Container shortage is a key reason for freight rates remaining high | Photo Credit: MOHAMED ABD EL GHANY Shipping cost escalations hurt smaller maritime nations more, making their exports unviable and prospects of economic recovery weak Starting from the end of 2020 and into 2021 container shortages and congestion at ports, along with other disruptions, resulted in record container freight rates, notably on the routes from China to Europe and the US. These are reflected in the Shanghai Containerized Freight Index which covers cargo departing from Shanghai, China. It is reported that in June 2020, the spot rate on the Shanghai-Europe route was less than $1,000 per TEU ( twenty-foot equivalent unit) but by the end of 2020 it has reached around $4,000 per TEU and remained firm throughout the first quarter of 2021. subscribers exclusiveSUBSCRIBER EXCLUSIVE hdfc mf cover.jpg Should you invest in HDFC NIFTY100 Equal Weight Index Fund? Copper-searches+G0L9FV76A.3.jpg.jpg Continue to hold longs on MCX copper bl18motorinsurancepix Top reasons why two-wheeler insurance claims get rejected CCI_UDHindu_KSL_UD83AOCFF_R1517148392_4_70afb72b-9aea-42e7-885c-6b846140cdf2.jpg Commodities boom continues to drive India Inc’s December quarter numbers How did this happen? The second half of 2020 witnessed demand for container shipping picking up and absorbing spare capacity. Vessels supply capacity remained limited but idle container shipping capacity started to decline in relation to growing demand as maritime trade witnessed a recovery. In 2020, the capacity of global container fleet expanded by about 3 per cent while container trade volumes contracted by 1.1 per cent. With a view to maintaining freight rates during the period of lower demand carriers restricted their capacity. When the demand picked up the container lines released more capacity but by that time the supply was constrained by a number of factors, notably port congestion and container shortages which led to container ships waiting, especially in the west coast of North America. Chinese ports which accounted for a significant part of global container trade also experienced congestion which, in turn, adversely affected the supply chain efficiency. Despite a 3 per cent increase in supply capacity (Clarkson’s Research, 2021), the spot freight rate on the Shanghai-Europe route reached $7,395 per TEU by end of July 2021. Freight rates also escalated on the China-US trade corridor and faced backlogs and longer waiting periods which resulted in container shipping lines declaring extra fees and surcharges. Despite significant increase in the container fleet capacity on the Shanghai west coast-North America route, the spot rates reached around $4,500 per FEU (forty-foot equivalent unit) in April 2021 and further to $5,200 per FEU in July 2021 compared with $1,600 per FEU in April 2020. This abnormal surge in container freight rates extended across 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 witnessed an increase from $2,672 to $8,102 TEU ( Review of Maritime Transport 2021). Profitability of container lines The record breaking container freight rates have yielded huge profits to shipping lines. In 2020, the full year profit of container lines reached $25.4 billion but in 2021 it is estimated that the profits will reach $100 billion (Drewry-2021). Despite the pandemic-related disruptions, congestion at ports and a continuing shortage of containers, MAERSK, the largest container line, is expecting a profit of $24 billion in 2021. But the latest figures compiled by Data Analyst Alphaliner in 2022 suggests that the Mediterranean Shipping Company — a Swiss-Italian Shipping Line — has 645 ships with 4,284,728 standard TEU capacity, 1,888 TEU more than MAERSK. Container ships of MSC call at 500 ports on more than 230 trade routes and annually transport more than 23 million TEUs. However, both the companies have a 17 per cent market share in container shipping. Huge increase in profits has motivated container lines to order new ships. The surge in new orders was also influenced by low prices of new and large ships and improved availability of ship financing. Addition of new container fleet capacity is no guarantee that the lines would reduce freight rates as they would quote prolonged port congestion and container shortages as reasons for keeping the freight rates high. Global freight rates are likely to remain high until shipping related supply chain disruptions are removed and normalcy is restored ( Hellnic Shipping News 2021). Impact on global trade The impact of these high rates has been serious. A specific example reported is export of pepper from Vietnam. Vietnam Pepper Association has reported that high logistic costs have resulted in a loss of export markets. For exports to the US in 2020, the freight costs per 40 foot container was $2,000-3,000 but in 2021 it had surged to $13,500. For exports to the EU, there was a corresponding increase from $800–1,200 to $11,000. This huge increase prompted US importers to import pepper from Brazil. For the US, the shipping costs come only a third of that from Vietnam while for the EU it works out to only one-tenth ( Vietnam Plus – 2021). Some companies have stopped exporting to certain destinations while others have been looking for goods or raw materials from nearer locations ( Financial Times, 2021). According to a report by the UNCTAD, the impact of high freight rates will be greater in small island developing countries where it is estimated that import prices would increase by 24 per cent, consumer prices by 7.5 per cent, whereas in the least developed countries the consumer price levels are expected to increase by 2.2 per cent. Shipping cost escalation would not only affect exports and imports but also the prospects for short and medium economic recovery. The governments of maritime countries are concerned about this development and this is the time for the governments to intervene and control the excessive freight escalation by enforcing appropriate regulatory measures. Growth in international sea borne trade in 2020 significantly declined to -3.8 per cent as a result of the Covid pandemic and total volumes of sea borne trade reached 10.7 billion tonnes. Developing countries, including the transition economies of Asia, accounted for 60 per cent of global exports and 70 per cent of imports. In 2020, global GDP also declined by 3.5 per cent — the largest downturn in 70 years. The greatest impact is reported to be in the services sector, namely, tourism, travel and hospitality. For maritime trade, the downward trend was mitigated by boost in demand largely influenced by the governments’ stimulus packages. Global demand appears to have revived with the lifting of some Covid-19 restrictions in 2021. However, the UNCTAD predicts that annual growth in maritime trade between 2022 and 2026 will slow down to 2.4 per cent compared with 2.9 per cent over the past two decades ( Review of Maritime Transport 2021). The writer is a former Acting Chairman of JN Port, Mumbai, a former Chairman of Mormugao Port Trust, and Adjunct Faculty of Indian Maritime University, Chennai