Shipping Crisis: Is the US-China combo the driving factor catalyzed by the pandemic?

Dr Deepankar Sinha, Indian Institute of Foreign Trade, cites industry feedback on the shipping crisis, which reveals that empty containers are being shipped to China instead of making them available to Indian exporters. This aspect needs confirmation and further probe.

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COVID-19 pandemic initiated a slowdown across the world’s logistic systems, owing to the quarantine of ships during the early part of 2020. In India, the vessel had a mandatory quarantine of 14 days since they sailed from the last port of call. This quarantine was withdrawn in December 2020 but caused a delay in the unloading of import containers. This cascaded into the paucity of containers for exports as the turnaround time of vessels went up, leading to the drop in the logistics capacity across the shipping routes. The delay in the whole cycle eventually led to a decrease in sailings over time. The loss of revenue was compensated with the freight increase and the surcharges. These events served as a prelude to the current shipping crisis.

The matter got aggravated by the blockage of the Suez canal with the grounding of the container vessel – the Evergreen. Shipping stopped for around seven days or so, leading to a collective delay of about 1000 shipping days. Containers got held up in Africa, Latin America, Australia, the US, and different parts of the world, causing a further dearth of container availability across the ports. Globally, there are about 180 million containers – but they are in the wrong place. The shipping lines repositioned empty boxes at the cost of the exporters and levied increased freight with surcharges. Industry experts estimate Asia to be the most affected region by this pandemic, followed by Europe.

The Superpowers and the simmering shipping soup

Following these events, the pandemic led to the closure of specific ports in China, one of the world’s leading exporters. The Yantian and Guangzhou terminals were under lockdown, causing blank sailings and stocking of containers. This event lasted for around a month or so. The availability of containers across the ports further tightened, leading to the container freight increase. COVID-19 also slowed down the productivity of the ports of Los Angeles and Long Beach in the US. To add to this situation, the flow of containers between China and the US became the leading driving factor, with COVID-19 acting as the catalyst to this crisis. The shipping lines levied an additional surcharge referred to as value-added surcharge (VAD). For example, in mid-July, the German shipping line Hapag-Lloyd announced VAD of US$ 5,000 per Forty Feet Equivalent (FEU) and US$ 4,000 per TEU for cargo shipments from China to the USA and Canada. In addition, other surcharges, namely congestion surcharge was also introduced in ports where waiting times increased.

The US imports surged by 20% till early 2021, causing a significant inflow of containers.  For every 10 containers shipped to the US ports from Asia, 4 were only moving out. And for every four containers moving out of US ports to China, 3 were empty. China accounted for around 40% of exports to the US  (as of Jan 2021). The increase in income levels of the US citizens during the pandemic led to greater consumer spending in merchandise as coronavirus highly impacted the service sector. Exports from China to the World went up by 28% or so.

 

Meanwhile, container waiting time in India, as understood by some exporters, is 40 days or more. On average, the freight rates jumped by 200%, and Asia – Rotterdam freight went up by 600%. Short supply created an import frenzy – retailers restocking items. Is this sign of the Bullwhip Effect? – meaning that excess inventory in the pipeline may cause a sudden drop in goods and containers. 

The freight rates varied across the different trade lanes; for example in the freight for movement of containers (per TEU) from west coast ports (JNPT, Mundra, or Pipavav) of India to the other ports in the Indian subcontinent ranged between US$ 700 to US$ 3000, whereas movement to the US West coast costs between US$ 3600 to US$8300 exclusive of surcharges. The Freight Baltic Daily Index indicating the trend of container spot rates for (FEU) breached US$ 10,000 in June 2021.

Cooling of shipping freight: A Christmas gift?

The question is how long this crisis would continue and whether the shipping lines are really in a dire financial state for which the freight rates increase is justified. If the restocking continues, the inventory across the echelons is likely to increase, causing a drop in demand, and post-Christmas the consumer spending is also expected to reduce. Furthermore, with the increase in vaccination, the pandemic is expected to mellow down, causing the rise in spending on service industries like tourism, hotels, and flights. Shipping lines expect this frenzy to continue till Christmas. With Christmas in the offing, more containers are expected to flow. The orders for new containers which were canceled in the early part of 2020 are now getting executed. 

The economic recovery across the globe is uneven, adding fuel to the fire. Some countries, such as China, are exporting more than importing, and the reverse is valid for the US. However, in India, the imports have consistently exceeded the exports. Hence Indian exporters may experience a delay in getting containers depending on arrivals but not starve for the same, losing business and competitiveness. The average earnings before interest and tax (EBIT) for container shipping lines is expected to touch 100 billion Dollars in 2021, as the average EBIT in the first quarter of the year was 27.1 billion Dollars. This result is more than 25 billion Dollars for 2020 as a whole (https://www.seatrade-maritime.com/containers/container-line-profits-could-hit-100bn-2021).

So, the question is, where are the empty containers? A preliminary discussion with freight forwarders and exporters indicates that empty ones are being shipped to China instead of making them available to Indian exporters. This aspect needs confirmation and further probe – hence the shipping lines and their agents in India should exhibit transparency indicating the availability of containers in different dry ports and shipping of loaded export versus empty containers; if not, refrain from shipping empty containers out of India. 


Dr. Deepankar Sinha is a professor at IIFT. Views expressed are personal. Usual disclaimers apply.

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