The state of supply chains: Shipping
High volatility and big bottlenecks are defining shipping at the start of 2021 as the industry handles a surge in demand for physical goods and a crunch in container capacity
In the space of a few months, the whole axis of global trade shifted and then shifted again. The carefully calibrated threads linking one continent to another were shaken by the pandemic, with wide ranging consequences.
Even as we pass a calendar year since the scale and potential of the crisis was emerging, global shipping is still feeling the effects.
This huge component of the global economy has seen the ripples of COVID-19 build into waves that continue to wash through the industry, as even small, localised changes here can have big knock-on effects.
Just one blank sailing of a relatively large container ship would mean thousands of twenty-foot equivalent unit (TEU) containers left in a port (the largest ships can now carry more than 20,000 ETUs each, for example) and tens or even hundreds of thousands of tons of capacity taken off the market.
This meant the net effects built up across 2020 as initially shipping lines reduced capacity, only to be met with a huge, unexpected surge in demand for consumer goods and PPE, often being made in lower cost production centres. Ports struggled to cope, especially as workforces were thinned by COVID-19 and crews were quarantined. Even now, containers are still not where they need to be and shipping companies are inundated with customers desperate to get their goods booked onto the next available ship.
We spoke with industry expert Pyers Tucker, who is part of industry giant Hapag-Lloyd AG, to understand the ongoing dynamics and how they are shaping supply chains.
A three-part problem
When it comes to the state of shipping, “The root cause is … the way the world is responding to the virus,” says Tucker.
He notes three vital dynamics to understand. Firstly, “There's been a demand explosion in the second half of 2020, which is spilling over into 2021.
“The second thing is that it's actually terminals that are the bottleneck, not container carriers and ships. You need look no further than all the ships that are having to anchor for many days outside many key ports.”
Finally, “Its container shortages, which are caused by the two previous [elements].”
Lockdown changes demand
Tucker emphasises that the change in demand, led by changes in consumer behaviour is the biggest change they have experienced within the industry, as “20% of the demand for the first half of 2020, shifted completely unexpectedly into the second half of 2020.”
The scale of this change is massive. First trade volumes collapsed, with the chief economist for the RWI’s RWI / ISL container handling index noting that “In February, we saw a drop of the index like never before”, with more drops in April and May before massive recovery begins in their data.
Nobody saw coming this huge demand in the second half of last year, and that surplus of demand, it just it blows the system up
To give some context of that 15-20% shift, the industry is estimated to have experienced an estimated 2% growth in container trade and an 0.5% increase in volumes across the whole of 2019. An explosion of 20% in one half of the year would likely mean a change in global throughput of nearly 100 million TEUs. “Nobody saw coming this huge demand in the second half of last year, and that surplus of demand, it just it blows the system up,” explains Tucker.
Tucker says that the driver is the biggest recorded change in consumer spending “Since consumers’ behaviour started being measured systematically in the early 1970s.
“What has happened is there's been a massive shift of consumer expenditure from services back to physical goods … because of people being in lockdown [and] not being able to spend money on services, as in travel, holidays, restaurants, bars, etc.” Government income support further helped here in numerous economies, with cash injections sent direct to consumers boosting consumption.
Big shippers, big importers were all desperately trying to cancel as many bookings as they could, and trying to cancel as many container space orders that they could. It seemed at the time to be logical and rational
“In the US they had a 6% to 7% increase in expenditure on retail goods in 2020 versus 2019. Nobody, nobody forecast that. Nobody expected that,” he exclaims.
On the industry side, as shipping companies looked at data coming through in H1 2020, “big shippers, big importers were all desperately trying to cancel as many bookings as they could, and trying to cancel as many container space orders that they could. It seemed at the time to be logical and rational,” notes Tucker. This compounded the issue in the second half of the year.
A collapse in container currents
“In March, April, May the shipping lines started cancelling sailings,” explains Tucker but “how do empty containers get back from Europe or the US to Asia? They go on the back hauls, but the back hauls are being cancelled. So those empty containers were piling up in Europe and they were piling up mostly in terminals waiting to be loaded out.”
Initially, most weren’t concerned about this as demand seemed on a downward trajectory that looked as if it would continue across 2020. “Then suddenly demand came back from June onwards, [and] demand starts ramping up month after month after month.” This inbound volume rapidly began to collide “with these empties piled up on the on the key side,” creating major log jams that continue to effect us even now.
Terminals in turmoil
On top of all of this, container ports were facing labour shortages from quarantines and absences from illness. The crisis compounded again as productivity fell below typical levels, even at the most efficient ports.
Tucker gives the example of Singapore, which “Is normally one of the most efficient ports in the world, far more efficient than anything in the US,” where normally “you can just sail straight in - maybe a two hour wait - no big deal. However, for the last few months, “it's been a three to five day wait to get into Singapore. If you then look at Long Beach, you're all you need to do is look at any of the vessel locator portals, and you will see that are more ships anchored outside Long Beach than are actually alongside terminals.”
Despite all of this explosion in demand, the actual turn[around times] for the containers went up
At the time of writing on 9th February 2021, there were 36 cargo vessels not underway outside the Port of Long Beach California according to MarineTraffic. This dwarfs the 19 anchored outside the port in January 2015 when the port was paralysed by a strike, which was considered an extreme backlog at the time.
“You'd have thought with all this high demand that container turn[around] times would go down and they would be used more quickly,” remarks Tucker but, “they didn't. It went up 15%. The reason is because of all those delays,” where containers “were stuck in ships waiting outside port. They were stuck in terminals that couldn't handle them. They were stuck because there weren't drivers to pick them up. So actually, despite all of this explosion in demand, the actual turn[around times] for the containers went up.”
Processing a booking backlog
This means for Hapag-Llloyd they “Are trying to remain as flexible as possible. We do everything we can to try and facilitate things,” but they are handling a lot of anxious customers who are desperate to book their cargo onto ships.
Normally we handle about 50% more bookings than we actually load. At the moment we're having four times as many bookings,
“Normally we handle about 50% more bookings than we actually load. At the moment we're having four times as many bookings,” explains Tucker. “That is causing huge workload for our customer service and booking people.”
Tucker gives an insight into the panic among those seeking shipments, which is driving this dynamic: “What's actually happening is that a customer in China is placing a booking, we're having to reject it because we just don't have the space. The ships are late; they're not coming in. The customer then replaces the booking and we have to re-handle it and re-reject it. Then the customer breaks it up into four smaller bookings and replaces the bookings. He gives one of the smaller bookings to a freight forwarder who he thinks might have an end and then they place the booking.”
What changes now?
Looking forward, Tucker has a warning for supply chain operators: “If anybody thinks that 2021 will be less volatile than 2020, we believe they need to think again. It's going to be every bit as volatile.”
In the short term, Tucker says that they initially expected things to quieten down following Chinese New Year, “But already by end of November, December,” they could see from their order book that high demand levels similar to what has been experienced so far is “going to go well beyond the Chinese New Year” to at least April in his opinion.
What's going to happen for sure, is the huge swing that we saw in consumer expenditure from services to goods, it's going to swing the other way hard and fast
Beyond this, he is cautious of making too many predictions, with the exception of an eventual softening of demand for his sector. This is likely to happen as lockdowns end, vaccinations begin to have an effect and economies open up. “When that starts happening, what's going to happen for sure, is the huge swing that we saw in consumer expenditure from services to goods, it's going to swing the other way hard and fast.”
Alongside this, he thinks “There's going to have to be an adjustment or retail expenditure towards what is more sustainable, long-term, based on GDP,” as government financial support diminishes and a weaker labour market takes effect.
He advises caution here though for those expecting the bottom to fall out of the market when this does happen. Shipping firms have learnt from 2020 and “I think the carriers have learnt their lesson and they are going to be much better and much faster at managing capacity in 2021 and in the future. So, even though there will be a softening of demand for container space for physical goods, that doesn't mean that price is going to cash back through the floor.”
Therefore, you need to think “Really carefully and hard about your forecast, and what you think will happen and when you think it will happen.”
If you have a supply chain, which has been reduced to the lowest possible cost, it has to work exactly as planned. The moment it doesn't work as planned, this kind of stuff happens
“Longer term, I think supply chain managers need to pay a bit more attention to agility and the robustness of their supply chains, rather than extracting every single last piece of cost,” thinks Tucker.
“If you have a supply chain, which has been reduced to the lowest possible cost, it has to work exactly as planned. The moment it doesn't work as planned, this kind of stuff happens,” so he predicts a key long-term trend that will result from this prolonged period of intensity in the shipping industry will be a re-evaluation and re-balancing of supply chain risk and production centres.