There is commotion across the global shipping industry – 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.
In summary: Infographic
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 several blank sailings from Asia to Australia, Europe and the United States. Unprecedented lockdowns in China were a major contributing factor to this. Analyst Sea Intelligence reported 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. 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 – leading to congestion at several ports around the world, including at important transhipment 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 – although, an exemption applied for maritime crew on commercial vessels. Maritime crew arriving internationally were permitted to leave their vessel, but only if they proceeded to an airport to leave Australia (with quarantine in the meantime) or if they joined another vessel. To make matters more complicated, each State and Territory put in place their own local maritime restrictions.
Below, we’ll take a more detailed look at each aspect of how the shipping industry has been impacted over the past year.
Constrained capacity and rising freight prices
The combination of increased blank sailings and a sudden increased rapid 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, increasing to nearly 29 per cent at transhipment ports in October 2020. Maersk’s rollover ratio increased to as high as 35 per cent that month. 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 left particularly in strife, as passenger air fleets were grounded and air cargo capacity fell by 91 per cent. Australian airline Qantas would transport freight to over 500 locations through its 22 dedicated freight terminals. But with a significant amount of cargo being carried through the belly of passenger aircraft, and the evaporated demand in travel, this disappeared.
With the extreme drop in air cargo capacity, air freight prices – especially to 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 drop.
Surge in container demand: the global container shortage
The sharp, unexpected increase in demand for exports led to a massive rise in container demand. It’s a global problem, with major shipping line Hapag-Lloyd calling it the “strongest increase in [container] demand, following one of the strongest decreases in demand ever”. But there simply aren’t enough containers to around – leading to an international container shortage of which Australian exporters are still feeling the pinch.
Why has this happened?
It’s a combination of factors – the reduced number of containers that began in early 2020 with the sudden drop in exports, the rise in port congestion caused by the sudden increase in demand, industrial action in Sydney (discussed below) and reduced number of operational vessels with many going into refurbishment during the blank sailing period. So, by the end of 2020, carriers were reporting major shortages of 40ft-high cube containers, with Container xChange report noting that availability in China was“still at a record low”.
Imbalanced container availability in Australia
The ultimate paradox is that Australia is simultaneously suffering from a rise in surplus, empty containers. Australia has a largely imbalanced container trade, with more full containers entering the country than empty containers leaving.
The COVID landscape has blown this completely out of proportion. 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 is a large amount of exports coming out of China, leading to a massive number of empty containers piling up in Australia.
‘Container parks’ in places like Port Botany and the Port of Melbourne are reaching capacity, with a lack of available slots at the empty parks and queues beyond expectations. Struggling carrier capacity has meant empty containers have been left behind, with Container Transport Alliance Australia (CTAA) reporting that in Port Botany alone there is 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 empty container parks and are rather redirected elsewhere – all this coming with added costs to the importer. Port of Melbourne Chief Executive stated that their empty containers would usually be carried back to China, but the constrained capacity with shipping lines meant they simply couldn’t do that.
And this is a global problem. Market intelligence states that approximately 50,000 containers are 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 the empty container just sitting there, 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 ‘sweepers’ 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. When it came to Melbourne, the CTAA noted that, “Not all shipping lines are experiencing the chronic build-up of empty stock, but enough of the large volume lines are, leading to a high level of containers dwelling longer in almost all empty container depots”.
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. The Maritime Union of Australia (MUA), which forms part of the Construction, Forestry, Maritime, Mining, and Energy Union (CFMMEU), has been negotiating the terms of new enterprise agreements with major Australian port players such as DP World and the Patrick Corporation. The deadlocks in bargaining have 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. The chief executive of Patrick Terminals said that industrial action reduced their operations in Sydney to around 50-60 per cent 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.
Industrial action is not off the horizon yet. 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. Freight & Trade Alliance director Paul Zalai said that it would have a “devastating impact” on supply chains, with CTAA director saying the action was “playing havoc”.
For now, the industrial action at VICT has been suspended. DP World made an application to the Fair Work Commission (FWC) to stop the industrial action, citing economic harm as a reason. The FWC ordered a suspension early on the morning of 20 February until a final hearing in mid-March decides whether the action can continue. DP World announced that it had also finalised negotiations with the union after two and a half years of bargaining, concluding agreements at its 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 has 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 90%. 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 to stevedore fees were vigorously criticised 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”. Paul Zalai said the charges were a “disgrace”, with transport operators being “held at ransom” – forced to pay a surcharge to collect and deliver containers, with no power to negotiate.
Stevedore charges have then been 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 their own equivalent. Mr Zalai once again described these as “exorbitant”, noting specifically that these surcharges would threaten the competitiveness of Australian grain exporters, who would need to now absorb an extra AU$17 per tonne of direct costs.
Stevedore charges to shipping lines are reportedly declining (with an offset by an increase in Infrastructure Surcharges to be borne by the importer). However, any savings are reportedly not being passed on by shipping lines with commensurate drops in terminal handling charges. The Freight & Trade Alliance (FTA) and the Australian Peak Shippers Association (APSA) continue to advocate on behalf of the industry on this matter.
Government intervention – it can only do so much
The Federal Government has made efforts to assist the industry through introducing the International Freight Assistance Mechanism (IFAM) in April 2020.
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. Outbound, the scheme is prioritising time-sensitive perishable goods. Inbound, it is prioritising medical supplies, medicine and other goods deemed to be in the national interest. IFAM 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 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, the industry will need to find a way to ride out the problem on its own.
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 in March, having secured 10 million doses of the Pfizer vaccine and just under 54 million doses of the University of Oxford-AstraZeneca vaccine.
Skyrocketing air cargo prices has meant stronger demand for ocean freight, with some also turning to ‘air-sea logistics’ as an alternative to just shipping goods by air. But until we can tilt the scales to introduce more air freight to the market at economical prices, the demand for ocean freight will continue.
Unless the market 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. If you are looking to ship your products internationally, or are thinking of importing goods from overseas, speak to International Cargo Express to ensure you don’t face unexpected delays and costs.