What’s all the fuss about container rates?
Over the past year, freight costs have gone up significantly. While bulk costs have risen too (more so for smaller ships), the increase is much sharper for containers, where spot prices have risen five to ten times on certain important routes; there is a shortage of container-ships as well as containers while ship-building orders are surging.
This coupled with surges in prices of coal, natural gas, steel, copper and aluminium are giving an impression of strong global demand for goods and of extreme shortages.
Is that really the case? Let us look at a few data points:
1. Global demand for shipping has risen only 5% versus non-Covid disrupted 2019.
2. Container-ships on average make around 7.4 trips a year. This implies that the average trip takes around 50 days.
3. Freight rates generally move in line with volumes, except when capacities are close to full. Given the capacities in 2019 were nowhere near full; this is not the case at the moment.
So why then are we seeing these shortages? We believe this is because the number of trips a ship can make in a year has fallen. The 50 day timeframe we mentioned above has lengthened abruptly due to two reasons:
1. Covid-19 protocols at ports have meant several extra days while loading or unloading, as international travel rules necessitate testing of the ship’s crew. There are also restrictions placed on ships on the basis of the nationality of the crew manning the ship, and restrictions on the ports itself due to employees getting infected.
2. The geographical spread has changed as well. In a normal year, 40 per cent of containers are destined for East Asia, and around 20 per cent each for Europe and North America. However, of the additional container volumes shipped in the first half this year, 45 per cent were headed to North America and 40 per cent to Europe partially due to higher fiscal stimulus in those regions.
This skew has also created a problem of movement of empty containers back to where they can be filled up again. If a ship goes to the American West Coast from China; there is an imbalance, as those containers cannot be filled up again to be shipped back to China or some other destination. Los Angeles, for example, has seen imports spike even as exports decline, necessitating abnormally high handling of empty containers thereby increasing the trip time.
As a result of these factors, 30 per cent of container-ship capacity is currently anchored, versus just 20 per cent a year back. According to the latest Global Liner Performance report, vessel schedule reliability dropped to just 36 per cent in July, from an average around 80 per cent in 2019; average delays have now stretched to seven days, with several companies seeing lead times rise by two to six weeks.
The uncertainty in shipping timelines can cause firms to try to hold more inventory than normal. This is a classic intensification of the supply-chain bull-whip, where apparent demand seen by upstream component and raw material suppliers disconnects completely from the downstream real demand for finished goods.
This volatility has very few winners, if any. The confusing signals emerging in variables like inflation can trigger policy errors: For example, due to freight-rate hikes, goods with low-value-to-weight ratios are seeing costs rise by 10-30 per cent, which if passed through, would account for 0.5 per cent of US inflation. It would also mean a decline in demand. In addition to all this, the loss due to the goods reaching late and thence losing its value is one we cannot even estimate.
Port and trade regulations are ad hoc, keep changing as the spread of the Covid-19 variants ebbs and flows, and are out of the influence of international forums, imposed and enforced as they are by local/national governments.
Shipping may remain disrupted for another six to nine months, until vaccines or infections cause a large enough population to have Covid-19 antibodies or countries coordinate to standardise regulations so the regulatory friction at ports eases.