Background
Declaration of Covid-19 as a Pandemic by the WHO
After the first cases of Covid 19 reported in Wuhan, China, at the end of December 2019, on March 11, 2020, the World Health Organization (WHO) declared Covid-19 as a pandemic, given that infections were already occurring rapidly worldwide.
The city of Wuhan was closed and isolated. Travel was restricted, many countries reduced their economic activity, even closing those industrial sectors that were not "essential" and established remote work from home, in order to reduce the mobility of people and prevent the spread of the Covid-19 virus; especially the high-risk population (older adults over 60 and those with comorbidities such as diabetes and hypertension), were sent home and were no longer allowed access to plants, offices and facilities.
The transportation industry in its various modes (maritime, air and land) also suffered from this lack of personnel (crews, pilots, drivers, machinists, etc).
All of the above caused changes in consumption patterns and the disruption and breakage of supply chains in several industrial sectors that were already fully developed, especially those originating in China and Southeast Asian countries.
Change in consumption patterns
The sudden shift to teleworking or home office led to changes in people's consumption patterns, now forcibly confined to their homes. Online purchases of all kinds of items and food increased exponentially, benefiting companies like Amazon, DHL, and food delivery companies like Uber Eats and others.
Restaurants and convenience stores had to innovate and flex their home delivery in order to survive.
Demand for hobbies such as electronic and video games also unexpectedly increased for home entertainment, and electronic component manufacturers dedicated their production to these "gaming chips" due to the lack of regular demand for the automotive industry's "chips".
Disruption and breakage of supply chains in various industrial sectors
The closure of plants, especially in the automotive industry during the months of March and April 2020, starting with auto parts manufacturing plants in China, South Korea and other Asian countries, and continuing with automotive assemblers, stopped the flow of materials in the supply chain. Given the uncertainty of how prolonged this closure of activities would be, inventories in the supply chain were reduced to minimum levels due to the lack of replacement supplies.
Something similar occurred with other industries such as appliances, food service, aeronautics, etc.
This drop in demand quickly reached the first links in the supply chain, producers of raw materials such as steel and aluminum, electronics (chips), glass, plastic, etc., causing plant shutdowns and a lack of operational personnel considered as a high-risk population.
Steel, aluminum, auto parts, appliances, etc. manufacturing plants in China and Asia also reduced their activity and therefore the demand for maritime transport and containers also decreased. The flow and repositioning of empty containers was also interrupted.
Start of economic recovery.
As more was known about the ways of transmission of the Covid-19 virus, preventive measures and social distancing were adopted, which allowed the gradual and partial opening of the industry during the second half of 2020. Demand began to return and companies found themselves with broken supply chains that had to be rebuilt, which would take time to replace both personnel and lost production.
Because of the above and the trade war between the US and China started by President Trump, the industry began to reconsider the convenience of having a low-cost but very distant supplier (Chinese) or a closer one (Mexico, Canada, etc.) but at a higher cost.
Development of vaccines and vaccination campaigns in the US and other countries.
The arrival of President Biden to power in January 2021 and his massive vaccination campaign in the US and the sharing of vaccines with Mexico and Canada, created the conditions of confidence that people were waiting for, thus accelerating the economic recovery in North America. Mexico benefits from this accelerated recovery of the US via the USMCA and synchronizes its industrial opening with that of its main trading partner.
Suddenly, the demand for raw materials (for example, steel) and intermediate goods (for example, chips and auto parts) increased, taking the (mill) producers by surprise, who found themselves in the need to restrict the volumes of orders they accepted from customers, due to the lack of capacity to attend to the avalanche of orders and above all to protect themselves from "panic buying", which would only artificially increase demand and inventories unnecessarily.
The automotive industry saw its production limited due to the lack of "chips" that manufacturers had allocated to the electronics demanded by the home office.
How did the current situation in maritime transport originate?
Already during the first quarter of 2021, Lloyds reported that “The difficulties experienced for several months in the maritime freight logistics chain will continue well into the second half of 2020, according to cargo consolidators and other sources, including high prices, low reliability in ships, capacity issues and acute lack of equipment”1
Indeed, demand returned, but issues such as the lack of containers, congestion in ports and the lack of labor in them resulting from the sanitary measures implemented in the face of the pandemic, created a vicious circle that will be resolved as quickly as vaccines reach port workers.
The reliability in the itineraries and transit times of the ships was at a minimum given the congestions, very high rates and the lack of capacity and equipment positioning problems continued, not only in the ports of the Far East but also in America, Europe, the Middle East and Australia, confirming that the situation was occurring worldwide.
Taking advantage of the situation, several shipping companies began to announce aggressive increases in rates even before the high season.
According to the publication Shipping & Freight Cost Increases, Freight Capacity, and Shipping Container Shortage (2021)2 of June 24, 2021, freight rates continue to be very high, due to delays and closures caused by the pandemic, incessant demand for transport from Asia to the US and a severe lack of capacity.
It also mentions that the blockade of the Suez Canal from March 23 to 29, 2021 by the M/V Ever Given and the outbreak of Covid-19 in the Chinese port of Yantian that occurred at the end of May, have exacerbated the situation.
The port of Yantian (which is part of the Chinese port of Shenzhen, the 4th largest container port in the world) handles 25% of the cargo originating in China destined for the US and has been operating at limited capacity in recent weeks due to the mentioned pandemic outbreak. As a result, neighboring ports have also become congested and have been unable to help resolve the situation.
This drop in activity at the port of Yantian could impact maritime transport even more than the blockade of the Suez Canal, given the congestions that could consequently result in European ports such as Hamburg and Rotterdam, causing more delays for importers and exporters.
Air freight rates have also increased as importers and exporters seek alternatives to sea transport.
6 reasons why maritime freight costs will continue to rise
The article published on June 7, 2021 by Think.ing3 states that freight costs have significantly increased and that intense competition for maritime cargo capacity is "the new normal".
Given that the increase in new cargo capacity will slowly come into operation, it is expected that maritime freight rates will continue to reach new record levels this year and will remain above their pre-pandemic levels in the long term.
The mentioned article cites the following reasons:
No relief in the short term
The increase in maritime freight rates began in the fall of 2020, but in the first months of 2021 there has been a new increase of up to three times more in all types of cargo (dry bulk and containers) along the main maritime routes.
Container transport rates skyrocket as consumer goods demand increases due to quarantine
Evolution of the average monthly maritime freight rates from Qingdao, China to Manzanillo, Mexico, for 40-foot containers.
Continuity in global imbalances further increases maritime freight rates
Global imbalances in production and demand resulted from countries closing and opening unsynchronized and at different times, as well as because shipping lines cut capacity on main routes and a lack of properly positioned empty containers. Competition for maritime cargo has intensified as economies increase their opening and inventories are rebuilt along several links in the supply chains.
Year-on-year growth of freight rate indices, 2018 - May 2021
There are few alternatives to maritime transport
Only for high-value products would there be alternative modes of transport, such as sending electronic items by air or by railroad, but capacity is currently limited and rates have also increased. Shipments of low-value products have recorded increases ranging from 5% to more than 20%. Consumers will soon start to feel this impact via higher prices or changes in product availability.
The unbalanced recovery of 2021
Some countries are already exporting above their pre-pandemic levels, while others like the US continue to lag behind the total economic recovery. The trade in goods will increase not only in the countries that are large exporters, but also in their trading partners as they recover. As competition for maritime transport capacity is expected to continue, the unbalanced recovery will continue to exacerbate some of the problems of world trade, including the repositioning of empty containers. This will put more pressure on freight rates in the short term.
Congestion and port closures cause delays
As the relationship between canceled calls and delays suggests, port congestion is part of the problem. There are some signs that average performance will start to improve, as the proportion of ships arriving on time at their destination stopped falling in April and average delays were reduced. But overall performance remains at the lowest levels of the last 10 years.
Percentage of vessels arriving on time.
