01/09/2021
This article was published on 27 August 2021 by the Straits Times’ Business Column. The contents were derived and/or contributed by a major carrier, Mr Hsieh Huey-Chuan, President of Evergreen Marine Group. Evergreen is the 7th largest container liner, Drewry World Container Index, Hyundai Shipping and Senior Economist from Maybank Singapore.
I have outlined the relevant points herein.
Supply Chain Outlook for 2021/2022
The supply chain crunch which was supposed to be temporary looks like it will last well into next year as the Delta variant upends factory production in Asia and disrupts shipping. Manufacturers reeling from shortages of key components and pricier raw materials are forced into bidding wars to get ship space, pushing freight to record highs and prompting some exporters to raise prices.
China’s determination to stamp out Covid 19 has meant even a smaller number of cases can cause major disruptions to trade. This month, the world’s 3rd busiest container port at Ningbo shut for 2 weeks after a single port worker tested positive for the Delta variant. Earlier this year, Shenzhen docks were idled/shut down after the discovery of a handful of cases.
Port congestion and shortage of container shipping capacity may last into Q4 2021 or even mid-2022. If the pandemic cannot be contained, port congestion may become a new normal.
Sending a container from Asia to Europe cost about 10 times more than May last year while the cost from Shanghai to Los Angeles is six-fold as reported by Drewry World Container Index.
Higher freight rates could feed into inflation as noted by Dr Chua Hak Bin, senior economist at Maybank Kim Eng Research in Singapore.
Forecasters have lowered growth in United States projections for this year and lifted inflation expectations into next year.
Now container liners don’t sign long-term agreements and most deals are done by spot prices.
For Asian factories outside China, the problem is even worse. Many Chinese firms are willing to pay above market rates to load their cargo, according to Hyundai Marine Merchant. Hence, when the ships call outside China, they are already almost full.
Summary
Basing on the above, you may note as follows:
Port congestions in China with an average of 30 to 50 vessels waiting to berth at the China ports causing delays between 2 to 3 weeks. In SIN, the situation is slightly better with delay of between 3 to 5 days.
This means there are limited vessels available for carrying China’s export.
China shippers are paying premium freight rates to load their cargoes on board. For example, current freight from SHA to NYC is about US$ 16,000 to US$ 18,000 per 20ft GP, the Chinese shippers are paying an additional/premium rate of US$ 2,000 to US$ 3,000 per 20ft GP for guaranteed shipping/load on board.
This means the limited vessels availing space/equipment are made lesser with the China shippers bidding for the limited slots/spaces.
Due to above situations, the space and equipment available to other Asia ports are very limited.
E2e’s opinion
In our opinion, the situation may revert back to sub-normal but it will not be a pre-pandemic norm. Basing on past decades of records, any prices that go up seldom come down. Take for example our economic rice/meals. Prior to the pandemic, we used to pay about S$ 3.00 to S$ 3.50 for a decent meal. However, currently, the same meal cost about S$ 5 to S$ 6 per pkg. Same goes for our petroleum too.
However, we believe the shipping rates will subside to a variable extend depending on a few factors as follows:
For example, due to the vessel delayed/congested in China, the container liner increased their freight rates between 6 to 10 fold. This means each voyaging vessel’s revenue is excessively covering any vessel idling in China. Basing on 1 mega vessel with capacity of 20,000 x 20ft GP, each voyage from Asia to U.S.A. coastal areas average about 20,000 x US$ 15,000 = US$ 300 million dollars hypothetically.
With these exorbitant profit, carriers will tend to increase their supply by building more and bigger vessels. On the other hand or from the demand side, with the high freight rates, shippers or consignees may choose to ship discretionary with some exiting the market. Eventually, these will lead to a new equilibrium.
As most countries are investing in vaccination with some working on the 3rd jags and also, taking measures against the new Delta variant, lockdowns and safety measures will be more relaxed allowing more labour force to return to office, port and ships.
Given the unfortunate global scenarios, we have little choices but to temporary bear with the ongoing challenges.
