Tracker Q4 2021, Ti sets out some of the key issues which are presently having an impact on the operational capabilities of the shipping and logistics industry; the service levels that carriers and logistics operators are able to provide and the rates that they charge.
These issues are wide-ranging, some impacting on capacity within the industry, others on the underlying volumes of containers being shipped. The relation and interaction between these two factors obviously have a profound impact on freight rates, resulting, as we have seen this year, in sky-high prices and enormous profits for shipping lines.
Since the beginning of the Covid crisis, production has been disrupted by a variety of different factors. Government lockdowns led to the suspension or reduction of production at many manufacturing locations across Asia. Although China was badly affected at the outset, disruption has been ongoing across the region over the past 18 months including in Vietnam where a large proportion of factories are only recently coming back on-line. In addition, in the past month (November 2021), a shortage of coal has forced the Chinese authorities to implement rolling power cuts to limit electricity usage, and this has resulted in a drop in output by up to 20%. Less well known has been the difficulty which many emerging market exporters have faced in accessing trade finance, critical to the functioning of many global supply chains. The International Chamber of Commerce has estimated that an additional US$1.9 to US$5 trillion is needed to return to 2019 trade finance supply levels.
This challenging manufacturing environment has been exacerbated by ‘lumpy’ demand from Western customers, struggling to understand their own markets. This has resulted in a stop-start pattern to both orders and fulfilment, wreaking havoc with inventory management and, most egregiously, with the capacity planning of shipping lines.
Not just playing catch up…
Part of the problem for the industry is that freight volumes have not just been consistently high, but highly volatile – what’s called the bullwhip effect. That is, even small adjustments to consumer behaviour downstream result in the distortion of orders throughout the supply chain. The stimulus packages provided by the Biden administration (as well as in most countries around the world) have led to retailers and wholesalers placing orders with Asian manufacturers which could be many times than required by the market. Eventually, some analysts believe that the market could be awash with product – driving down prices in a welcome relief for inflationary pressures. The jury is out on this unexpected consequence.
With capacity largely fixed (it takes time to build ships and new port terminals), operations can quickly be overwhelmed by unexpected and unplanned for volumes. The shipping industry is not alone in this – in the past, many parcels companies have been gridlocked by e-commerce volumes over the holiday period. Shipping lines also have to make a decision as to whether it is worth investing in new capacity, given that the peaks we have seen may be ‘once in a generation’ and that by adding new capacity to their fleets could lock in persistent low rates once the present crisis is over.
The one-off nature of stimulus packages also reduces the visibility of when the market will return to ‘normal’ levels. For example, the Port of Los Angeles has seen above five-year average container volumes (2016-2021) from July 2020 until the latest available data for August 2021. This means that across the 19 month period since the start of the Covid crisis, the port has handled 736,398 more containers than might have been expected, even with the drop in volumes seen between February 2020 and June 2020. In short, the high port volumes are clearly not (just) about playing catch up for the disruption experienced by Chinese manufacturers in the early days of the crisis. They are a result of US consumers and businesses having more money to spend on physical assets produced in Asia and specifically in China. A large proportion of this spend results from stimulus packages but consumers also have more money to spend due to an increase of savings during lockdown.
Forecasting the trajectory of shipping rates even in the short term is highly problematic. However, in Ti’s opinion, it is likely that there will be ‘regression to the mean’ and that pressure on rates is naturally down, rather than up. There have been no big changes to the industry dynamics which suggest that sky-high rates will be the new normal. In fact, given the order book for new ships and the chances that this new capacity will be launched onto the market in the middle of a 2023 downturn, shipping lines could face a challenging period: the usual bust after a shipping boom. However, at least (for the shipping industry) if this is the case consolidation in the industry and the alliance structure will create a rates’ floor.
As we have discussed, the return to this norm will be delayed by re-stocking of inventories by North American and European manufacturers and retailers. These are presently at historic lows and their replenishment will act as a ‘parachute’ for rates into Q2 2022. Other positive demand-side forces include consumer spend which will hold out until savings have been drawn down and credit limited by interest rate rises.
Complicating this outlook is the inability of suppliers to meet this demand. The situation in China is unpredictable with manufacturers having to cut output due to the energy shortage and a zero-tolerance approach to Covid leading to suspension of production in factories and services at ports and airports. This may mean that consumer and business demand in the West goes unmet in the short term and some economic value is lost for good. On the other hand, this may be a good thing, flattening demand, cooling markets and allowing ports and shipping lines to deal with backlogs. Offset demand would also cushion falling shipping rates further into 2022, meaning that it will be 2023 before historic norms are reached.
This Brief provides a snapshot of Ti’s latest coverage of freight rate developments, the full version of which can be downloaded here. As well as extended coverage of the supply chain challenges highlighted above, Ti’s Ocean Freight Rate Tracker Q4 2021 includes the results of an exclusive survey detailing how more than 240 industry executives think ocean freight rates will develop and a breakdown of rate development trajectory in 2022 and beyond.
Source: Transport Intelligence, 23 November 2021
Author: Transport Intelligence
A new quarterly report tracking a range of metrics across demand, capacity, sentiment, price development and cost leaders. The report will map out expectations for price development over the upcoming quarters.