Connector Series - Q2 2021
In general, the main underlying factor still dramatically disrupting the global supply chains are the effects of the Covid-19 pandemic. On the one hand, the substantial shift from consumer spending on goods instead of services as a consequence of worldwide lockdowns and hence very limited travel and other service spending, has led to a surge in demand for goods. This demand surge has continued through the normal patterns of the seasons, making demand drops for example during Chinese New Year, largely disappear.
Port productivity and congestion
As a consequence, the throughput in the world’s ports is extremely high, with many ports worldwide working at or beyond 100% of their yard capacity. At the same time port productivity is reduced by a second Covid-19 effect, which is a shortage of labour as a result of sick-leave and operating with social distancing measures in place. This combination has for example in California led to an unprecedented delay and backlog of vessel operations with ships carrying more than three quarters of a million TEU waiting in line. In the big Asian transhipment ports like Singapore, the congestion results in largely unreliable feeder connections and those feeders, eventually, transport the cargo only to face congested out-ports. With the recent development in India, we expect the situation in the subcontinent to deteriorate further, as many states have brought in night curfews, lockdowns and various other restrictions that will affect the work in ports in addition to a shortage of labour due to the surge in infections and fatalities.
Freight rates and surcharges
Another effect of the demand surge are drastically increasing freight rates. While first mainly spot rates skyrocketed by several hundred percent, then came surcharges (congestion, equipment etc) of several hundreds of dollars per TEU. The carriers have now also increased contract rates at 2 to even 3-digit percentages. They are building their pricing on the fact that during the surge in demand the supply has maxed out. The worldwide idle container vessel fleet is at 0.8% according to Alphaliner which, as a matter of fact means, that every vessel that can carry containers is charted out to the shipping lines.
Container vessel supply
The lines have chartered the vessels themselves at charter rates that have increased dramatically as well, with average sized, rather old ships of e.g. 4,250 TEU closing today for a minimum two years at almost 40,000 USD/day, which is more than double of what closed 6 months ago. The orderbook, at the same time, is building up quickly (+60% on 2020 yoy) with many lines investing billions of dollars into new ships. These, however, will not start to be delivered before the end of 2022. At the same time, new container building is forecast to be below the expected increase in demand for equipment in 2021. Again, Covid-19 impacts on staffing and productivity in the factories building containers. The combination of the factors in the current market indicate that high spot rate levels and substantial increases to contract rates will persist for a longer period.
Suez Canal blockage impact
While the worldwide shortage of capacity and equipment had already been critical, the Suez Canal incident with the blockage through the Ever Given, has added another layer of complexity to global supply chains. Although the vessel has been salvaged already weeks ago, the side-effects of the blockage still have a massive impact. Hundreds of vessels that lined up in both directions bring a surge of volume to already congested ports, compressed into short time windows due to simultaneous arrivals. Even those vessels that were diverted to sail around the Cape of Good Hope, bring the same effect a few days later resulting in ongoing pressure on major ports like Singapore, Port Kelang, Rotterdam or Dubai and the respective out-ports. There are reports estimating some 2 million TEU having been caught up in this event, together with a combined fleet delay of more than 1,000 days. Also, due to the delay, the already significant pressure on empty equipment is growing even further, with the hundreds of thousands of containers being tied up for longer than anticipated and hence not available for earlier reloads as planned. This comes at a time when worldwide schedule reliability had already plummeted from almost 85% in 2019 to under 35% just recently with a downward trend.
Meanwhile here in New Zealand
For New Zealand in particular, all of the described factors lead to an operational environment which has been extremely challenging for several months, with especially shortage of capacity and equipment resulting in an extraordinary pressure on the services calling Aotearoa. The long ongoing operational disrupted situation at the Ports of Auckland has put additional pressure on shipping to and from New Zealand. While the Port is working hard on solutions, for example by bringing in and training extra labour as well as progressing as quickly as possible with the automation project, these solutions take a lot of time and operations along the New Zealand coast have been adversely affected for a long time now by the continuous suspension of berth windows, limited move count for containers and slower than required operations.
The consequences are various. One of them is the shift of volumes to other ports in New Zealand. The Port of Tauranga, for example, has also reached a critical state of congestion, with ships anchoring off shore waiting to be cleared for operations and at the same time container volumes in the port building to a level that required the port to largely stop accepting the gate in of full containers outside of a very strict window. Depots and inland hubs in the Auckland area such as Metroport have also reached critical capacity levels and capped the intake of equipment.
In other New Zealand ports, the shortage of required empty equipment continues at least in part due to a lack of options for the lines to position the boxes while at the same time empty equipment needed for the NZ market has partly been positioned by the lines themselves to trade lanes with higher contribution levels, such as Asia-Europe. The earlier described principle of supply and demand becomes clearly visible also for New Zealand exports and further also affects the domestic market heavily with coastal operators increasing rates substantially and logistics cost, e.g. for trucking, heavily increasing.
New Zealand export shipping capacity
The biggest flow-on effect of the disruptions on the operations in New Zealand is the reduced capacity as Shipping Lines are unable to operate to their normal weekly service schedules. With vessels slipping from a weekly rotation to 10 – 12 days or more, the result is a reduction in capacity of 30-40%, which can never be replaced. This results in maxed out vessels for all trade lanes, strict allocations and the requirement of forward bookings far in advance. The produce peak season in New Zealand has also added to the complexity. Due to the heavy nature of produce, the average weight of containers increases, and the vessels reach their deadweight capacity earlier than at other times of the year. As a result, less containers can be shipped per voyage, which in turn adversely affects the already congested ports.
Outlook
The numerous operational constraints worldwide continue to be extremely challenging for Container Liner Shipping and we expect this situation to prevail through the second half of 2021 and most likely into 2022. To avoid operational disruptions to your supply chains as much as possible, we would like to again ask you to place bookings as early and far in advance as possible in order to mitigate operational risks and build resilient inventory levels. Thank you for your co-operation and support.
We would like to re-assure you that our teams and our service providers are working tirelessly on solutions to provide you the best possible customer service in order to keep the impact on your operations, and those of your customers as limited as possible.
Stay Safe, and Stay Connected.