The global shipping industry is in a state of flux – unprecedented congestion, delays and unfeasible freight prices have caused chaos beyond anticipation. The entire sector is fraught with uncertainty, with lockdowns and border closures bringing national economies to a grinding halt. The global pandemic has affected virtually every aspect of shipping – everything from large-scale shipping line contracts down to the price of a single freight container.
Australia is no exception. Whilst a smaller market, the shipping industry in the land down under has certainly felt the colossal impact of COVID-19 over the past 12 months. The country continues to battle against some of the most challenging market conditions we have ever had to face, with few signs of normality returning in the near future.
Freight forwarder and licensed customs broker, International Cargo Express (ICE), has felt the impact strongly in Australia. The industry challenges were described as ‘unprecedented’ by the company with over 30 years of experience. Below, they share their reflections on the past 12 months and provide some insight into what the future might look like.
COVID-19 hits Australia
When the global pandemic hit Australia and the world in early 2020, the shipping industry was woefully unprepared.
Demand for shipping services dropped dramatically and carriers introduced numerous blank sailings from Asia to Australia, Europe, and the United States. Lockdowns in China were a major contributing factor to this. There was an increase of 435 blank sailings in mid-April, with the three main shipping alliances showing a 17-24% blank rate across the first 15-21 weeks of the year, according to Analyst Sea Intelligence. Maersk alone issued over 90 blank sailings in Q1 2020, indicating a 3.5% fall in capacity for that period.
As soon as the lockdowns in China eased, the demand from Asia, especially from China to Australia, U.S. and Europe suddenly increased (particularly due to a massive demand for face masks, hand sanitizer, and PPE) – leading to congestion at several ports around the world, including at important transshipment hubs in Asia. Carriers started to increase their rates on a monthly basis and additional surcharges were implemented (such as PSS & Equipment Imbalance Fees), but the situation became tense as insufficient empty containers were returning to Europe or Asia – leading to a global container shortage.
Simultaneously, we were confronted with vessel quarantines, lockdowns, and slow operations. The Australian Government implemented a raft of restrictive border measures, closing the border to all non-Australian citizens and residents. To make matters more complicated, each State and Territory put in place their own local maritime restrictions.
A more detailed look into each aspect of how the shipping industry has been impacted over the past year is provided next.
Constrained capacity and rising freight prices
The combination of increased blank sailings and a sudden increased demand in shipping resulted in many ocean carriers and airlines suffering from constrained capacity.
Shippers would constantly find that there was no room for their cargo on freight vessels, leading to expensive delays and major disruption to their business operations. There was a rise in rolled cargo despite ocean carriers trying to provide as much capacity as possible. Maersk’s rollover ratio increased to as high as 35% in October 2020, according to Ocean Insights. Even as recent as February 2021, Australian meat exporters are reporting 10-day delays to secure the right containers for their shipments.
Things were worse in the air. Agricultural exporters in Australia were substantially affected as passenger air fleets were grounded. With retail air travel virtually ceasing, air cargo capacity fell by 91%.
With the extreme drop in air cargo capacity, air freight prices – especially to and from China – spiked to unprecedented levels. Some shippers have reported the cost of shipments doubling due to rising air freight costs and worst of all, there is no real sign of a significant change ahead.
Surge in container demand: the global container shortage
The sharp, unexpected increase in demand for imports led to a significant rise in container demand at origin ports. There simply aren’t enough containers around – leading to an international container shortage of which Australian importers are still feeling the pinch.
Why has this happened? It’s a combination of factors.
Australia has a largely imbalanced container trade, with more full containers entering the country than empty containers leaving. Couple this with the rise in port congestion caused by the sudden increase in demand, in addition to the industrial action in Sydney (discussed below) and blank sailings, and the ultimate result is that not enough empty equipment is being repositioned back to critical origin ports.
The COVID landscape has made the situation considerably worse. A demanding peak season with a significant rise in imports, alongside the impacts of the pandemic, has left ports unable to cope with the influx of containers. There are an abundance of exports coming out of China, leading to a huge number of empty containers piling up in Australia, particularly in Sydney and Melbourne. We’re now finding a lack of available slots at the empty parks and queues beyond our expectations.
‘Container parks’ in places like Port Botany and the Port of Melbourne are reaching capacity. Struggling carrier capacity has meant empty containers have been left behind, with Port Botany alone suffering an imbalance of over 30,000 TEU since April 2020 of imported containers compared to exported containers. Empty containers once unloaded cannot be de-hired due to the lack of space at container parks and are rather redirected elsewhere – all this coming with added costs to the importer. These empty containers might usually be carried back to China, but the constrained capacity with shipping lines and reduced time allocation for loading at the ports has meant this simply cannot happen.
This is a global problem. Market intelligence states there are about approximately 50,000 containers stuck in Australia, around 35,000 containers in South America, 150,000 in the United States, plus containers are stuck on board of vessels at anchor in Los Angeles and Long Beach, California.
So, with all these empty containers just sitting idle, why is there a container shortage? The short answer is a trade imbalance – we are importing much more than we are exporting. But it is not a simple solution. With already constrained container capacity, shipping lines prefer to transport full containers rather than empty ones (despite many ‘sweeper’ vessels deployed to export empty containers). The operational costs of managing empty containers are high, but the profit margins to deal with them are slim.
Industrial action and trade unions
To make things worse, Australia has experienced a wave of industrial action at a time where importing was already at its most challenging. Trade unions have been negotiating the terms of new enterprise agreements with major Australian port players such as DP World and the Patrick Corporation. The bargaining deadlock has caused port workers to stop work across multiple terminals in Sydney, Melbourne, Brisbane and Fremantle – leading, of course, to increased delays and port congestion.
Across September 2020, for instance, Sydney saw major disruptions due to industrial action at Port Botany – including bans on overtime. Industrial action reduced Patrick Terminals’ operations in Sydney to around 50-60% of usual levels, with a backlog of 90,000 containers. In Melbourne, the union had orchestrated three one-hour stoppages a day. Despite industrial action stopping in October, major delays lingered in the aftermath.
In mid-February 2021, the MUA were once again planning major strikes at the Victoria International Container Terminal (VICT) in Melbourne. This began on 19 February and involved a series of 12-hour stoppages of work. This would have once again been detrimental to Australian supply chains if the action proceeded as planned.
For now, the industrial action at VICT has been suspended. DP World also announced that it has finalized negotiations with the union after two and a half years of bargaining, concluding agreements in Sydney, Melbourne, Brisbane, and Fremantle until 2023.
Industrial action continues to be a pressing issue for importers, exporters, shippers, and ports across Australia, leading to ongoing uncertainty across entire supply chains.
Ever-surmounting stevedore charges
A wave of increased infrastructure charges have also been introduced, adding to frustration for both shipping companies and Australian businesses. In July 2020, for instance, Hutchison Ports increased its charges on containers delivered to and from its facility in Brisbane by 9%. VICT in Melbourne also imposed a 7% increase in their charges. Despite container volumes dropping, total operating profit margins for stevedores increased for the first time in a decade, from 5.8% in 2018-19 to 9.9% in 2019-20.
The hike in stevedore fees was vigorously criticized by governments. The Victorian Department of Transport said the decision was “completely unacceptable – especially at a time when everyone should be pulling together to keep businesses open, Victorians in jobs and goods moving across our supply chain”. Indeed, these charges effectively hold transport operators to ransom, forcing them into a non-negotiable position whereby they must pay to collect and deliver containers.
Scaling stevedore charges were then followed by shipping line charges. Around September 2020, shipping companies imposed port congestion charges of up to US$350 per TEU. Shipping line MSC announced a US$300 per TEU Sydney port congestion surcharge, whilst CMA CGM’s ANL announced an equivalent surcharge. As a result, grain exporters, for example, needed to absorb an extra AU$17 per tonne of direct costs. Thankfully announcements were finally made in early March for the removal of congestion surcharges, a promising direction in a challenging landscape.
Government intervention – it can only do so much
The Federal Government has made efforts to assist the industry. In April 2020 the International Freight Assistance Mechanism (IFAM) was introduced.
IFAM is a temporary measure aiming to reconnect supply chains, supporting the import of medical supplies and other nationally critical products. The agricultural, seafood and healthcare sectors are particularly targeted industries. The scheme received an extra $317.1 million in funding in October 2020 to extend the scheme until mid-2021.
But government intervention can only do so much.
Without a full-scale, nationally co-ordinated response to tackling key issues, such as; constrained carrier capacity, the massive costs of air freight, the unprecedented container shortage, the insufficient infrastructure to cope with imbalanced imports and exports, unpredictable industrial action across the supply chain and rising stevedore and shipping line surcharges, Australian businesses and consumers will be subject to ongoing hardship.
Conclusion – where to from here?
As we look to 2021, the world awaits the results of the COVID-19 vaccine which will no doubt have a dramatic impact on the industry and markets. The Federal Government has entered into contracts to distribute the COVID-19 vaccine from March, having secured 10 million doses of the Pfizer vaccine and just under 54 million doses of the University of Oxford-AstraZeneca vaccine.
At International Cargo Express, we’re encouraging clients to turn to ‘air-sea solutions’ (a combination of both quick air freight, and affordable ocean freight) as an alternative to just shipping goods by air. But until we can tilt the scales to introduce more air freight to the market in line with historical prices, the increased demand for ocean freight will continue. In more recent weeks we have received positive news as freight rates from China have slowly started to decrease, and the removal of port congestion surcharges in Sydney has been warmly welcomed.
However, until the market fully resets, we could be in for a volatile couple of years. The only solution is to adapt and think of creative alternatives in our ‘new normal’. There is no such thing as a ‘one-size-fits-all’ approach to surviving, and ultimately thriving, in a post-COVID environment.
This article was written by Alice Farley, Branch Manager and Head of Marketing of the Australian freight forwarder International Cargo Express. If you are looking to move goods internationally, contact ICE to ensure you don’t face unexpected delays and costs.