Two sides of the same coin

Modern industries demand better service levels and the pandemic has spurred the process of change in the supply chain. Next year could be a pivotal period in the evolution of the shipping industry, shifting it towards a more collaborative approach. The pandemic is tipped to have far reaching consequences, writes Nick Savvides, Container News' managing editor, more profound than just stacking the odds.

Heads I win, tails you lose, shipping’s new spin on a win win situation. Carriers are spinning the line that they are interested in their customer welfare, but as is often the case, actions speak louder than words. And while lines will make a fast buck this year, shippers have complained of a poor service, and unreliable timekeeping.

But will that continue into the future?

Winning is just the flip side of losing and this year’s great losers have been the shippers who have seen the cost of transportation skyrocket for a number of reasons, whether it’s the control of vessel capacity, the container shortages caused by the imbalance of trade or simply the surge in demand for port and inland cargo services.

Whatever the cause, rates have soared bringing, at times, angry responses from cargo owners. However, there is a sense from at least some shippers that they are biding their time. They know that what goes around comes around, and there will be a price for the carriers to pay for the mega-bucks that they are charging today. Charges, not just in the base rates for moving cargo, but also for the myriad surcharges that shroud the actual costs of moving freight.

It is also undeniable that shippers have for the last 30 years seen the cost of freight as negligible in the total cost of bringing products to market. It was this fact that allowed the transformative shift of production to China, lowering labour costs, but also due to the cost of transporting the proverbial US$100 trainers, which was set at one cent, from China to the US or Europe.

While it is indisputable that shippers have had a good run for their money, it is also the case that shippers have, at least to those of us in the press, always said they are prepared to pay more for a reliable service. This year reliability has gone out of the window. Shippers are booking cargoes weeks ahead with the knowledge that the freight will be rolled over and delayed, which is not as significant a problem for those cargo owners that do not move perishable goods.

Reliability has been a problem, not just because carriers cancelled services, but also because the pandemic has seen labour forces slashed, not enough dockers, lorry drivers and freight trains available. Moreover, the patterns of trade were disrupted by the pandemic with the first half of the year seeing volumes crash, either through China’s lockdown of manufacturing, and later through the slide in demand in Europe and the US.

Inventories were slashed, but the return to high demand was rapid and, it was the speed of the turnaround that caught many shippers and operators by surprise. That said the movement of goods was caught in a perfect storm.

Cyclones whirled around the logistics sector and none more so than in the perishable goods sector which was feeling the full force pandemic gale. The cost of moving a reefer can be double the price of a standard container. With Pacific rates at nearly US$4,000 a standard forty-foot box, and over US$3,000 from the Asia to Europe, plus the peak season, congestion and other surcharges the costs can mount up.

James Hookham of the Global Shippers’ Forum said that for some cargo owners the cost of freight has become so great, US$10,000 plus, that it is too much for some who will simply not move their cargoes, rather than pay these prices.

However, Hookham, like other shippers, is also convinced that the carriers have latched on to a good thing and are riding the storm for their own benefit, rather than helping move cargo for the benefit of all.

It is a view that carries some weight in the US, with consultant Jon Monroe arguing that, “No one feels the pain of the broken ocean import supply chain more than the BCO (beneficial cargo owner). Ultimately, they are paying for a delayed service and in many cases missing product deadlines that cost them business.”

Five day waiting times outside of ports, slow inland travel times, slow turnarounds of empty boxes have all caused delays. And service delays cost money. That is why shippers want to know when their cargo will arrive, and they want to know how much it will cost in total. That has been the mantra from shippers since containerisation began.

This pandemic ridden year has seen the acceleration of e-commerce and that offers shippers greater visibility. Shipping lines have embraced the e-commerce idea and that has led the carriers to rapidly digitalise their operations too, and that is all as a consequence of the global pandemic. The digital push has come from such collaborative organisations as the Digital Container Shipping Association (DCSA) and other mutually beneficial organisations that are looking to standardise the use of digital tools in the industry.

This year has also led to the rise, particularly in the US, of online shopping and that will offer carriers new opportunities, one that Maersk has been discussing for some time, they want to become shipping’s first integrator.

Integrator status implies a level of sophistication not seen before in the shipping industry. The maritime sector is caught cobwebbed in its traditions, it has developed systems and methodologies over centuries that new tech demands must be forgotten. New technologies require new ways of working. Ringing out the old and ringing in the new is more than just about a new year, it is a new era.

Simply using new technology to replicate old methodologies is not digitalisation, but stagnation. A paradigm shift is coming and 2021 could be seen as the year when digital transformations and decarbonisation became the cornerstones of vessel and supply chain development.

Currently in its infancy, and there’s no guarantee that the newborn will survive. The two pillars of the newly evolving supply chain will shape its formation and maturity. Having begun with the digital process that was spurred on by Covid-19, decarbonisation by contrast is driven by regulation, which has been stymied by the pandemic.

Velocity and momentum will need to be regained in the decarbonisation process as regulators return to live meetings, probably in the second half of next year.

Financial institutions will aid that process through initiatives such as the Poseidon Principles, though that group will need to be broadened to include many more financiers from many other countries.

Meanwhile in the short-term the surge in volumes, in the US has been the subject of investigation by the Danish consultancy, Sea-Intelligence, which found that container volumes in October were up over 20% year-on-year, but retail sales had risen just 2.2% in the same period.

Sea-Intelligence believes that while there were some retail sales increases and inventory replenishment there appears to be a growth element to inventory building too.

Or as Sea-Intelligence puts it, “There is a distinct likelihood that the ongoing cargo boom supports a large inventory build-up, bringing inventory levels significantly above the pre-pandemic levels. This understanding of the development would close the ‘missing gap’ between the qualitative and quantitative approach to understanding the market. But this would also imply that at some point in 2021, we would be due for an inventory correction.”

If the consultancy is reading the situation correctly the upcoming contract negotiations may see a qualitative change from previous years. Spot rates often form the basis for the start of contract discussions, but long contracts with high rates and uncertain service levels seem an unlikely scenario.

Shorter contracts and some certainty on delivery will more likely be what the shippers are after, while the lines will be looking to maintain utilisation levels to the maximum while the negotiations continue.

Once the cargo levels begin to drop will the carriers reform to type and battle for market share, in a race to the bottom? That seems an unlikely scenario too. Change is coming and the change will probably mean that we in the demand economies will have to pay more. We will start to pay the environmental costs of our high-flying lifestyles.

That is a change which is long overdue. But it is also a change that will come because of the new visibility in the supply chain, we will know where our produce, manufactured goods and other consumables come from and we will be able to choose not to support child labour in far off countries and poor conditions that cause ecological damage.

Flipping this coin will be a win win situation for the planet and, just as with globalisation, container shipping and supply chain logistics should be at the forefront of these changes. If not we could all be losers in the longer term.

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