From late 2020 into 2021, container shortages and port congestion, along with other disruptions, resulted in record container freight rates, particularly on routes from China to Europe and the US. These are reflected in the Shanghai Containerized Freight Index, which covers freight departing from Shanghai, China.
It is reported that the spot rate on the Shanghai-Europe route was less than USD 1,000 per TEU (20-foot equivalent unit) in June 2020. but by the end of 2020 it has reached around $4,000 per TEU and has remained stable throughout the first quarter of 2021.
How did it happen? In the second half of 2020, demand for container shipping increased and absorbed spare capacity. Vessel supply capacity remained limited, but idle container ship capacity began to decline in proportion to growing demand as maritime trade experienced a recovery.
In 2020, the capacity of the global container fleet increased by about 3 percent, while container trade volume fell by 1.1 percent. In order to maintain freight rates during periods of lower demand, carriers reduced their capacities.
As demand picked up, container lines freed up more capacity, but by this time supply was being constrained by a number of factors, most notably port congestion and container shortages, which caused container ships to wait, particularly on the west coast of North America. Chinese ports, which account for a significant portion of global container trade, have also been hit by congestion, which in turn has had a negative impact on supply chain efficiency.
Despite a 3 percent increase in delivery capacity (Clarkson’s Research, 2021), the spot freight rate on the Shanghai-Europe route reached $7,395 per TEU by the end of July 2021. Freight rates on the China-US trade corridor also escalated and faced backlogs and longer wait times that led to container shipping companies declaring additional fees and surcharges.
Despite a significant increase in container fleet capacity en route from the west coast of Shanghai to North America, spot rates reached around $4,500 per FEU (40-foot equivalent unit) in April 2021 and a further $5,200 per FEU in July 2021, compared to $1,600 per FEU in April 2020.
This unusual increase in container freight rates spanned Asia, South America and Africa. On the China-South America route, the rate increased from $959 per TEU in July 2020 to $9720 per TEU in July 2021. During the same period, freight rates on the Shanghai-West Africa route also increased from $2,672 to $8,102 TEU ( Sea Traffic Review 2021).
Profitability of container lines
Record-breaking container freight rates have brought huge profits to shipping companies. In 2020, the total annual profit of container lines reached $25.4 billion, but in 2021 profits are estimated to reach $100 billion (Drewry-2021). Despite the pandemic-related disruptions, port congestion and ongoing container shortages, MAERSK, the largest container line, expects profit of $24 billion in 2021.
But the latest figures, compiled by data analyst Alphaliner in 2022, suggest that the Mediterranean Shipping Company – a Swiss-Italian shipping company – has 645 ships with 4,284,728 standard TEU capacity, 1,888 TEU more than MAERSK . MSC container ships call at 500 ports on more than 230 trade routes and transport more than 23 million TEU annually.
However, both companies have a market share of 17 percent in container shipping. The huge increase in profits has motivated the container lines to order new vessels. The order push was also impacted by low new and large ship prices and improved availability of ship financing.
Adding new container fleet capacity is no guarantee that shipping lines would lower freight rates, as they would cite ongoing port congestion and container shortages as reasons to keep freight rates high. Global freight rates are expected to remain high until shipment-related supply chain disruptions are resolved and normalcy is restored ( Hellnic Shipping News 2021).
Effects on world trade
The impact of these high rates was severe. The export of pepper from Vietnam is mentioned as a concrete example. The Vietnam Pepper Association has reported that high logistics costs have resulted in a loss of export markets. For exports to the US in 2020, the freight cost per 40-foot container was $2,000-$3,000, but by 2021 it had risen to $13,500. For exports to the EU there was a corresponding increase from USD 800-1,200 to USD 11,000. This huge increase prompted US importers to import pepper from Brazil.
For the US, the shipping cost is only a third of that from Vietnam, for the EU only a tenth ( VietnamPlus – 2021). Some companies have stopped exporting to certain destinations, while others have sought goods or raw materials from closer locations ( financial times2021).
According to a UNCTAD report, the impact of high freight rates will be greater in small island developing States, where it is estimated that import prices would rise by 24 percent and consumer prices by 7.5 percent, while in the least developed countries, consumer price levels would rise by 2.2 percent percent increase.
An escalation in shipping costs would not only affect exports and imports, but also the prospects for economic recovery in the short and medium term. Seafaring country governments are concerned about this development and it is time for governments to step in and control the excessive freight escalation by enforcing appropriate regulatory measures.
International sea trade growth in 2020 fell sharply to -3.8 percent as a result of the Covid pandemic, and the total volume of sea trade reached 10.7 billion tons. Developing countries, including Asia’s transition economies, accounted for 60 percent of world exports and 70 percent of imports.
In 2020, global GDP also fell by 3.5 percent – the largest decline in 70 years. The biggest impacts are reported to be in the service sector, namely tourism, travel and hospitality. In maritime trade, the downward trend was mitigated by a surge in demand, which was largely influenced by government stimulus packages.
Global demand appears to have picked up again with the lifting of some Covid-19 restrictions in 2021. However, UNCTAD predicts that annual seaborne trade growth will slow to 2.4 percent between 2022 and 2026, compared to 2.9 percent over the past two decades ( Sea Traffic Review 2021).
The author is Former Acting Chairman of JN Port, Mumbai, Former Chairman of Mormugao Port Trust and Adjunct Faculty of Indian Maritime University, Chennai
February 17, 2022