Is there an end in sight to supply chain disruption?

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Bob Biesterfeld knows the depths of the global supply chain crisis first hand — he has hauliers still unloading Halloween costumes from containers at the Los Angeles and Long Beach port complex.

For the boss of CH Robinson, North America’s largest freight broker, the delayed shipments of vampire, ghost and witch outfits provides the perfect illustration of the turmoil in ocean shipping for the past 18 months. About 90 per cent of world trade moves by sea, and these logistical woes have tormented businesses across the globe from Argentine winemakers to Sri Lankan clothing producers.

Record vessel delays have clogged ports and crammed warehouses, adding to the supply ruptures caused by the semiconductor crunch and petrochemical shortages. Smaller companies have had to fight tooth and nail to secure space on container ships to keep production and sales moving while facing cash flow pressure as they soak up rocketing freight rates — up seven times on average pre-pandemic levels — and mounting stockpiles. Consumers have experienced it via empty shelves, limited product availability and rising prices.

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Jens Bjorn Andersen, chief executive of DSV, one of the world’s largest logistics groups currently squeezed between frustrated shipping lines and angry customers, describes the situation as “the worst I’ve seen” after more than three decades in the industry.

The shipping bottlenecks have exposed one of the most serious threats to the global economy as it emerges from the pandemic: whether the worldwide traffic jam remains gridlocked or begins to flow again in 2022. If the bottlenecks persist, freight costs will remain high, space for cargo on ships will be limited and retailers and manufacturers will have to endure chronic delays. That could in turn fuel inflation, prompt supply chain upheavals and accelerate consolidation of shipping networks, fundamentally changing world trade.

During the pandemic, container shipping had to juggle a tremendous surge in consumer demand for goods with the reality of having slashed capacity during the initial lockdowns in the first half of 2020. As a result a highly synchronised system was spun out of rhythm.

Containers stacked up at the terminal in the Port of Long Beach in California
Containers stacked up at the terminal in the Port of Long Beach in California © Jeff Gritchen/MediaNews Group via Getty Images

“We used to work on an eight-lane highway,” says Randy Chen, vice-chair at Wan Hai Lines, a Taiwanese shipping company, of global logistics operations, “[then] we shrank the highway by half. The shipping industry was the first to get it back to eight lanes.” But, adds Chen, it has been more difficult for ports, warehouses and trucking — all hit by Covid-related labour shortages — to do the same.

Terminal closures last year at two of the world’s five busiest container ports — Shenzhen and Ningbo-Zhoushan in China — after small Covid outbreaks, as well as the freak blockage of the Suez Canal by a mammoth 400-metre-long ship, added to delays. “Every time we have a Covid-related incident, it’s like a car accident that stops all eight lanes,” adds Chen.

Now, the spread of the Omicron coronavirus variant has the shipping industry on edge, waiting for the next hitch that could derail operations. In Europe, pre-Christmas lockdowns in some countries and added restrictions in others knocked confidence. Most eyes are on what China — home to seven of the top 10 container ports in the world including the busiest, Shanghai — does next. Beijing, which operates a national zero-Covid policy, put Xi’an, a central city of 13m, into lockdown in December; Hong Kong has temporarily banned passenger flights from eight countries, including the US; and the city of Ningbo was partially shutdown last week in response to fresh coronavirus cases.

The prospect of a rerun of 2021’s supply chain problems fills companies with dread. “Our warehouse is full but there are always one or two parts missing,” says Johanna Urkauf, managing director of KTM Bike Industries, an Austrian bicycle manufacturer.

Erik Yim, managing director of China Merchants Port Holdings, a state-backed group, says “the only way” to restore order to the supply chain is to have closer alignment between governments on coronavirus measures through an internationally recognised protocol designed to protect key transport workers. That, he adds, must be combined with keeping vital infrastructure such as ports open and early warnings of hold-ups.

Simon Heaney, analyst at Drewry, a maritime consultancy, is pessimistic that we will see a dramatic change this year. “We expected to have more improvement in supply chains becoming unblocked by this stage. In fact, things have worsened,” he says. “We have more feedback telling us how deep a crisis inland logistics [trucking and ports] is facing.”

A medical worker collects a swab sample from a civilian at a mobile testing site in Xi’an, in northwestern China’s Shaanxi Province
China, the world’s largest exporting nation, maintains a zero-Covid policy © Tao Ming/Xinhua via AP

All eyes on China

A key factor in whether ocean liners can restore a reliable infrastructure for global trade in 2022 will be the strength of consumer goods demand — if it remains strong it will be difficult to clear backlogs. About 60 per cent of spending by a US consumer typically goes to goods and the rest to services, but that has risen to 65 per cent, according to Bernstein. As a result, US imports were up almost 20 per cent in September and October 2021 over the same months in 2019.

Demand for container shipping tends to rise in the weeks before Chinese new year — in early February in 2022 — when factories close temporarily and exports ebb. It is the time we might see some improvement, says John Pearson, chief executive of DHL Express.

But shipping executives say the lunar new year will probably be followed by a restocking of depleted inventories — hovering at historic lows in the US — that could run into the peak summer season for container shipping to deliver Black Friday and Christmas 2022 goods.

Ron Widdows, a former shipping executive and head of FlexiVan, which rents out one of North America’s largest fleets of chassis — steel frames that are attached to lorry cabs and carry containers — says that a sustained drop in cargo flows would help to restore productivity, get rid of empty containers and deal with the backlogs. But he thinks it is unlikely to happen quickly.

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Instead he expects further bumpiness in getting products to market from a possible halt to some Chinese manufacturing during February’s winter Olympics in Beijing to strict coronavirus quarantine rules for seafarers. “It’s as much about volatility as it is the absolute volume,” he says.

Not all of the shipping lines’ customers are convinced of a sustained demand boom. Some have been stung paying about $15,000 to move a 40-foot container from China to the US west coast, 10 times more than pre-pandemic. Transport costs are set to keep rising this year as the higher spot market rates get locked into annual freight contracts, which are currently under negotiation. Other customers say fear-mongering over potential shipping chaos this year looks more like a bargaining strategy by the carriers.

The return of tourism, hospitality and other services plus rising consumer bills and higher-interest rates could all soften demand for goods, says James Hookham, chief executive of the Global Shippers Forum, a trade group representing importers and exporters.

“I’m not buying the hype that says we will endure this for most of 2022,” says Hookham, who believes shipping congestion could ease within weeks once consumers begin feeling the pinch. “There’s no inevitably about the continuing high levels of demand for container shipping.”

A cargo ship carrying containers is seen near the Yantian port in Shenzhen
Terminal closures last year at Shenzhen port in China added to delivery delays © Martin Pollard/Reuters

Unlocking the US

The transportation problems are global, hitting businesses and consumers from São Paulo to Tokyo. But some executives and analysts believe one bottleneck, above all the others, may hold the key to ending the disruption: the neighbouring ports of Los Angeles and Long Beach, the US gateway for Asian imports. Outdated infrastructure and the inability to operate 24 hours, seven days a week like Asian counterparts have contributed to severe congestion.

The size of the queue of vessels lined up outside the terminals has become a barometer of worldwide supply chain convulsions. While that queue has lengthened out many miles to sea because of new rules, the effective number of container ships waiting — above 100 last Thursday — is at a record high. LA/Long Beach accounted for roughly 22 per cent of shipping capacity waiting to berth globally last Tuesday, according to Kuehne + Nagel, a Swiss logistics group.

“If we solve North America, then there would be enough capacity for the rest of the system,” Alan Murphy, an analyst at consultancy Sea-Intelligence, told a meeting of shipping experts in December.

Line chart showing the total container ships queued at the Los Angeles and Long Beach port since December 2020. The number of container ships backed up have reached record level in recent weeks, even with a new queuing system where ships must spread out 40-150mi away from the port before dropping anchor.

However, easing congestion in the US appears far from simple. Joerg Wolle, Kuehne + Nagel chair, says that inefficiency at the ports and the truck driver shortage — neither of which have short-term fixes — mean the system has been unable to cope with the demand surge.

Wolle hopes for some slackening of labour tightness with the gradual return of workers but believes it will take time: “we will be lucky and happy if we see a real relief [in the system] by autumn.”

Equipment is a further restraint. The US has 4 per cent fewer chassis in circulation than in 2018, according to consultancy ACT Research, yet demand has increased. CH Robinson’s Biesterfeld says that makers of the steel frames and trailers would be unable to pump out enough to make a difference before the second half of 2022.

Casting a further shadow over a return to normality are negotiations with the workers at LA/Long Beach whose contracts expire in July. The previous 2015 pact was only reached after intervention by the Obama administration following nine months of talks, as well as industrial action that left dozens of ships backing up outside the port. Peter Sand, chief analyst at Oslo-based shipping data provider Xeneta, says that talks with the dockworkers, which typically centre on pay and automation, will almost certainly result in “unavoidable disruption in some form”.

Container ships moored off the Los Angeles and Long Beach ports in California
Los Angeles and Long Beach ports accounted for roughly 22 per cent of shipping capacity waiting to berth globally last Tuesday © Tim Rue/Bloomberg

‘It will never normalise’

In the decade prior to coronavirus, shipping cargo in containers was so cheap that the industry, plagued by excess capacity, struggled to make a profit. Some carriers went bust and the world’s top shipping lines formed three alliances, sharing space on voyages. Now, the world’s leading nine carriers control 83 per cent of tonnage.

This consolidation plus the dearth of investment in new ships before the pandemic and tightening emission regulations has led many commentators to conclude that higher rates will persist.

And the expectation that the world will have to learn to live with lofty freight rates has bled into discussion of the link between shipping costs and inflation. Industry executives say the costs, even multiplied by 10, are still a tiny fraction of the price a consumer pays for a product. But a UN report in November predicted a 1.5 per cent increase in global inflation due to shipping — and even more for lower value items such as furniture and high-tech goods containing thousands of components that criss-cross the oceans.

The National Stadium, a venue of the Beijing 2022 Winter Olympics
There may be further problems in getting products to market from a possible halt to some Chinese manufacturing during the winter Olympics in February © Thomas Peter/Reuters

The shipping crisis has also sparked questions about the evolving shape of the infrastructure that underpins international commerce and economic prosperity.

Scott Price, president of UPS International, sees one consequence of the past 18 months as a “migration to new supply chain models” with companies moving production of complex goods closer to consumers — to combat higher transport costs and the end of cheap Chinese labour.

Those predictions come as shipping lines deploy more vessels to lucrative lanes. Tonnage dedicated to routes between North America and Asia grew 30 per cent between January and December 2021, according to data from consultancy Alphaliner. While much of that extra capacity ended up waiting offshore rather than cruising, capacity serving Africa or journeys between Asian nations dropped 3.3 per cent and almost 10 per cent, respectively, over the same period.

Shipping companies also significantly slashed the number of port calls in their networks in the second half of 2021. Stops at the five biggest Asian and northern European ports on weekly loops have plummeted by a quarter since 2016, a phenomenon that has only accelerated in the pandemic according to Alphaliner. Lars Mikael Jensen, head of global ocean network at Maersk, says that the shift to a “more hub-and-spoke” model — which the Danish shipping group is in the process of adopting — will help restore reliability.

“Instead of calling at every port directly, we put [the cargo] on to feeders at a connection point,” he says. “That will make the network less dependent on individual delays at ports . . . this is something we’re looking to do more of.”

Line chart of $'000 showing Freight shipping rates have rocketed during the pandemic

This next phase in industry consolidation worries transport economist Antonella Teodoro of consultancy MDS Transmodal. Her analysis shows a 12 per cent drop since the start of 2019 in the number of countries that African nations are directly connected with, which makes trade more expensive.

“Less direct connectivity for small economies should keep some regulators awake at night,” says Teodoro. “This is not about us not having Christmas goods in time but a worsening [economic situation] for countries left behind by globalisation.”

Sean van Dort, logistics chair of the trade body Joint Apparel Association Forum Sri Lanka, echoes those concerns. Fewer vessels have been making direct calls to the country’s commercial centre Colombo to drop off the fabrics, yarns and accessories from East Asia needed by garment suppliers to manufacture for multinational brands.

“Many small and medium-sized companies have had to close or temporarily shut down as they don’t have the financial power to air freight goods,” he says. Shipping lines are “a moth to the flame and go where the higher freight rates are”.

For cargo owners on the sharp end of the disruption, the shipping industry warns of a lengthy wait for better news.

“I don’t think it will ever normalise,” says DSV’s Andersen who believes the past two years has led to fundamental change in the logistics industry. “If ‘normalise’ means going back to the situation we saw prior to Covid, to be honest I don’t think we’ll ever get back [to that].”

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