At Least 2 Extra Years of Excessive Freight Charges Says Drewry

Maritime analysis agency Drewry is predicting the identical factor we’ve been saying right here in Common Cargo’s weblog for some time: excessive freight charges aren’t going away with the pandemic.

Continued Excessive Freight Charges

Mike Wackett studies within the Loadstar:

Shippers should brace themselves for a minimum of two extra years of elevated freight charges and tight provide, in accordance with Drewry.

The maritime marketing consultant predicts common charges – a mix of spot, contract, backhaul and regional commerce charges – will enhance about 23% this yr; however for some headhaul routes, it stated, the hike can be “considerably increased”.

Excessive charges don’t essentially imply remaining on the peak, record-breaking ranges we’ve been seeing. Drewry does count on charges to return down some subsequent yr from the highs they’ve reached, however shippers will nonetheless be paying considerably greater than they used to earlier than the pandemic, in accordance with the Loadstar article, the place Wackett quotes Drewry’s senior supervisor for container analysis Simon Heaney:

“For 2022, we do see some erosion in freight charges because the inflationary influence of provide chain inefficiencies hopefully disappears, however we predict carriers are nonetheless going to have the ability to preserve freight charges excessive, because of the in-depth capability administration they fine-tuned in the course of the pandemic, in addition to the pricing self-discipline they’ve proven.

“For subsequent yr, whereas charges will come down, they may nonetheless be considerably increased [than pre-pandemic] and we count on common charges will come down from this yr’s lofty highs by roughly 9%,” stated Mr Heaney.

Shrinking Competitors Not Pandemic to Blame for Excessive Freight Charges

We’ve centered on that in-depth capability administration Heaney refers to a terrific deal in Common Cargo’s weblog. The way in which charges shot up in the course of the pandemic left many considering the pandemic is the reason for the surged charges. Final month, we posted a weblog to make it crystal clear COVID-19 is just not the reason for these excessive freight charges. For some time, we’ve been making an attempt to let shippers know that when the pandemic ends, freight charges aren’t prone to all of a sudden “return to regular.” Common Cargo CEO Devin Burke gave seven components that had been constructing towards increased freight charges earlier than the coronavirus outbreak started, leading to a tipping level for freight charges to skyrocket when the pandemic. Not the least of those components is capability administration, which Burke referred to in his checklist with clean sailings.

Clean sailings are cancelled sailings. In the course of the early months of the pandemic, carriers cancelled lots of of sailings. At that time, we hadn’t but seen the surge in on-line purchasing and delivery demand that will be brought on by lockdowns stopping spending on going out and journey and authorities stimuli placing more cash in folks’s pockets. At first, demand dipped. Drops in demand naturally put downward stress on pricing in any business. Nonetheless, for worldwide delivery, freight charges didn’t drop, they elevated. That’s as a result of by cancelling so many sailings, carriers had been capable of drop capability (provide) even under the market demand.

Carriers had been in a position to do that due to how a lot competitors has shrunk within the worldwide delivery business over the past a number of years, not solely via mergers, buyouts, and chapter but additionally via service alliances. With all the key carriers grouped into simply three service alliances dominating all of ocean freight delivery, carriers are capable of management capability. I’ve been warning for years that this might ultimately lead to increased freight charges for shippers and argued regulators ought to rethink their stance on permitting service alliances earlier than we even acquired to the purpose of shrinking to solely three.

A New (However Outdated) Hope

Whereas the long run sounds darkish for shippers relating to freight charges, there’s a little bit of hope, like secret plans hidden inside a small droid, that Heaney and Wackett’s article presents:

Nonetheless, he stated: “One small crumb of consolation for shippers is that ocean carriers and non-operating homeowners are, doubtlessly, sowing the seeds to shorten the bull run they’re having fun with proper now by over-investing in new tonnage.”

Within the first three months of the yr, carriers and non-operating homeowners signed contracts for some 170 newbuilds, at a capability of about 1.9m teu, the vast majority of which shall be delivered in 2023. And with additional orders within the pipeline, the supply-demand scales might tip again the opposite manner in two years’ time, particularly if there’s a additional world demand shock within the interim.

Maybe the most important issue that led to all of the shrinking service competitors within the worldwide delivery business was overcapacity. As carriers raced to construct greater ships, have bigger capability fleets, and management extra market share within the business, capability properly out-paced demand. This (together with carriers undercutting one another’s charges) put extreme downward stress on freights charges. Through the years, I’ve written many articles about file low freight charges, which had been unhealthily low for carriers and the business as a complete, which might ultimately flip excellent news into unhealthy information for shippers. Carriers misplaced billions, and competitors shrank.

Carriers spent extra years fighting overcapacity than exhibiting the self-discipline to regulate it. The monetary reward of capability management has been so nice, with earnings hovering within the billions, it appears uncertain carriers would let capability get uncontrolled once more.

Why the New Shipbuilding

Heaney, in Wackett’s Loadstar article, is quoted as sounding confused about why carriers would order new ships proper now:

“I don’t perceive why homeowners are so determined to amass new ships which are going to take a minimum of two years to be delivered,” stated Mr Heaney. “They don’t seem to be going to reach in time to money in on this growth and all they’re actually doing is to doubtlessly enhance the danger of overcapacity returning to the market after a number of good years of repairing the scenario.”

It’s apparent, as Heaney factors out, that ships to be delivered in two years will miss the demand growth taking place now. There are a number of different main causes I can consider for the ship order enhance taking place now. That would be the subject of Thursday’s weblog.