The State of Shipping

The Pandemic Ridden Supply Chain

The timespan between February 2020 and late summer 2021 has proven a challenging period for many businesses and people alike. Most of these difficulties stem from the domino-effect chaos wrought by Covid-19. This situation spiraled out of control in a twofold fashion.

First, the virus devastated both human physical and mental well-being. The pandemic compelled health care professionals to work overtime in life-threatening environments and caused lockdowns that forced hundreds of millions into isolation. Second, the virus continues to severely affected and continues to affect the majority of commercial activity around the world.

From a commerce standpoint, the spread of the virus, coupled with lockdowns, negatively hit many businesses in the form of mass layoffs and a ransacked supply chain. While several governments worldwide have pursued stimulus packages to rescue furloughed workers, alleviating pressure on global supply chains is a tough challenge. As a result, importers, supply-chain managers, freight forwarders, and shipping lines have faced significant problems. Thus, for those who make their living in the field of international business, the logistical challenges of 2021 have slowed, impeded, or downright ended many business transactions.

Supply Chain Management in The Age of COVID-19

The Shipping Container Crisis: Island Leaf's Experiences

The freight forwarders with whom we have collaborated have offered keen insights from the trenches throughout the year. We have gleaned crucial information about the issues driving the container crisis through solid, friendly relationships with shipping line representatives and freight forwarders. We are working to navigate these strange times by taking the advice of our trusted partners and applying it in real-time.

Because we serve several customers based in many countries, Island Leaf Commodities has the first-hand experience with the ongoing container crisis. Indeed, we have seen the cost of shipping a 40' high-cube container from the Main Australian ports to ports in Asia, Latin America, and North American increase by over 75% in a period of just a few months. Price hikes are particularly severe in Sydney Port, where shipping lines add a "congestion fee" charge for every container leaving the port. This accrues to between $500-$700 per 40' high-cube container.

Increases in basic freight costs and additional congestion fees are not just confined to Oceania and Southeast Asia. China, the country that produces the most consumer goods, has also experienced a massive lack of container supply. Current prices reflect this minuscule container supply, as importers need materials made by Chinese-based producers. After talking to importers and people in the freight industry based in the Latin American (LATAM) and Caribbean regions, we learned that the average price for shipping and processing one 40' high-cube container totaled around USD 9,000. This price includes origin-handling charges, high sulfur-emissions charges, port-congestion charges, and destination-handling charges.

The container crisis has further exacerbated and slowed moving European-origin material. As a result, we've had orders get rolled back by up to 6 weeks due to a lack of empty containers available at storage yards. For example, after placing orders from major European ports to major Indian ports since early February, freight forwarders informed us that shipping lines would not have containers available for packing until at least six weeks out. Furthermore, when the delta strain proliferated across South East Asia in April, container processing at major Indian ports like Nhava Sheva and Mundra slowed to a trickle. Although the tide is beginning to turn against delta, the significant backlog of containers continues to add friction to processing efficiency. For example, we recently learned that one of our orders must endure a lengthy 2-week transshipment at Nhava Sheva Port.

Correspondence with a European-based freight forwarder further illustrated the severity of the container shortage. The agent stated that his company had to push back all orders originating from Italy during the first quarter of 2021. This setback was particularly critical for him, as Italy is one of his company's top three origins for container orders.

Port congestion, backlogged containers, and departure/arrival delays did not end after the second quarter of 2021; they persisted or even became worse. To illustrate this point, space on container ships originating from Australia became very scarce in the summer months. Island Leaf specifically felt this bite, as we had several orders rolled by a few weeks before they departed for their destination at the beginning of June.

Next, our experiences dealing with this shipping crisis are not just limited to jumping through Covid-hoops associated with booking containers. Owing to our mission to connect the right products to the right people, Island Leaf has a diverse product portfolio, lined with commodities such as iron ore, limestone, soybeans, sugar, barley, and corn. These traditional commodities usually aren't loaded into containers—specialized ships called bulk vessels that can haul anywhere between 25,000-400,000 tons of (usually) only one commodity directly take them from origin to destination. Moreover, these ships typically travel from their port of loading to their destination, making no transit stops along the way. Bulk vessels are usually loaded and discharged (relatively) quickly, meaning their call times at port are, on average, shorter than those of traditional container ships. Intuition may lead many to believe that the bulk-vessel transporters have dodged the Covid-19 bullet, but unfortunately, this is not the case.

Congestion at ports, and the threat of congestion at ports, have increased the risk of being the nominal shipper on bills of lading. Because of the reality that their vessel may enter a congested port, shippers face the potential risk of incurring demurrage and detention (DnD) charges when loading or discharging vessels at their respective origin and destination. Thus, end sellers are unwilling to book bulk vessels, aiming to transfer the risk to buyers and sell on FOB or FAS incoterm. This phenomenon is due, once again, to staffing scarcities at ports and vessel congestion.

Finally, we'd like to share our experiences of early 2021's black-swan event that poured salt on the shipping industry's open wound: the blocking of the Suez Canal by the Evergiven. As most people involved in international business and logistics know, the Evergiven became wedged between two banks of the Suez Canal at one of its narrowest points. It took one week for crews to pry the Evergiven from the sides of the canal, meaning no traffic could transit the Suez at that time. As a result, almost 100 ships waited in line to transit the canal; countless more were rerouted.

Unfortunately, Island Leaf had a few containers on a ship queued at the southern entry of the Suez Canal. After the authorities cleared the snafu and endured a long backlog at a transshipment port in the Mediterranean, the containers arrived at their destination—8 weeks after their original ETA.

The Bigger Picture

From what we have seen, most delayed departures and rolled-back ETAs stem from Covid-19. The resulting slowdown resembles a nasty domino effect, which affects the entire supply chain.

While lockdowns have slowed port container processing rates, they have also affected how quickly ships can enter ports. So, inbound ships sometimes have had to wait at port for many days. Back in January, for example, over 30 container ships sat fully loaded just outside Long Beach port as container unloading, processing, and reloading moved at a snail pace.

This logistical nightmare extends far beyond Long Beach Port and the United States, for that matter. A major logistics company recently published a report explaining that every port in the world is experiencing slower than regular processing times, congestion, and a lack of containers. These reports summarize the experiences we've dealt with over the past eight months.

To the average businessperson who relies on trans-ocean commerce, the current situation is quite bleak. And, adding insult to injury, everyday consumers and small businesses that don't necessarily deal with transoceanic shipping directly are also starting to feel the bite of this global shipping crisis.

The BBC published an article earlier this year that highlighted how the global container shortage affected businesses around the world. In one example, a small business owner in the UK, who imported her OEM product from a Chinese manufacturer, faced shipping bills of £10,000 ($13,870) per 40-foot-high cube, an excessive increase from the £1600 ($2,220) average price. Unfortunately, the business owner could not transfer this 625% price increase to her consumers, and as a result, she had to sell her products at a loss.

The shipping crisis has severely impeded the global shipment of food as well. Rice and sugar exporters in Thailand, India, and soybean exporters from the United States have severely constrained outflows. The lack of containers and bulk vessels has severely disrupted food supply chains. Now, most food exporters are shipping out only between 20%-30% of their average capacity. It is easy to imagine food shortages leading to more devastating famines if the situation deteriorates.

Effects and End?

While the Island Leaf staff will not feign psychic abilities and proclaim that "the shipping crisis will be over by the end of 4Q2021", we can offer a bit of an outlook.

First, hearkening back to the bulk vessel issue, we see that end sellers of certain commodities are starting to offer their products on CFR/CIF/CNF incoterms. However, these end sellers have decades of experience under their belts, and as a result, benefit from the relationships with shipping lines and forwarders that they've built. But, they seem keen to accept the apparent risks associated with being nominated shipper, so we take this as a positive sign.

More unfortunate, however, is the fact that vaccination efforts in the United States have lost quite a bit of momentum over the past two months. While the average number of vaccinations per day reached up to 2 million as soon as President Joe Biden enacted the War Time Powers Act to speed up distribution, the number of Americans willing to get their shots sharply declined by early June. As a result, there has been a resurgence of Covid-19 cases among the unvaccinated in the United States, not to mention the rise of the delta variant. This resurgence certainly affects workers at all points on the supply chain.

Additionally, a significant imbalance of shipping containers plagues several ports worldwide, meaning it will take months, possibly even a year or more, for the balance-of-containers to return to the pre-pandemic norm.

2022 and Beyond

It is pervasive for people to predict that there will be no reduction of limited booking space, astronomical freight costs, and congested ports until the first quarter of 2022, when alleviation will finally begin. And, most of us who make international business their career, and are optimistic, would like to agree with them. However, the advent of black swan events, especially during the Covid pandemic, must be factored into all predictions. Not only does this include increased rates of spillage due to fully loaded ships on the seas or port accidents, but it also includes other risks, one of the most notable ones being mutant Covid-19 strains. The highly virulent delta strain and the rise of the lambda-variant are testaments to this last point. Although many believe the phrase to be a shibboleth, time will only tell how quickly and to what extent logistics and shipping will recover from the Covid-19 pandemic.