Why the shipping crisis is likely to persist

The flip side, however, is a historic jump in the cost of shipping goods from India to destinations abroad. According to data compiled by the website Indian Transport and Logistics News, the cost of shipping a ‘container’ from Kochi to Europe’s port of Rotterdam has increased by 873% between March 2020 and August 2021. A container is a metal box, either 20 feet or 40 feet long, and is the standard way of shipping goods around the world.

Freight rates on other routes have jumped equally eye-wateringly: 759% in Mundra-Hamburg, 650% in Kochi-New York and 311% in Mundra-Baltimore (see Chart 1). The spurt in India’s exports comes amid a global logistics crisis, manifested by hike in freight rates, acute shortage of containers to ship goods and longer wait times for unloading ships at ports.

Mismatches and deadlocks are creating shortages in all areas. Data for April-September 2021 shows a 23% decline in consumer electronics imports by India over the year-ago period (in value terms), a 28% decline in automobile tires and tubes imports, and a 47% decline in imports. Is. auto component. In the case of electronics accessories and auto components, global chip shortages are also a major reason behind the decline.

Worse yet, the global logistics crisis is expected to continue over the next year. The chief executive of Danish shipping giant Maersk told Reuters that, “nothing” in the data suggests the situation will ease this year. Some analysts expect the deficit to subside only after the Chinese New Year in February 2022. Such are the growing implications that Federation of Indian Export Organizations (FIEO) President Dr A Sakthivel, while welcoming the October trade data, called on the government to set up a regulatory authority for freight traffic. He also asked the government to provide freight support to all exporters by March. 2022, “as freight rates increase.”

surge in demand

In the initial COVID-19 months, from around March 2020, major shipping lines actually projected surplus capacity after a sudden drop in demand due to the lockdown. They adjusted their operations accordingly, and re-routed the ships or simply parked them somewhere. By August 2020, freight rates began to come down (see Chart 2). At the heart of the crisis was a surge in demand, driven by consumers stuck in lockdown in the early stages and panic buying in some countries. Consumers unable to spend on travel or eating out or entertainment outside the home spent more on buying goods online. For example, online retailer Amazon saw its sales and net profit increase by 37% and 84% respectively in 2020.

This jump in demand was only half the story. With it was a global shortage of containers and ships to move those containers. There is a global imbalance in trade, with ‘developed’ countries being net importers of consumer and consumer durable goods and Asian countries such as China and Vietnam being net exporters of such goods. This means that containers are loaded at Asian ports and shipped to large consumption centers such as Europe and the US. They are unloaded there and then shipped to empty Asian ports, again to be refilled.

There are obstacles at every step. Ports at the heart of the global trading system, such as Los Angeles and Shanghai, have moved in and out of lockdown over the past year. This affected the speed with which containers were loaded or unloaded from container ships. Even as of October 2020, the port of Los Angeles-Long Beach saw no more than a few container ships waiting at any one time to unload their cargo. By February 2021, this number had increased to 40. By mid-October 2021, it had crossed 60.

At the other end of the world, countries such as China, a major supplier of consumer goods to the world economy, implemented one of the strictest sets of COVID-19 protocols in the world. Even a single Covid-19 case or two disrupted services at important Chinese ports. Thus, even if factories in China came out of lockdown and started making goods, there was no guarantee that they would be shipped out of China.

In an explainer on the global logistics crisis, Fretos, a digital booking platform for international shipping, said that by the last quarter of 2020, it had become clear that cargo rates are unlikely to come down anytime soon. It said: “Logistics is global. So a backlog of ships off the coast of California means fewer empty containers going back to Asia, meaning fewer ships and containers are available for export, with one container shipped from Asia to Europe in November and December 2020. The cost of doing so increases by 400%. The same backlog has also caused record-high delays.”

One-off shipping incidents only made the problem worse. This March, Ever Given, a giant container ship, got stuck in the Suez Canal, effectively blocking one of the world’s major shipping routes for days. The ships were forced to take longer routes, exacerbating the lack of available containers. At a time when global shipping was already at capacity, freight rates increased on all other routes, not just the Suez route.

In major consumption centers such as the US and Europe, the crisis has been exacerbated by shortages of trucks and workers at critical points in the supply chain. Amidst these shortcomings, global container shipping companies like Maersk have done very well. In 2020, Maersk reported average quarterly revenue of $9.9 billion. It averaged $14.4 billion in the first three quarters of 2021. Its net profit has increased from $3 billion in 2020 to $11.9 billion in three quarters of 2021.

loss india

The global shortage of containers and ships has had a severe impact on countries and ports that are not at the heart of the global supply chain, including India. Given the severe shortfall in container capacity, global shipping companies have focused on bridging the shortage on major routes.

As Transport Intelligence, a consultancy, pointed out: “Most of the capacity formerly serving developing markets has been allocated to the major trade lanes i.e. the Trans-Pacific trades and the market from Asia to Europe. The increase in rates has led to the expansion of shipping lines. This has made it economical to deploy much smaller vessels on these lanes. Prefer to consolidate services … Disruptions in shipping schedules have reduced the export capacity of many smaller countries, resulting in containers being abandoned in port.” It said small and medium-sized enterprises (SMEs) in developing countries are “the worst affected”.

Especially in recent months, Indian exporters have not been able to get rid of this problem. Between May and August, the cost of shipping a 20-foot container from India to the US increased by 19% and that of a 40-foot container by 38%, according to Container xChange, a global platform for buying and selling containers. Back in June, FIEO’s Sakthivel noted this growth, saying: “While freight growth is a global phenomenon, we may suffer further as we have a large MSME (segment) in exports, who have huge There is less negotiating power.”

Pointing out that Indian exporters remain “at the mercy of foreign shipping lines”, he called for greater focus on a shipping line that can serve Indian industry. So-called ‘blank sailing’, whereby ships simply leave ports on their routes because it is uneconomical (or other more lucrative ports are available), have increased dramatically.

Thus, containers are piling up at Indian ports. Ships operated for the most part by global shipping lines can skip Indian ports altogether. In instances where an Indian exporter manages to place a container on board the ship, the cost involved can be astronomical. Containers xChange reported that inbound containers at Chennai port are almost four times the number of containers being shipped, indicating that containers are piling up at the port.

Acknowledging the record jump in Indian exports, Johannes Schlingmeyer, co-founder and CEO of Container Exchange, explained that the imbalance was because “exporters are facing obstacles in exporting their goods from India.” With such high freight costs, many small exporters do not find it easy to ship the goods out. In the plan of global business, India is a less important destination than China or Europe or America. In addition, handicapped by the relatively small size of its state-run shipping line, the Shipping Corporation of India, exporters depend on foreign shipping lines for business.

elapsed time

Thus, a report in April by the United Nations Conference on Trade and Development (UNCTAD), an intergovernmental organization to promote the interests of developing countries in trade, showed an increase in freight rates in developing regions such as Africa and Latin America. . Bounce on the main east-west routes (China-America or China-Europe). As the carrier began to exercise its discretion and abandoned ports of relatively little importance, it stated, “there was a mismatch between the supply and demand for empty containers, as empty containers were left behind and were discarded.” Failed to move (taken where they could be filled).”

The UNCTAD report concludes: “Carriers, ports and ships were all surprised by the pandemic. The subsequent shortage of empty containers seen since the end of 2020 is unprecedented. There was no contingency plan to address the lack of availability or mitigate its negative effects. Given current trends, several months are likely to elapse before this disruption is absorbed into the marine supply chain and the system resumes smooth operation.”

Furthermore, global shipping is an oligopoly, with a few companies controlling the bulk of the maritime trade. This has prompted many traders, including Indian exporters, to accuse such companies of cartelization and unfair trade practices.

This crisis, however severe, will subside, possibly by early next year. Already, Chinese manufacturers have dramatically expanded production of new containers, while shipmakers are seeing a surge in orders. But long-term questions remain about the ability of the global trading system to withstand sudden shocks such as the COVID-19 crisis. Meanwhile, Indian authorities will again have to keep a close watch on how the country’s export infrastructure and shipping capacity can be enhanced to better withstand such shocks.

Avinash Celestine is with Howindialives.com, a search engine for public data.