Global transportation markets were rocked by COVID-19 impacts, but none more so than ocean container shipping.
Shippers are facing never-before-seen container rates, as shown in the figure below, while service degradation has increased dramatically. The last time the industry saw such disruption was in 2010, following the Great Recession. SeaIntelligence Consulting reports in this latest disruption that global port to port scheduled service performance, which measures the actual departure and actual arrival of vessels, dropped to 50%. However, if you consider the backlogs at ports, shortages of chassis, and congestion on the rail and road networks, the end-to-end delivery performance experienced by shippers is often well below 50%.
Three important factors converged to create this perfect storm. Firstly, the rolling lockdowns of global economies as they attempted to deal with COVID-19 transmission initiated container imbalances. As China was recovering and restarting its factories, Europe and the U.S. were locking down. This meant that increased export shipments out of China became trapped in Europe and North America as companies could not ingest the imports due to lockdowns. The result was that containers became stranded and could not return to China for reuse fast enough.
Secondly, consumer buying habits changed during the period. Consumers, locked down in their homes, shifted spending from services to products and began ordering goods for home improvement projects and other activities. This added more pressure on demand out of China.
Thirdly, personal protective equipment (PPE) orders from Chinese factories exploded, adding even more demand on ocean carrier services. All the while, unloading and returning containers was constrained.
Navigating Rough Seas
The sector must take two immediate actions that will enable the return to some semblance of normality: the container imbalance must be resolved and port congestion must be improved. If we look back to 2010, the container imbalance was also the cause of market turmoil and, in that case, it took roughly 90 days for the container imbalances to be resolved. However, port congestion was not a contributor in 2010 and today we see challenges that include chassis shortages, driver shortages and labor impacts due to COVID-19.
Both ports and shipping lines are committed to addressing the backlogs. Ship owners have added more capacity in the form of more available ships than ever before to handle the demand. They will continue with regular sailing schedules over the Chinese New Year to facilitate the return of empty containers while also ramping up production of new containers. Ports are opening additional storage space to relieve congestion of empty container storage while also working on initiatives to improve operational efficiencies.
Pricing is expected to normalize in the second half of the year; however, expect that rates will remain higher in 2021 vs. 2020. Price normalization is contingent on container availability improving, ports clearing their backlogs and no new constraints arising. Drewry’s two-year spot rate index (see figure) is beginning to plateau. However, it should be noted that bunker fuel prices are rising and will need to be accounted for in budgets. While current contract pricing is three to five times lower than the spot market today (Flexport), it’s expected that 2021 contract rates will increase over 2020 levels, potentially by double digits, continuing the pricing trends set in 2018-2019. Carriers will likely continue their 2020 capacity management discipline, and future rates will likely not experience the large drops previously associated with carriers’ attempts to buy market share.
Waves of Change
Container shortages and port backlogs are expected to improve in the second quarter of this year. These improvements will serve to increase capacity and equipment availability. One action shippers can take is to do a much better job making minimum quantity commitments (MQCs); they will need to be much more accurate in the future or risk paying spot rates for unforecasted volumes.
Looking further into 2021, demand will become the focus. There are two schools of thought. The first school of thought is that demand will remain firm throughout the year and leading up to the traditional peak season period of September through early December as companies restock their inventory levels and begin holiday shipments. However, SeaIntelligence Consulting expects a very different scenario. Following the broad rollout of vaccinations, it expects consumer spending to shift back to services and away from products. In this scenario, it predicts that the increased capacity will meet a significant drop in demand, leading to oversupply, before finally levelling off. This may be a bit optimistic, though, as the yearlong rollout of global vaccinations may provide ample time for carriers to make capacity adjustments.
Gartner recommends that shippers plan for continued firm demand through 2021, but be prepared if significant changes in demand do occur. This latter scenario will result in more volatility to service schedules as carriers blank sailings to match capacity to demand.
Senior Director Analyst
Gartner Supply Chain