Container Crunch

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As the world emerges from the Covid crisis and businesses large and small ramp up their operations, bottlenecks are starting to appear as demand for imported raw materials and goods far outstrips availability and supply. The construction sector is a case in point where the supply chain has all but broken down in some instances and prices for certain materials are increasing week by week, thus putting pressure on business’ financial planning. Similar supply issues are impacting large retail outlets like DIY depots, garden centres and business in general, manifesting itself in rising prices and fuelling global inflation, which is exercising the minds of central bankers alike.

The breakdown in the supply chain is in no small part down to the issues that currently prevail within the global container and containership market. When the global lockdown occurred in Spring 2020, container vessels had to berth virtually where the next delivery or pick up port was on their itinerary at that point in time. Container boxes were unloaded and stored at ports around the globe whilst vessels were cold stacked at different deep-water ports or laid up offshore.

Re-starting what are very complex supply routes and logistics for container shipments from the position of vessels and the containers they carry (in the tens of thousands in the mega ship class) being scattered in various ports around the world, took considerable time and effort. Freight forwarders and the container liner companies first had to pick up where they left off let alone start to deal with fresh capacity demands and this resulted in lengthy delays being experienced by importers of containerised cargo (which encompasses any consumer item one cares to imagine).

The grounding of the megaship Ever Given in the Suez Canal in March caused further disruptions to the supply chain as vessels had to be re-routed around Africa during the week-long blockage at Suez adding weeks to journeys. The week-long shutdown of the Yantian International Terminal in South China (the world’s third largest gateway) due to a resurgence of Covid cases in June has caused yet more disruption for the containership industry and liner schedules were even more acutely impacted than they were following the week-long blockage of the Suez Canal in March. Shipment delays surged once more and the impact is now expected to carry through to late 2021 or even through the start of 2022.

The current logjams in the system and unbalanced trades will take months to resolve, and the end result has been a huge uplift (in some instances by 100%) in container box freight rates as well as daily charter rates charged by the major international liner companies, just as the liner peak season is settling in, spelling USD billions in profits for liner operators this year.

Several forwarders, eager to secure short-term capacity for their shipments, stepped into the chartering market and hired their own ships for short periods (two months or less). Rates for such brief hires have been reported in the 6-digit figures ($100,000-plus per day) for some panamax vessels and even for smaller feeder ships. Together with skyrocketing liner freight rates, this has led to a new rally for charter rates in June.

At the same time (second half of June), liner companies raised the ante in the S&P markets. Leading ocean carriers opted to bid for vintage second-hand tonnage at substantially higher than early-June prices, rather than committing to expensive 3 to 5 year-long charter hires. Soaring steel plate prices have also led to significant increases in newbuilding values, which in turn helped push prices for modern second-hand tonnage to new heights.

All of this will continue to exert inflationary pressure on consumer and industrial indices for some time until the container box supply and demand equation comes back in to equilibrium, but whether this is transitory – as some leading economists believe – remains to be seen.

by Russell Parker : Chairman of Klapton’s Maritime Sureties Committee

Photo by Corey Seeman / CC BY-NC-SA 2.0