A shipowner tries to fix freight rates in such a way as to recover capital costs, depreciation, operating costs, agency commission, administrative expenses and other overheads, and get a reasonable return on investment. But with coronavirus taking a toll on the global economy and seaborne trade in early 2020, the container shipping sector was badly hit.
The sector had been struggling with an over-supplied market and slow demand growth even before the pandemic which kept the container freight rates generally low over the past few years. As the pandemic weakened economies, this segment experienced major setbacks. The early part of 2020 witnessed modest recovery in demand and freight rates, but with the outbreak of the pandemic the prospects for demand not only decreased but fleet development was also affected.
With lockdowns coming into force in March 2020 and reducing the demand for container goods, shipping companies adopted strategies to manage supply capacity to reduce costs and keep freight rates from falling. The spread of Covid also led to a sudden drop in demand for seaborne transport. This development forced the container lines to apply strategies such as increased blank sailing (that is, skip port calls), idling of vessels and re-routing as a way of adjusting supply to low demand. This allowed freight rates to remain stable at a time of lower demand for ocean shipping.
Although blank sailing, accompanied by low oil bunker prices, helped shipping lines mange supply capacity and reduce costs, it still accounts for about 40 per cent of the operating cost of a vessel and has an impact on revenue due to capacity withdrawals (Drewry London 2020, Annual Report).
From the perspective of shippers, these strategies meant severe space limitations to transport goods and delays in delivery dates which had an impact on supply chains and the proper functioning of ports (UNCTAD Review of Maritime Transport 2020).
The levels of increase
These factors culminated in freight rates reaching historically high levels by early 2021. The surge in freight rates spread across some developing regions such as Africa and Latin America, and even outpaced the rise observed on the main East-West routes. While the increase in freight rates recorded on the Asia-East coast-North America route was 63 per cent, on the China- South America it was 443 per cent higher than the median for that route.
Rising freight costs over the last year due to shortage of shipping containers have reportedly had a detrimental impact on small and medium-sized exporters. Drewry’s Composite World Container Index — a global index for container spot market freight rates on all major routes — peaked at $6,727, up by over 300 per cent since the emergence of the pandemic in December 2019. Drip Capital, a California-based digital trade finance , in its analysis on the global shipping crisis has stated that small and medium businesses globally account for more than 25 per cent share of the $18 trillion maritime trade. While the Suez Canal hold-up in March 2021 unleashed different challenges on the shipping and logistics industry, small and medium businesses particularly have been going through a bad patch since the onset of the Covid pandemic.
At a time when exports are giving a big push to Indian economy, exporters are forced to shell out more to ship goods to global destinations. Container lines have announced surcharges and as on July 7, freight rates from J Port, Mumbai, Mundra and Hazira to the Mediterranean have seen an increase of $500 per TEU (twenty foot equivalent unit). Currently, it costs $2,800 per TEU to Barcelona in Spain — an extra $500 would mean an 18 per cent increase in shipping costs. CMA/CGM — a French shipping company — will apply a high season surcharge of $1,250 per TEU for dry cargo to the east coast of Central America from India via Malta.
Exporters hit
According to FIEO (Federation of Indian Export Organisations), a 40 foot container to the US before Covid costing $2,000 is now $6,200 6500; the rates to Europe have increased from $1,200 to $5,000, while the West Africa market has seen a 600 per cent jump.
According to the Indian Rice Exporters Association, African nations are the biggest buyers of Indian basmati rice. Africa as a market accounted for 54 per cent of India’s $4.796 billion non-basmati rice shipments during 2020-21. Freight rates to Africa has more than doubled to $115 per tonne compared with $45 per tonne a year ago. An African buyer, who used to get rice delivered at $400 per tonne last year, has to pay $500 now.
Container shipping lines will be able to advance a number of arguments like shortage of containers, congestion in the South China and the US ports on the west coast, delays and detention of ships at ports due to the pandemic and labour shortage, empty container repositioning, the hold-up of ships at the Suez, etc., to justify the abnormal increase in freight rates.
Had the increase in freight rates been modest or moderate, the global shipping community would have accommodated such increases. The world’s top ten container lines seem to control about 85 per cent of the total cellular container capacity and they seem to have taken unfair advantage by exploiting the market with their oligopolistic power. These container lines have formed shipping alliances among themselves to consolidate their position and continue to abuse the potential market power.
Latest reports suggest that the US President has issued an executive order demanding the Federal Maritime Commission to take all possible steps to protect American exporters from the high costs imposed by the ocean carriers. In the circumstances, the best antidote appears to be for the national Competition Commission to monitor freight rates and market behaviour with a view to creating a fair, stable and sustainable environment in the area of maritime transport with requisite regulatory oversight.
The writer, a former Chairman of Mormugao Port Trust, is an Adjunct Faculty of Indian Maritime University, Chennai
Source : The Hindu Businessline
