The tremendous growth of consumer demands for commodities has made the sea freight shipping industry a pivotal support system for trade and commerce all over the world. As per a report by the UNCTAD, over 80% of international trade is carried on via sea freight thus making it the backbone of international trade. However, since last year the container shipping industry has suffered a blowback mainly because of the pandemic. This industry is going through a rather unusual predicament. The pandemic resulted in an unprecedented chain of events that resulted in a global container shortage crisis. Moreover, the unavailability of shipping containers has caused a ripple effect throughout the entire supply chain. This has had a negative impact on international trading activities.
In today’s post, we are going to talk about the ongoing container shortage crisis, its causes, and its impact on the container shipping industry.
Why the container shipping industry is facing this crisis?
The present container crisis is a complicated mess that can be attributed to a number of factors. To begin with, ever since the pandemic, there has been a change in the spending pattern of the consumers. The restrictions in the movement have prompted customers to rely increasingly on online shopping. The succession of lockdowns in several countries worldwide had a negative impact on the normal functioning of the ports. Most of the ports were functioning under restrictions with a reduced workforce that destabilized the cargo handling processes. This in turn resulted in several blank sailings. The shipping lines lowered the number of vessels in transit since deploying ships without enough shipments would have resulted in a loss. As a result, the imports and exports slowed down considerably. Additionally, the port congestion in several ports around the world further deepened the crisis.
The situation in China
China was the first country that successfully controlled the pandemic earlier than any other country. In a time when most of the countries were reeling under the effects of the Coronavirus, the Chinese factories already resumed production. Moreover, the resumption of Chinese export operations allowed them to start moving shipments to the USA for the holiday season. They started exporting in October 2020 before the start of the Chinese New Year.
Precisely for this reason, this industry had to deal with the issue of light sailing since containers were not available at the Chinese depots. To quote from an article from Container Xchange, “Due to the fast increase in demand after months of blank sailings, container availability for 40ft HCs across China is currently at just 0.05 CAx points, compared with 0.63 at the same time last year.” Additionally, the disruption of the ground freight and air freight industry further added to this stagnation.
The disruptions in the air freight industry
The container crisis was further exacerbated by the disruptions in the air freight industry. Because of the pandemic, the international air freight volumes plummeted considerably. As a result, more and more cargo was being shipped via sea freight. The same was also applicable for ground freight. In North America for instance, there was an acute shortage of truck drivers so even domestic freights in the US were being moved by ports.
Late return of empty containers
Yet another factor behind the ongoing container shortage is the slow return of empty containers. The shipping lines reduced the number of sailing because of which the empty boxes were not being returned on time. Most importantly, the workers’ shortage because of the pandemic resulted in a chassis shortage. In the USA, the boxes are generally collected from the dock and then moved inland. However, it was taking a long time for the boxes to return to the docks from the consignee’s sites. This was obviously because of the lack of workforce at both ends. Lastly, the shortage of truck drivers further complicated this crisis. Putting it simply, the shortage of workforce delayed the timely return of the containers to the port. It was taking as long as a week for the empty boxes to be returned to the ports instead of just one or two days.
Results of the container shortage: Can the disruptions change the trading pattern?
In the aftermath of the pandemic, there was a massive surge in demand for empty containers. The e-commerce boom, along with other factors like greater demand for pharmaceutical products put further pressure on the container shipping industry. Presently, the rise in consumer demand has destabilized the Asia/Pacific trade lanes. Due to the container shortage, shippers are redirecting the boxes to Asia where there is high demand. As a result, several international shipping lines are repositioning the empty boxes from all over the world to the Asian ports. They are doing this to cope with the rising demand in the USA of commodities coming from Asia especially South East Asia and China. Yet another impact of the container crisis is the race for the manufacture of containers. Nonetheless, container manufacturing is lagging as production is lesser than the demand.
High freight rates
Till the present crisis in the container shipping industry, shipping used to be an inexpensive affair. However, with disruption after disruption, the containers have become super expensive and prolonged shortage could even lead to a reordering of international trade. The most palpable impact of the container shortage is the hike in freight rates. The increasing demand for space and the shortage in container supply have driven the freight rates dramatically high. For example, the freight rates between China to the US West Coast have gone up by 174% as compared to the pre-pandemic times. The freight rates between China to the US East Coast have soared by 85% compared to 2019.
How the container shortage will affect the shipping rates and price of commodities
The container shipping giants are taking steps to curb the rise of shipping rates even during times of disruptions. For example, CMA CGM has announced that they will be capping the spot rates for sea freight. Other multinationals are expected to follow suit. We have to keep in mind that the decarbonization endeavors in this sector will push the rates higher up. Nevertheless, Maersk has suggested this isn’t going to affect the prices of commodities.
Shipping lines are enjoying all the profits
The high ocean freight rates are also taking a toll on several other trade lanes particularly, the Asia- North Europe trade lane and the Trans-Pacific trade routes. Nevertheless, the shipping companies are enormously profiting from this situation and are mostly operating at full capacities. Asia to North America trade lane has become so profitable that shipping lines are sending back ships without cargo to encourage more exports.
Companies are adopting new policies
To cope with the lack of containers, multinationals are adopting desperate measures. For example, the two American retail giants, Walmart and Home Depot are directly chartering ships. Peloton, an exercise bike manufacturer, is moving their goods via air freight despite the sky-high prices. In Asia, a large number of containers are being moved by rail freight. In fact, shippers are moving a large quantity of freight from China to Europe by road. The China-Europe road network is allowing freight forwarders to avoid the congested Chinese ports.
Shift in the trading pattern
According to the Maersk CEO, the combination of pandemic-induced disruption, container shortage, and trade wars could shift the trading pattern away from China. In fact, many Chinese manufacturers are now opening production centres in inexpensive countries for circumventing the trade barriers. China’s strict Covid-19 measures coupled with the imposition of tariffs on Chinese goods in the USA and calls for boycott of Chinese commodities in a large market like India are providing Chinese manufacturers enough reasons to move to new territories. Additionally, this will also help in the diversification of supply chains.
When the container shipping industry will start functioning normally?
According to Eytan Buchman from Freightos, the container shipping industry is presently stretched to its limits. Therefore, a cascading effect is unavoidable. All container ships on the planet are now sailing the seas and even then shippers are not finding enough space to move their cargoes. The crisis isn’t going to abate until the empty containers are sent back to their right places. In July 2021, the sea freight shipping industry transported over 15 m containers. This number is more than what was being moved before March 2020. Nevertheless, the average shipping duration for sea freight has gone up from 41 days to 70 days.
The container shipping industry can expect a permanent solution to this problem when the spending on goods decreases. The excessive demand for goods will not go down until the threat of the pandemic is gone for good. Production of manufacturing companies is presently at its fullest. Even though the shipping companies have started with the construction of new container ships it will take at least a few years until they are ready to sail. Simply stated, the crisis of the container shipping industry isn’t going away any time soon.