Post-Pandemic Supply Chains: Turning the Tide on Sea Cargo Stoppages
03 November 2021
In order to get up to speed with the current challenges represented by both the huge backlog of containers at nearly all the world’s major ports and the rising numbers of orders as the peak shopping season looms, Louis Chan, Principal Economist (Global Research) at HKTDC, asked Nicolas de Loisy, President of Supply Chain Management Outsource (SCMO), a global advisory firm specialising in logistics, transportation, and supply chain management, as to how best the situation can be resolved.
Chan: How serious are the current global supply chain bottlenecks?
de Loisy: Very serious!
A bottleneck happens when a transportation hub, gateway or mode is blocked in whole or in part. In supply chains, a bottleneck could be a canal, a strait, a container port, a bulk port, a dry port, an oil or gas port/ jetty/ terminal, an airport, a factory, a warehouse or a loading/ unloading bay. So the question currently on the mind of every shipper, shipping line, freight forwarder and airline is: “Will the ports and/or airports where I load and unload my cargo be in lockdown at the time of loading and unloading, and will they have become a bottleneck as a consequence?”
When this is the case, all supply chain planning is thrown into disarray and challenges start to pile up. In front of a port in lockdown, depending on its size, there can be anywhere from 10 to 150 ships queuing up. During the Suez Canal blockage last March, which lasted only six days, 400 ships were stuck. A port in lockdown sees its productivity drop. How much depends on the availability of crew gangs (dockers, stevedores or longshoremen), but that availability can change every day.
There are nine major potential bottlenecks in the world. These include: the Suez Canal, which controls 10% of global oil and trade, including 16 million TEUs (Twenty-foot Equivalent Units) per year; the Strait of Gibraltar, which controls 30% of oil and gas; and the Strait of Malacca, which controls 25% of oil and trade.
There are also 18,000 seaports and 3,200 airports that offer freight and cargo services. These may become bottlenecks any time a national government imposes a lockdown. Moreover, over 100 container ports have a throughput of over 1 million TEUs and may also become major bottlenecks. Examples in China include Ningbo or Yantian, which have been in lockdown in 2021.
Yantian was in lockdown for four weeks last June. The world’s 10th largest container port, it has a yearly throughput of 15 million TEUs. The closure impacted 400 ships and there were up to 100 ships queuing up at the port. Given an average container ship size of 4,600 TEUs, this meant up to 1.8 million TEUs were affected (25 million TEU slot fleet / 5,446 ships in 2020 = 4,600 TEU average ship size). During lockdown, the port still operated at an average 30% productivity. However, many shippers used alternative ports at Shenzhen (Shekou, Chiwan), Hong Kong and Guangzhou (Nansha).
Another example is the port of Long Beach/ Los Angeles (LA/LB). Although not in lockdown, it has been experiencing heavy congestion, with up to 75 container ships queuing at the port in September this year. The reason was that strong rates on trans-Pacific trade have pushed shipping lines to dedicate more capacity to this trade. They have chartered all the container ships available on the market and repositioned ships from smaller trades to the trans-Pacific trade and to the Asia/ Europe trade.
The resulting high volumes have put considerable strain on the ports, resulting in port and inland congestion, and higher costs for clients. In the case of LA/LB, the bottleneck has nothing to do with either shipping lines or Covid-19 directly. Supply chain planning is becoming very difficult at this time due to bottlenecks, transit-time increases, and decrease in schedule reliability. It is resulting in an increase of inventories for all industries, which is resulting in transportation volume increases.
The port, itself, even in its current maximum productivity mode, cannot cope. In short, it cannot compare with similar Asian ports, which work 24/7/365 and are therefore at 100% of the available time. In LA/LB and all other American ports, the terminal berth production is 66% of that of comparable Asian ports production, the terminal gate production is 52% of similar Asian ports production, and it becomes even worse with regards to the production of American rail, trucking and unloading bays of warehouses, factories, supermarkets and hypermarkets.
This creates a volume unbalance in the supply chain flow, and therefore a bottleneck. So the solution belongs to an American cultural change of their inland working hours and transportation habits. American supply chains should work more to solve these bottlenecks. The US president has just announced his intent to tackle that challenge.
In recent times, there have consistently been 100-120 port bottlenecks around the world due to Covid-19 lockdowns. These are to global supply chains what organ failures or heart attacks are to a human body. They immobilise an estimated 10% of the global fleet (or around 500 ships) and an estimated 20% of the global container fleet of 43 to 70 million containers.
In the opinion of Drewry, the maritime research consultancy, there are more than enough containers in the world. However, due to bottlenecks, they are currently not at the right place and shipping lines are unable to maintain the usual “supply chain dance” of pick-ups, loadings, empty repositioning, unloading, and deliveries.
Mostly due to Covid-19 lockdowns, but not only, bottlenecks tend to arise due to a lack of capacity (ships) and equipment (containers) being at the right place and the right time. They also arise due to the lack of availability of people, trains and trucks inland, especially when a higher capacity is required. Therefore, increasing capacity and equipment may not actually solve the challenges brought about by repeated and random bottlenecks. It follows that the 15-20% fleet capacity increase ordered by shipping lines and due in 2023 may not suffice.
All of this is bad for global trade. Spot container rates have increased by more than 1,000%. Rates over US$20,000 per 40’HQ will inevitably result in business interruptions, near-shoring, bankruptcies and more. This is happening not only in the world’s largest container trades – namely Asia/North America and Asia/Europe – but is also having a knock-on effect on other trades.
Owing to the so-called Bullwhip Effect – defined as the demand distortion that travels upstream in the supply chain due to the variance of orders, which may be larger than that of sales – delays and uncertainties will increase, in turn resulting in inventory increases and cash flow shortages. Such delays and uncertainties have contributed, for example, to the temporary closures of the factories of major carmakers in the US and Japan.
Especially with regard to major bottlenecks, time is of the essence. Two weeks is usually considered the tipping point. In instances less than two weeks, people are patient and wait for the bottleneck to resolve itself, as it generally does. Beyond two weeks, there are more structural consequences, and those involved start casting around for alternative solutions.
When bottlenecks cannot be resolved, other passage routes and gateways are chosen. When one mode of transportation mode is deficient, other modes are preferred. When transportation rates become so high that they unbalance the logic and profitability of the trade itself, then the trade is replaced by another trade. As long as there is a demand, there will be a supply. This is what near-shoring is all about.
Chan: Are there preferred solutions yet emerging?
de Loisy: Near-shoring, also called de-offshoring or re-onshoring is the act of relocating the point of production closer to the point of consumption. This is generally due to various factors, such as rising transportation costs, loss of transportation choices, or other geopolitical factors that make the original trade economically unsustainable. We then will usually see a diversification of suppliers, with new ones being added closer to the points of consumption, and older ones being retained but with smaller orders.
Once the unbalancing factors of the trade come back into balance, then the old suppliers may see their orders increase again, but only if they survived in the meantime. Following the principle of survival of the fittest, those who are best suited to their market – whether new or old suppliers – are more likely to thrive once the various unbalancing factors return to their “normality”. Adaptability, after all, is the very essence of survival.
When a mode of transportation is saturated, alternatives are sought. The cost of transportation increases from sea-freight, to rail, to road, to sea-air, and to air. But as a consequence of lockdowns around the world, all modes of transportation have been impacted. All container ships available in the world, also called cellular ships, are currently chartered, with charter rates reaching up to US$200,000 per day. That is 15 times the usual charter rate – a 1,500% increase. All dry bulk ships have seen their charter rates increase six-fold, from US$5,000 per day to US$30,000 per day for small bulk ships, as they have become an alternative to container ships.
International rail-freight between China and Europe has seen rates more than double since 2020, and reached US$18,000 in September 2021. This is cheaper than the current sea-freight rates and therefore attractive. But this rail trade is limited to just over 1 million TEUs, which represents only 6% of the 24 million TEU volume between Asia and Europe, and only 0.6% of the 226 million TEU volume of global container transportation in 2020. It is therefore reserved for freight forwarders’ favoured clients, typically those who supported them when times were bad.
Another relatively “unheard of” trade is road-freight (or trucking) between China and Europe. At US$34,000 per 40HQ, it remains a cheaper alternative than air-freight, which would cost US$200,000 to US$400,000 for a 40’HQ volume, depending on volume-weight ratio. It goes without saying that a US$5,000 supplementary surcharge will facilitate skipping the traffic jam at any border, and guarantee a two-week transit-time for trucking from China to Europe.
This is also a much better transit-time than the 1.5 months now required for rail transportation (two to three weeks, plus 10 days of congestion at each gateway of Alashankou or Khorgos in Kazakhstan and Malaszewicze in Poland). Both are also better than the expected two months, instead of the usual one month, by sea-freight at this point in time. However, road-freight remains very small by volume, standing at 12,000 trucks or 40’HQ, in 2021. This accounts for only 0.1% of the traffic between Asia and Europe or 0.01% of global container volume.
Air-freight is also at 400% of its usual price, having slowed down from the 1,200% increase of the first half of 2020. It remains an option affordable only to a few industries with very high margins. This is demonstrated by the global share of air transportation compared with other modes of transportation: air-freight represents 35% of the value transported in the world, but only represents 0.25% of global volumes.
Chan: Has any upside yet become apparent?
de Loisy: This situation will naturally resolve itself when the unbalance between supply and demand is gone, and therefore the volume unbalance in the supply chain flows are resolved. Supply will increase in a number of cases.
When Covid-19 ebbs then the global transportation will rebalance itself within six months of the pandemic ending. However, it will take much longer for the global supply chains to come back to a state of balance and readjust their flux, depending on the number of manufacturers that have gone bankrupt in the meantime. An increase in the container fleet will also increase the supply. For 2021 to date, there has been a container fleet increase of more than five million TEUs.
The pace of reopening also matters as this will affect how fast unloaded cargo at ports and airports could be delivered downstream, and cargo for export would be delivered to ports and airports. Geopolitical changes such as globalisation could also dramatically increase supply, due to the optimisation of global infrastructure resources.
Geopolitical changes, such as trade wars, can also decrease demand by reducing trade. After all, the US’s trade wars against China and others, during the Trump administration, reduced merchandise trade volumes by 3% in 2019. If we were to have a new, more lethal Covid-19 strain, we would then see a higher death toll globally. This would dampen the current online spending spree, as people would probably focus on food and survival necessities first. The phasing out of fiscal stimulus measures would have a similar impact. Meanwhile, if international tourism restarts, then people are likely to spend more money on tourism and less on material things that need to be transported.
Some are placing hope in the forthcoming Chinese New Year (CNY) holidays in China. This might help by calming things down and allowing some time to rebalance the container disequilibrium. Another possibility is that near-shoring will create natural feedback loops that reduce trade, and therefore demand, thus rebalancing the market.
As Sun Tzu says: “In the midst of chaos, there is also opportunity”. Transportation cost increases have increased margin opportunities for freight forwarders, while also impacting heavily on their cash-flow. E-commerce is booming and people under 35 years of age are all more or less tech-savvy. It is therefore timely to focus on digital trade and digital applications, all of which are likely to present good investment opportunities.
Similarly, industries currently at the peak of their cycles are ship-owning and warehouses, and 3D printing is also becoming more attractive for some industries. It is a mature industry that is now more than 30 years old, and while it is traditionally considered expensive – and is much more costly than mass manufacturing – it becomes much more interesting and profitable when transportation rates increase dramatically. 4D printing (shape-morphing nanotechnology) is also a new opportunity to look at for both products and packaging.
Besides an increase in transportation costs, there has been a decrease in schedule reliability to 33% globally and to less than 10% with regards to the Trans-Pacific trade. This results in inventory increase and supply chain breakdowns. Indeed, we are starting to see car manufacturing plants closing down in Japan and the US due to missing parts. Inventory increase results in immobilisation of capital, which in turn results in cash flow shortages in the whole supply chain, impacting manufacturers, traders, freight forwarders, wholesalers, and retailers.
There are therefore huge opportunities for finance and money lending companies to step in and offer their services. Shipping lines themselves could potentially start giving payment terms to their corporate accounts, whereas they traditionally only accept pre-payment. An industry that was barely surviving for 20 years is expected to see profits of US$150 billion in 2021. It’s clear that along with pharmaceutical companies, medical tool companies, e-commerce companies, social media and other digital applications, shipping lines are benefitting from the pandemic. They are now even offering contracts over several years to their large corporate accounts, thereby hedging future risks.
On the other hand, sustainability is a key element of the post-Covid recovery. Regarding this, shipping lines are striving to follow the Energy Efficiency Index for Existing Vessels (EEXI) 2023 emission reduction regulations issued by the International Maritime Organization (IMO). One way to achieve this is to slow ships, so as to produce fewer emissions. But slowing down ships actually reduces yearly capacity, which reduces supply and therefore increases rates.
Alternatively, costly technology can be incorporated into ships, either via ship-scrubbers or by using new-built ships that use fuels such as hydrogen, liquefied natural gas (LNG), synthetic natural gas (SNG), ammonia or methanol, which emit less than the traditional bunker. After all, sea transportation does represent 2% of global carbon emissions, which should be reduced in that industry accordingly.
One of the keys of the art of supply chain management is planning. Reduced schedule reliability and increased transit times are damaging planning capabilities. The global supply chain and transportation industries currently manage these irregularities manually, and a unique opportunity lies herein. I call it the “Bottleneck Watch”, which could be a website that publishes, on a daily basis, the status of countries, ports, and airports in terms of lockdowns, as well as the daily productivity of every port and airport and the availability status of containers, trucks and inland railways.
Similar to the John Hopkins University Covid-19 dashboard, it could be used as a gateway for branding purposes by any organisation such as the World Trade Organization (WTO), the United Nations (UN), the IMO and the International Air Transport Association (IATA), or by Hong Kong or by mainland China under the framework of the Belt and Road Initiative (BRI).
Chan: Anything else that’s worth remaining wary of from your point of view?
de Loisy: Geopolitics can and does have an impact on humanity and societies. Iran and Venezuela represent one sixth of global oil production and transportation. As a result, they have a “shadow fleet” of hundreds of tankers, dry bulk ships and container ships. With geopolitical changes, these countries could easily stop being under sanctions and embargoes and be returned to the fold of “countries possible to trade with”. This will have consequences when it happens and should be watched carefully.
It’s worth remembering that 90% of road and ship transportation is based on oil. A third of refineries’ production is dedicated to the aviation industry or air transportation, which is 100% dependent on oil. This is why the oil futures WTI went down to -$US37.63 a barrel on 20 April 2020 at the New York Mercantile Exchange. Indeed, the Covid-19 lockdowns dramatically decreased oil consumption for both road and air transportation, which quickly saturated the world’s storage capacity, as the output of oil rigs and wells cannot be slowed down or stopped. Moreover, one ninth of refineries’ production is now dedicated to producing the PPE and plastic medical devices so indispensable to fighting the pandemic.
The successive lockdowns due to Covid-19 resulted in humanity becoming more digital than ever. One consequence is a global shortage in semi-conductors. Another is an increase in hacking incidents. This should be watched carefully.
Populations in lockdowns get tired. Overworked medical personnel get tired. Ship crews onboard for more than a year and a half (instead of the traditional 8-10 months) get tired. Overworked ports crews and truck drivers get tired. This results in an increase in accidents due to fatigue, which is to be carefully watched and should be factored in by insurance companies.
Additionally, we are currently facing a number of potential threats at global levels that may also unbalance humanity in ways similar to increased transportation costs. According to the Food and Agriculture Organization of the United Nations (UNFAO), food costs have increased by 30% since the start of 2020. The money supply (M2) of the US dollar, on which all world currencies are based, has also increased by 20% in the past few months. At the same time, rich countries are experiencing massive debt increases due to Covid-19. These two monetary trends, in addition to increasing transportation costs, are leading to substantial global inflationary pressures.
This means that both food and consumer goods are becoming more expensive, while the actual incomes and savings of people decrease. When food and consumer goods cost more, the poorest part of the population cannot afford it and cannot feed itself. This inevitably results in social unrest, if not outright war of some kind.
Last but not least, there are other trends not related to Covid-19 that should be watched in the long term. Climate change is one of them. And we may consider that we are only at the start of a succession of crises, of which Covid-19 is but one. Following waves may include a global recession, increasing extreme natural incidents and collapsing biodiversity due to climate change.
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