With world in upheaval, new reality emerges for shipping industry

Covid-19 pandemic, Russia’s invasion of Ukraine and geopolitical tensions between global powers are forming a perfect storm for deglobalization.  Countries and companies are seeking shorter supply chains and moving away from global interdependence and integration.  These significant events have changed the shipping industry for better and worse.  And now, expecting new occurrences and black swan events is the new normal.

Given this trend, the maritime industry will see more cargoes being transported regionally instead of internationally and the size of ships will decrease in tandem, said Captain Walter P. Purio, Chairman of Rise-X and Director for Pilbara Ports Authority, during a panel discussion at the Bunker & Shipping Summit on June 15.

Panellist Peter Sundara, Head of Global Ocean Freight Product for Global Logistic Division, Visy Industries, pointed out that “container lines were making mega bucks at record high”. Ocean carriers generated about US$190 billion of annual profits in 2021 compared to the $25.4 billion in 2020 which was a whopping 491 percent increase. 

As such, Sundara said “carriers are king” now.  Shipping lines have the ability to control capacity through acts like blank sailing, among other tactics and therefore, negotiating for lowest rate with the highest capacity was practically impossible. Shippers will need to “take it or leave it” due to the high demand from a big number of shippers. 

In an attempt to have some certainty over costs and space, shippers are entering into multi-year contracts unlike that of the more common short-term contracts used in shipping.

Sundara also highlighted the importance of providing accurate and reliable forecast.  Having valid information ensures efficiency in planning and decision making for the maritime industry, which can create ripple effects in other industries.

Expect the unexpected

Disruption in supply chains, shortages and uneven trade patterns are just the tip of the iceberg when it comes to the impacts of Covid-19.  Traffic jams have increased significantly in Chinese ports due to the zero-Covid policy and lockdowns in Shanghai, and in the North Sea due to the war in Ukraine.  Sanctions on Russia and voluntary bans have also led to new congestions, further affecting the supply chain.

According to panellist Eric Jin, Head of Investment Support, BMT Asia Pacific, despite the disruptions, markets are still going strong.  The growth for the Asia-North America trade was 21 percent in 2021, but about four to six percent pre-Covid.  

Similar to that of the trade with US, the Asia-Europe trade which was previously growing at a rate of two to five percent, grew 12 percent last year.  The Intra-Asian trade known for its resilience was growing at a rate of four to five percent pre-covid, grew 10 percent in 2021.

According to Sundara, the logistic sector has faced numerous forms of disruptions the past two years, due to supply chain congestion and black swan events.  As such, Sundara claimed that the sector is now desensitized and has the “experience and tools to manage any form of disruption”.  The sector is also currently working with suppliers including shipping lines and various types of land transport to overcome disruptions more efficiently.

Planning ahead is new norm

The lack of space onboard ships and supply chain congestions have forced shipping lines to control capacity by blank sailing.  The act of cancelling a call or skipping particular ports, regions or even an entire leg on the scheduled route has caused increased uncertainty and unpredictability in maritime transport.

Coupled with other factors such as increased shipping costs and longer transit times, planning ahead has become the new norm. Shippers need to ensure that there is sufficient time for their shipments to be packed, gated into ports, loaded and also sufficient time for it to reach the destination.

Jin reported that 60 percent of shippers have claimed that “production schedules are not matched” due to ships moving less cargo and longer transit time.  40 percent of shippers have already been planning ahead for Christmas to ensure goods reach destination before the holiday season starts. On the other hand, 25 percent of shippers have been turning to alternative transport such as air and rail. 

Sundara added that “shippers are moving from Just in Time (JIT) to Just in Case”, due to supply chain congestion.  He cited Walmart as an example of this phenomena as shown by their 40 percent increase in inventory. However, stockpiling has caused working capital to be locked in as demand does not match the rapid increase in supply.

Other than companies, countries are stockpiling food such as livestock, wheat and grains, due to predicted supply chain disruptions for the next two to three years. Countries are stockpiling to reduce reliance on others and to ensure food security.

Hoarding of key commodities like corn, rice and wheat by China has caused shortages which drove up the price of food as seen by the food prices hitting a 10-year high.  Stockpiling would also increase the need for warehousing and logistic personnel.

Sustainability initiatives

Smart ports are on the rise along with digitalisation.  From a shipper’s point of view, Jin urged that port masterplans need to consider trade, vessels and connectivity to the hinterland.  Jin said as an example, ports would need to learn and adapt in dealing with autonomous vessels without people onboard.

Jin said ports are “a natural platform for people to come together”.  As such, ports and shippers should work together to build a Port Community System (PCS).  The European Port Community Systems Association defines a PCS as a neutral and open electronic platform enabling intelligent and secure information exchange between public and private stakeholders in order to improve the competitive position of the seaport communities.

The PCS can optimize, manage and automate logistics-efficient processes through a single submission of data, connecting transport and logistics chains. The implementation of a PCS would entail taking advantage of digital transformation to ensure effective coordination and collaboration between stakeholders, making ports more efficient, without spending millions on infrastructure.

Outlook 2022

Sundara shared that experts still believe that the current congestion in ports and land side infrastructure will remain unchanged throughout the second half of 2022.

Thanks to the huge profits carriers are earning, carriers have been ordering new vessels.  There may be overcapacity in the market in the second half of the year but carriers have control and will manage capacity through blank sailing.

Sundara also highlighted the importance of longer term planning for shippers.  The market will definitely bounce back to normal but the million-dollar question would be when.

Photo credit: iStock/donvictorio

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