Edward Lorenz's famous question to the current crisis; "Can a butterfly's wing beat in China start a hurricane in the US or Europe?" is apt to relate the effect of a nanoscopic virus that has upset the global production capacity and supply chain. We cannot evaluate all these variables separately in the post-epidemic period, the increasing freight prices, the export-import imbalance, the container crisis, and the effects of all these on global trade. Each of them has a strong influence on each other.impir
We live in a world with a highly complex supply chain; hence, all countries are affected when the wheels of International trade slow down. The global trade and logistics are in a period of recovery today. In the recent past, there were relentless increase in ocean freight and airfreight. Some periods aptly named 'hot-season'. However, as of the end of 2020 and the beginning of 2021, the price increase, especially in maritime transportation, and the shortage of equipment were unprecedented.
Commodity markets respond to higher freight rates. As costs increases, commodity prices rise. Decisions of some companies and countries were simply to abandon imports. The supply-demand imbalance have led to increase of product prices in all domestic markets.
Freight increases in maritime transport were primarily due to the lack of one-way demand and the resulting container shortage, while airfreight was on the rise also due to shifting demands from maritime transport to air transport. As a result, the increase in transportation costs is reflected in product prices. The resulting inflation in many countries due to the price increase in imported goods had a serious effect on their economy. In order to protect against the inflationary effect, some countries have also adopted to direct or indirect restrictive trade policies on imports, causing shrinkage in global trade.
Container shipping prices are expected to be at high levels thru 2021. Hence, the share of freight in unit costs will negatively affect profitability and product demand for importers.
The increase in freight prices also affects domestic products and also makes domestic prices unpredictable. After all, many domestic manufactured products have contribution of imported raw materials or semi-finished products. An input in manufacturing, if imported, even in the smallest part of the production process, will disrupt the entire manufacturing process and increase the cost. Be its imported automobile parts for manufacture of car in Germany or import of label to be pasted on a can of food manufactured in Singapore, there is a severe impediment to globalization.
The pandemic has affected the world trade and continues despite all the measures taken. A direct impact on world trade with severe breaks in maritime traffic and supply chain. Adverse effects include equipment crisis stemming from export-import imbalance, control and quarantine measures prolonging the loading and unloading process at ports, health problems experienced by ship crew and port officials, difficulties in working with limited personnel, etc.
The rise in Shipping Cost
One of the biggest reasons for the increase in freight prices was the imbalance in imports and exports globally. In 2020, the disruption in the supply chain in Far East-Europe line & Far East-USA line, along with the vessels inability to balance the load in two-way traffic, caused a significant increase in freight costs.
In order to minimize the risk of contamination within the scope of pandemic measures of transport companies, effects in increases of freight prices in expenses for special protective equipment, clothes, disinfection, and spraying materials. In addition, increasing waiting times at customs points cause an increase in container demurrage costs at ports and warehouse cost at airports.
Container shortages and port traffic due to pandemic-related operational disruptions have extended ships' turnaround periods, further increasing freight rates. In 2020, the shipping industry was also experiencing difficulties due to a severe contraction in demand. Countries closing their borders due to the pandemic and the decline in consumption hit global trade and consequently the shipping industry. In the last quarter of 2020, when the normalization process started in Europe and the USA and demand increased again, factories in the Far East increased their production. However, the required containers were waiting idly in European and American ports.
The first effect of rising prices in shipping were containers that had to return empty from Asia and Europe. Despite normalization of production in the Far East, the inability to find sufficient containers for export caused container shipping costs to increase rapidly. Between November 2020 and May 2021, the cost of shipping a 40' container from Asia to Europe has more than tripled, from an average of $2,000-2,500 to $7,500-8,000. According to the data of Freightos Baltic, which prepares price indexes based on 12 major sea routes, 40' container transportation fees on the North America - Asia line increased from an average of $2000 to $4,000. Source: Freightos Baltic Index; refinitiv Datastream - The Economist
Another problem is that many shipowners in recent years have invested little in their fleet as they have not been able to increase their capital costs. No one predicted the increase in demand for shipping due to the pandemic. In short, there was no expectation or plan to increase the number of ships.
Container Crisis
The increase in freight prices caused by the "empty container crisis" in maritime transport will be reflected in the unit costs of products and, therefore, on the label prices. Many countries are already reeling on this effect. On the other hand, the main problem for many companies in the period from April to May 2021 is container supply. Despite the price increase, the break in the supply chain causes severe issues due to companies that cannot carry their loads. Shipowners prepare "VIP customer lists" that give priority to companies with high business volume. Companies other than this are trying to carry their loads with offers above-market prices.
In 2020, factories worldwide were closing down, while on the other side, China entered the normalization process in the summer of 2020 and started production again. As the demand for goods from Europe and the United States increased in 2020, China regained its old export capacity. Still, the main problem was lack of import traffic. The containers that went to Europe and the USA before the pandemic had not returned. The empty container supply problem has not only increased freight rates but also production costs.
In 2020, the increase in ship accidents caused by unusual weather conditions increased the container shortage. According to the statistics of the World Maritime Council, between 2008 and 2019, there was an average of 1,382 container losses per year due to boat accidents. Three thousand containers were lost in 2020 alone. Due to a marine accident in Japan in December 2020, thousands of containers were transferred to other ships, resulting in a delay of weeks for thousands of containers. In addition to minor cases like this, the accident in the Suez canal has maximized the container crisis.
Suez Canal, Ever Given Accident.
In March 2021, the 400-meter-long container ship Ever Given landed on the Suez Canal for a week with its 220-ton load. The Suez Canal, one of the busiest trade routes globally, connecting Asian and European ports, was closed to transportation in both directions. Ever Given is a very large ship with a capacity of 23,000 containers, but the severe repercussion was that more than 400 ships had to wait at both entrances of the canal for more than a week as the channel was closed. This accident disrupted the supply chain and its effect will echo throughout April-June 2021. Due to this accident, 400 ships carrying hundreds of thousands of containers will arrive at their destination ports with delay, so they intertwine like dominoes. Apart from the two weeks delay due to this accident, waiting times will be longer in ports where many ships will arrive at the same time. Return schedules will be delayed, and some canceled altogether. As the causes of the container supply bottleneck or delays in delivering goods are listed, the Ever Given disaster in the Suez Canal will be discussed for months.
Global Trade vis-à-vis Container Freight
Despite the short-term congestion, the problem is not just an insufficient number of containers. Containers can reach other ports from the ports where they are piled, empty transport costs and high pricing increase these costs, but the balance can be achieved over time. The main problem is that the export-import balance to be established. For example, a container loaded with electronics from China goes to a European port, unloads, and returns to China by loading European machinery equipment. This example means that the supply chain works, and the balance of demand is achieved through two-way trade, with containers moving between ports. As of the spring of 2021, this balance has still not been established, and production has stopped or continues in a limited manner in most countries. Therefore, the vessels carrying imported products coming to these countries cannot find the necessary export cargo for return, and the containers remain empty.
Increase in Air Transport
Problems in maritime transport (export-import imbalance, container crisis, and the Suez canal incident) have increased the demand for air cargo transportation. Compared to maritime transport, air transport costs are very high, but many companies have to choose this route because they cannot book by sea.
Air Cargo remains a very strong business for airlines in 2021, the strong economy and restocking driving an increase in the share of world trade, with 13.1% growth in CTKs vs. the WTO's forecast growth for world trade of 8%. In February, industry-wide cargo ton-kilometer (CTK) increased by 9% compared to February 2019.
In April, air cargo transportation prices on the Asia-USA line increased up to 25% in some destinations. Rates in air transport have returned to pre-pandemic levels. Freightos data from the end of April allows us to see the increase in global air cargo volumes statistically.
The latest statistics from Baltic Exchange Air Freight Index (BAI) show that prices from Hong Kong to North America increased by 20.5% a week earlier to $ 7.63 per kg in the first part of April.
The increase in demand in air transport causes an increase in the supply-demand balance. However, this is not the only factor in a price increase. Increasing fuel costs also put additional pressure on prices. On the other hand, additional measures and disinfection practices taken at airports and warehouses due to the pandemic are all additional costs. Due to the pandemic, the export-import of materials such as vaccines, drugs, test kits, hygiene products is made at a high level, and the transportation of such materials is given priority. This is another factor affecting prices in airline transportation. Finally, the common use of passenger aircraft makes the cargo load entirely dependent on transport aircraft.
References
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The Economist (2021) Container-shipping costs have surged in recent months (https://www.economist.com/graphic-detail/2021/02/11/container-shipping-costs-have-surged-in-recent-months)
Mike S. (2021), How Will Ocean and Air Transportation Market Impact Your Supply Chain (https://www.mhlnews.com/transportation-distribution/article/21154686/how-will-ocean-and-air-transportation-market-impact-your-supply-chain)
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