10:51pm 28th December 2020
2020 WILL BE REMEMBERED AS A YEAR WITH MANY SURPRISES AND UNFORTUNATE EVENTS FOR MANY YEARS FROM NOW.
Its effect on ocean shipping has been fundamental and in many areas, 2020 has had permanent effects – some of which are positive – on the shipping industry. When the pandemic first began and countries started to close back in mid-March, there was a big unknown and many question marks. However, the biggest fear, a total shipping slump, didn’t happen. After brief volume decreases in April, there was a quick rebound as we forecasted in this article during the worst time of the pandemic when there were too many unknowns to plan too far ahead.
WE ARE GOING INTO 2021 WITH SOME POSITIVE NEWS BUT ALSO WITH MANY UNKNOWNS.
The latest vaccine news is definitely good news, but it will test the strength of supply chains once more as some vaccines require extremely low temperatures to keep them effective. This will be a huge challenge for developing countries. U.S.-China trade tensions are still a big shadow on trade, as well as the planned U.S. tariffs on some certain commodities from Vietnam and elsewhere.
WHAT IS AHEAD FOR US IN OCEAN SHIPPING? WHAT CHANGES AND BIG TOPICS WILL BE DISCUSSED IN 2021 AND THE YEARS AHEAD? HERE IS MY ANALYSIS BELOW:
1. Freight rates
Due to increased demand and successful capacity management compared in December 2020 vs. December 2019, ocean freight rates from Shanghai to USWC tripled from average $1,500/40hc levels to $4,500+ levels. Ocean carriers published record profits in 2020 after so many years. However, this type of extraordinary increase is not sustainable and it will not continue the same way. However, carriers have now found another tool to implement higher rates under premium services; when it was first introduced, premium services received mix reviews from industry stake holders. Right now, almost every carrier offers it, where they charge up to $2,000 per container and still add subject to roll cause. There are a limited number of new vessels coming into the market in 2021 and there won’t be much change on the currently-offered capacity. Carriers also took extraordinary measures to keep up with the demand in TP trade and address the equipment shortage by allocating equipment from other trades to the profitable Asia trade. Its effects are felt worldwide as other trades now suffer from the equipment shortage.
We predict that negotiated freight rates will be much higher than the 2019-2020 contract season. Based on the initial discussions that large BCOs are having with the ocean carriers, it is understood that importers are ready to pay higher freight rates and rather have vessel space than saving on freight costs. Carriers have the upper hand right now.
2. Increased carrier discipline
At the beginning of 2020, there was a big difference with the carriers in terms of how they managed capacity compared to past years. An increase in efficiency of capacity management is also a result of industry consolidation and there are only a handful of carriers that can make an impact on the market rather than twenty different carriers. In 2020, during the worst times of the pandemic, when cargo volumes went down the same type of decrease didn’t happen with freight rates, thanks to more disciplined carriers which managed the capacity much better by cutting capacity by blank sailings, reducing costs, taking advantage of lower fuel costs and focusing on the profitability rather than market share. Consequently, spot rates were stable even at the peak of the pandemic when there was less cargo. These tested and so far working strategies will continue in 2021. Blank sailings come with a cost to carriers, as it costs about 40 percent of the operating cost of a vessel (per Drewry) and have an impact on revenue due to capacity withdrawals. In spite of this, carriers will continue with their working strategy.
3. Carrier differentiation
Different service offerings increased end-to-end logistics solutions. After Maersk’s decision to offer end-to-end logistics solutions and offer more value-added services, we will see more differentiated service offerings from carriers. One size fits all types of services are coming to an end. Guaranteed loadings, early and faster discharge with a specific area to pick up the chassis in ports, and increased customer service support for premium services have been tested and are already in place. Although it is not working perfectly now, it will be more widespread and eventually will lead to other more value-added services in an industry where change happens very slow and rarely.
4. Regulatory involvements
We may see more regulatory involvements including the FMC as volumes grow and importers and all other stakeholders suffer from the consequences of extraordinary volume increases. Recent applications to the FMC regarding port demurrage and detention charges may be the start of broader regulatory interventions including recent carrier pricing practices. China’s Ministry of Transportation and Communications has also got involved in order to prevent further price hikes from carriers and has asked carriers to try to increase capacity rather than freight rates from China. COSCO and OOCL immediately followed this along with other carriers. This type of interventions will prevent rates from climbing to even-higher levels than their current levels. This is something to watch in 2021.
5. Embracing technology
One positive effect of the pandemic was the push to embrace technology in ocean shipping just like many other industries. There have been very exciting technological developments which will further accelerate in 2021. Slowly but surely the industry has embraced technological developments. Digitization of the supply chain and increased and more reliable platforms where real-time tracking and tracing is offered are almost a given at the moment. Smaller-size companies that cannot keep up with this trend will lose their competitive edge. In addition to the widespread usage of shipping platforms, we will also see more discussions about the implementation of blockchain, Big Data and AI in the shipping industry. New advanced technologies will increase efficiency and also give an extremely competitive edge to those that embrace these developments.
6. Cleaner shipping and sustainable shipping
Carriers are forced to address sustainability and it will be an important driver eventually similar to cost-cutting, profits, and market share increases. Greenhouse gas emissions from international shipping are still one of the top contributors of global pollution. The IMO has put ambitious goals in place to reduce total greenhouse gas emissions by at least 50 percent by 2050 compared with 2008 levels and become less dependent on traditional energy sources. The IMO 2020 low sulphur fuel usage regulation was one of the major initiative towards this goal and over the next years, sustainability will be one of the major discussion points in the industry.
COVID-19 IS STILL A BIG UNKNOWN GOING INTO 2021 BUT THE END IS IN SIGHT.
We expect 2021 will be continuation of 2020. With volumes reverting to a more organized manner, importers and all industry stakeholders will be more prepared. Once the vaccine is in widespread use, we will see commodities that have not been shipped as much will come into play and in the end it will balance against possible drops from other commodities that got shipped during the pandemic.
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