Global trade – all at sea and badly disrupted!
Global seaborne container trade and related supply chains have been heavily disrupted through the course of the pandemic. Shipping costs have consequently increased dramatically, and shippers are seeing massively increased revenues. We explore some of the trends taking place.
On 29 July, the ultra large container vessel M/V Ever Given arrived in the port of Rotterdam, Holland. It was some four months late and is the most high-profile single vessel example of the state of disrupted seaborne merchandise global trade.
For those not familiar with this case – the Ever Given en route from China to Europe got stuck in the southern part of the Suez Canal on 23 March, and it took six days to dislodge her. The Egyptian authorities subsequently ‘held/arrested’ the vessel while negotiations related to compensation were worked out between the Suez Canal Authority and the ship’s owners. Following an undisclosed financial agreement, believed to be in the region of $510 million, the Ever Given was allowed to leave Egypt some 22 days ago.
Following unloading at Rotterdam, the 400-metre long vessel originally carrying 18,000+ containers docked at Felixstowe in the UK on 3 August to unload its remaining cargo. The overall full cargo is reportedly worth in the region of $700 million to $1 billion. So, if you are a Joe Bloggs of Birmingham UK waiting for some Nike trainers or flat-packed Ikea furniture to turn up in stock those goods might be with you soon! Although you would have probably shopped elsewhere by now!
This whole Ever Given saga is now surrounded by innumerable insurance and legal claims, as I have written about within TXF before:
The legal and insurance cases involve not only the principal parties in legal battles with each other, but also claims from individual cargo owners, but also other vessels, shippers and cargo owners of many vessels whose voyages through the Suez Canal were disrupted by the blockage. The real winners here will be the insurers and lawyers and some of these cases can be expected to go on for years.
Even back in mid-July, anticipating the scale of future litigation, the ship owners Shoei Kisen Kaisha, together with Evergreen the group that had the vessel on a long-term charter, had filed and won an order from a London court to put any potential claims on hold for two months.
The Ever Given is certainly an exceptional case but with the global congestion fallout from the incident it helped exemplify just how much we rely on these global supply chains to perform smoothly. But supply chain disruption due to port closures through 2020 and continued port congestion has also had a severe impact on the sector. Containers are in the wrong places, container shipping costs have spiralled and a number of container shipping lines are placing orders for newbuilds. And at the same time the scenario has also placed more emphasis on the maritime sector to speed up decarbonisation.
Global seaborne trade is estimated to account for around 80%-90% of all global trade by volume, and around 60%-70% by value. Statistics vary markedly depending on the source, and one has to view the International Maritime Organisation (IMO), the United Nations Conference on Trade and Development Unctad and World Shipping Council (WSC) to get some idea.
Global seaborne container trade is estimated at around 60% of all seaborne trade. The majority of other seaborne trade is carried by tankers – eg oil, gas and chemicals etc, and with bulk carriers for minerals and soft commodities.
There were some 5,360 container vessels operating continuously in early 2020, and it is estimated that some 275 million containers were transported throughout that year. APM-Maersk, Cosco Shipping, MSC and Hapag-Llloyd are some of the leading container shipping firms globally. APM-Maersk is the largest both in terms of the number of ships and TEU (twenty-foot equivalent) capacity containers.
In addition to extreme incidents such as the Ever Given, the container shipping sector is having to cope with other major incidents such as the temporary closing of the key Chinese port of Yantian in June this year in order to control increasing Covid virus cases. The port is in the heart of China’s major factory belt and its closure will significantly impact on other ports also servicing this industrial heartland. Reports indicated that there was severe container disruption piling up at other ports with many vessels having to reschedule booked berthing slots.
Strains on working capital
It is estimated that only about 40% of container ships make an on-time arrival to port compared to 70% two years ago, according to Denmark-based Sea-Intelligence, with the greatest delays occurring at the adjacent US ports of Los Angeles and Long Beach.
Harbor Trade Credit, a Miami-headquartered provider of supply chain finance, states that transit times have increased by 3 to 60 days from China and other supplier markets, forcing buyers to hold inventory longer, and impacting cash flow.
Katie Newton, head of origination at Harbor, comments: “Companies purchasing goods from overseas are now burdened by longer delivery times which puts a stress on working capital. Having capital tied up in in transit inventory disrupts the cash conversion of the business.”
The company notes that with shipping disruptions causing longer Days Inventory Outstanding (DIO), the cash conversion cycle is lengthened and working capital is affected. Practical solutions such as a bespoke supply chain finance programme can help add working capital and stability for both the buyer and supplier. Many companies globally are having to adjust their financing strategies to accommodate for the disruption in seaborne and truck shipments.
Container rates hit record levels
Container shipping rates from Asia to the US and Europe increased to new record levels in July. The big increases are being driven by the tight market and a consistent lack of containers in the right place at the right time. This is particularly the case on the trans-Pacific route to US ports such as Los Angeles, but it also applies to key ports in Europe with trade from China.
The spot rate for a 40-foot container from Shanghai to Los Angeles increased to a record $9,733 in mid-July, 236% higher than a year ago, according to the Drewry World Container Index. The Shanghai to Rotterdam rate rose to $12,954. The composite index, reflecting eight major trade routes, hit $8,883, a 339% surge from a year ago.
And in an additional example of the tight market, in early July Germany’s Hapag-Lloyd served notice that starting July 18, it would place a ‘peak-season surcharge’ of $2,000 for each 40-foot container from East Asia to the US and Canada — an extra fee that by itself is higher than the full rate for a container shipped on trans-Pacific routes in 2019.
Port congestion in many countries, but particularly the US and certain key ports in Europe has been driven along through the pandemic by increased consumer spending on everything from computers to barbecues.
In the US, Los Angeles is the country’s busiest port, and it closed its fiscal year in June with record volumes of 10,879,383 TEUs, setting a new Western Hemisphere record as the US economy rebounded from pandemic lockdowns. This is 12% higher than the previous record set in 2018-2019 fiscal year. Six months into the 2021 calendar year, overall cargo volume is 5,427,359 TEUs, an increase of 44% compared to 2020.
This example is mirrored across much of North America and Western Europe where there is acute capacity shortage at many terminals. Consequently, container shipping lines are having to juggle their schedules and networks which are experiencing unprecedented disruption.
According to the latest the latest Global Container Terminal Operators Annual Review and Forecast report published by global shipping consultancy Drewry: “Global container port capacity is projected to increase by an average 2.5% per year to reach 1.3 billion teu in 2025. With global demand set to rise by an average 5% per annum over the same period, average utilisation rates will increase from the current 67% to over 75%. While 75% utilisation at a port or terminal level is not sufficiently high to be of major concern, at a global level this expectation of tightening port capacity in a market plagued by congestion due to supply chain imbalances is a cause for concern.”
Eleanor Hadland, author of the report and Drewry’s senior analyst for ports and terminals comments: “The strength of the recovery in demand, aided by high levels of liquidity in the financial market, have enabled [port] operators to bring forward their investment plans, resulting in a stronger capacity outlook post-pandemic.”
Drewry reports: “The majority of the forecast additional capacity will be delivered at existing terminals, with greenfield projects still remaining a low priority for most global operators. There are fewer greenfield automation projects in the pipeline but retrofitting of existing terminals is on the rise. The leading operators are also investing in digitalisation, recognising that this can increase the speed of movement of boxes through their facilities. Neutral trade platforms such as Trade Lens and GSBN use blockchain technology to streamline the regulatory and financial flows associated with the cargo.”
“Improving cargo flow is key,” says Hadland. “If via the roll-out of blockchain-based technology GTOs [global terminal operators] can achieve higher volumes over the same asset base, this will drive improved returns on investment.”
The move to ‘just-in-case’ supply chains
On the shipping line front, the world’s largest shipping line APM-Maersk is encouraging a ‘just-in-case’ supply chain model as fallout from the pandemic continues to impact the world’s supply chains.
The comments were made during The US Council of Supply Chain Management Professionals (CSCMP) annual State of Logistics Report presentation in June this year with supply chain executives on major forces shaping logistics in the pandemic and post-pandemic world.
“Just-in-time is not sustainable these days. Just-in-case supply chain models with inventory buffer ensure sales demand can be fulfilled,” said Matthew Hill, head of Maersk North America’s import business, during a virtual panel discussion. “Customers are trusting us with a wider part of their supply chain to focus more on shipment level performance instead of container level.”
The report is produced annually for CSCMP by global consulting firm Kearney and presented by Penske Logistics. Entitled: Change of Plans it delivers a snapshot of the US economy through the lens of the logistics sector in the overall supply chain.
The authors note: “As a result of a still ongoing pandemic and other disruptions, supply chains will be forced to continuously adapt. Change is inevitable in supply chains and adjustments are ongoing as manufacturers shift their sources and consumers shift their spending habits. Change will also come from the trend of multi-shoring and emphasis on optionality at the expense of lean and optimal. Safety stock is back, so more inventory will need to be carried.”
This year's State of Logistics Report is titled: "Change of Plans" and it delivers a snapshot of the American economy through the lens of the logistics sector in the overall supply chain. The report is a compilation of leading logistics intelligence from around the world and shines a spotlight on industry trends, and key insights on ever-evolving industry supply chains.
As a result of a still ongoing pandemic and other disruptions, supply chains will be forced to continuously adapt. Change is inevitable in supply chains and adjustments are ongoing as manufacturers shift their sources and consumers shift their spending habits. Change will also come from the trend of multi-shoring and emphasis on optionality at the expense of lean and optimal. Safety stock is back, so more inventory will need to be carried.
Three of the key report findings reveal that:
Sustainability efforts by the transportation sector are increasing. Consumers are considering environmental impacts in their purchasing decisions while governments across the globe are instituting more stringent regulations.
Moving forward, supply chains must continue to provide goods and services to the American public while dealing with tight capacity and volatile rising rates; H1 2021 has the highest rates the market has ever seen.
The US economy is now expected to grow 7.7% this year with advancements related to increased vaccinations and a return to normal.
Shipbuilding and decarbonisation
To help ease the demand for containers, shipping lines have placed orders for hundreds of thousands of new containers. But these are not going to make an immediate difference to the global situation.
And with carriers bringing in greatly increased revenues, orders are also being placed for newbuilds. Hapag-Lloyd has said it was doubling to 12 the number of container ships it was purchasing from South Korean shipyard Daewoo Shipbuilding & Marine Engineering. Each vessel will carry more than 23,500 TEU units of containers. However, full delivery will not be until 2024. Export credit financing for the first three LNG-dual fuelled vessels of this overall order was concluded in December 2020, and the 'green' financing was awarded a TXF Deal of the Year Award.
In addition, in April this year, French container shipping group CMA CGM announced a new order for 22 ships ranging in size and fuel type. The order was placed with China State Shipbuilding Corporation with deliveries planned between 2023 and 2024. The order includes 6 LNG-powered container ships with a capacity of 13,000 TEUs, 6 LNG-powered container ships with a capacity of 15,000 TEUs, and 10 very low sulphur fuel oil-powered containerships with a capacity of 5,500 TEUs.
In mid- July Cosco Shipping also announced a $1.5 billion order for ten new containerships. The order was placed with the company’s subsidiary Cosco Shipping Heavy Industry (Yangzhou). The order comprises six ships of 14,092 TEU capacity for an aggregate price of $876 million and four 16,180 TEU capacity ships for $630 million. Delivery will take place from December 2023 to June 2025
Delivery of the 14,092 TEU ships is planned from December 2023 to September 24, while the 16,180 TEU ships will deliver from June 2025 to December 2025. Cosco Group ranks as the third largest shipping line by capacity with nearly 500 ships representing a little over three million TEUs, amounting to about 12% market share. This latest order will add about 150,000 TEU capacity.
Increasing emphasis on the decarbonisation process for shipping continues to be a key trend very much on the agenda despite the problems faced on the supply chain front by shippers.
Following the publication late last year of Unctad’s Review of Maritime Transport 2020, UNCTAD’s director of technology and logistics, Shamika N Sirimanne, said the pandemic should not push to the back burner action to combat climate change in shipping. Therefore, post-Covid-19 recovery policies should support further progress towards green solutions and sustainability. “The momentum of current efforts to address carbon emissions from shipping and the ongoing energy transition away from fossil fuels should be maintained,” she said.
And in one interesting development on this front MSC Mediterranean Shipping Company is teaming up with Shell to develop alternative fuels and technology to help the shipping sector’s energy transition towards decarbonisation. MSC will work with Shell International Petroleum Company under a long-term memorandum of understanding seeking to “develop a range of safe, sustainable and competitive technologies that can reduce emissions from existing assets and help to enable a net-zero emissions future for shipping.”
“MSC’s efforts to decarbonise include strong partnerships with a range of companies across the industry. This partnership with Shell is a great example of the type of commitment that is needed to catalyse low-carbon solutions for the shipping sector,” said Bud Darr, EVP maritime policy and government affairs, MSC Group.
Shell and MSC have worked together over the last 10 years on projects, including bunkering biofuels and trialling very and ultra-low sulphur fuels.
Melissa Williams, president, Shell Marine, said: “Partnering with our customers to develop new technologies and fuels will help accelerate progress. Combining MSC’s experience as one of the world’s largest shipping companies with Shell’s expertise as a global energy supplier will help bring about effective solutions for this vital part of the world economy.”
MSC and Shell said they continue to envisage a range of net-zero fuel solutions and are also exploring options such as hydrogen-derived fuels and the use of methanol as a marine fuel.
Both companies have been exploring the potential benefits of progressing from fossil-based liquefied natural gas (LNG) to bio-LNG or synthetic variants. Together, the partners will explore opportunities for MSC to use LNG in its fleet, as the lowest emissions fuel widely available today. They will also consider future pathways, including methane-slip abatement technologies that will further bring down LNG’s emissions.
Also see my article of 9 December 2020 – Seaborne trade – not all plain sailing!
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