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Port congestions set the tone for a volatile 2022

Ports will remain a bottleneck in the supply chain, with capacity and reliability only likely to stabilize later in this year or next.
Port congestions set the tone for a volatile 2022
13 January 2022 •

Ongoing port congestion, and the limited success of efforts to ease bottlenecks, have dampened hopes of a brighter outlook for ocean freight in 2022.

Although the upcoming Chinese New Year may help ease some of the backlog, supply is likely to remain volatile through the remainder of the year, with conditions improving only in 2023.

“We’re expecting 2022 to be volatile, and while there will be improvements, I would expect the market conditions will remain pretty much the same as 2021, if not more challenging,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

At the turn of the year, prospects for trade and economic growth in 2022 were expected to brighten. However ports remain congested, taking a heavy toll on the reliability of liner services.

DHL’s Ocean Freight Market Outlook 2022-2024 report notes that carrier schedule reliability is now at an all-time low, with even the best performing carriers barely managing 45 percent ‘on-time’ performance and the worst falling below the 20 percent mark.

Covid-19’s long shadow

Covid-19 itself remains a key antagonist. The spread of the highly infectious Omicron variant has led to numerous flights being cancelled due to new travel restrictions that impacted major cargo hubs including Hong Kong.

More damaging for container shipping stakeholders was a spate of Covid-19 cases in the Chinese industrial hub of Ningbo in late December. Ningbo had already suffered a string of partial lockdowns under China’s strict zero-Covid policy during the second half of 2021.

The latest outbreak, in this case of the Delta variant according to various reports, took place at a clothing company in the Beilun District, a significant hub for both manufacturers as well as home to a string of container terminals.

The latest lockdown in Ningbo threatened the region’s ability to keep its manufacturing output at full pelt ahead of Chinese New Year factory closures. It also impacted the efficiency of trucking services and the operation of Ningbo-Zhoushan port, the world’s third largest container hub by volume.

Elsewhere in China, shipping on the Yangtze River, a key artery between industrial conurbations inland and coastal ports, was thrown into disarray at the turn of the year when some 200 vessel pilots were placed in 14-day quarantines after two pilots tested positive for Covid-19 in late 2021.

With so much capacity tied up at ports, the container shipping freight market tightened once again at the turn of the year. The Shanghai Containerized Freight Index (SCFI), a bellwether of container freight markets ex-China, broke through the 5,000 mark for the first time in its history. This is a huge annual rise when compared to the 2,783 points recorded on 31 December 2020.

Moving the problem

Atop that, other forces are challenging any quick recovery. Supply chains have also been buffeted by heavy rain fall across South East Asia, with flash flooding in Malaysia resulting in delays costing millions at Port Klang.

Efforts to alleviate bottlenecks have in some cases contributed to the uncertainty. Some carriers have opted to omit some ports but this has had significant consequences for customers shipping via these ports. Multiple port omissions have also made it difficult to measure the reliability of liner services.

Measures have been put in place to alleviate port congestion at the ports of Long Beach and Los Angeles, which includes additional charges for containers that stay beyond a stipulated timeline. This, however, have only served to move vessels to anchorages outside ports or had resulted in vessels slow steaming or being diverted to alternative ports.

Expected recovery to a new normal from 2023

But there are reasons for some cautious optimism. Carriers have been trying to fill gaps in the schedule by organizing extra sailings. Many businesses, on the other hand, have learned to plan their orders as far as possible to secure capacity.

There are hopes that the usual slowdown in manufacturing over Chinese New Year in February may help. “We are hopeful that the reduction in demand will ease the congestion situation at some ports, and help bring the reliability of the carrier schedules to a more normal situation,” said Leung.

But bottlenecks at ports are likely to play a major role in the efficiency and reliability of ocean supply chains for most of 2022. Jefferies analyst Randy Giveans calculated that in November last year, an average of 36.2 percent of total boxship capacity was stuck at ports.

Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding, notes that the supply and demand situation, at least for the first half of the year, will remain similar to last year. ”We are expecting volatility in supply in the first half of 2022 to continue largely along similar lines as 2021,” said von Orelli.

Jefferies’ Giveans also believes efforts to reduce bottlenecks may yield fruit later in the year. “It is likely that freight rates will soften from these peak levels during 2022 as congestion problems ease,” he noted.

However, it will only be when pent-up demand is satisfied – in part by an influx of new capacity – that global GDP growth will settle into a more regular pattern, according to the DHL Ocean Freight Market Outlook 2022-2024 report. The report noted that container vessel order books are at the highest level in 10 years, with the majority of container vessels being built in China. Should container production remain stable, supply growth will overtake demand growth in 2023 as recent orders start to be delivered.

In 2023 and 2024, when the availability of equipment has improved, and global port congestion has eased, freight rates will gradually stabilize. The caveat, however, is that rates will be at far higher levels than pre-Covid days.

In the meantime, customers should work closely with their shipping partners to protect themselves from the worst of the crisis. "To secure ocean freight supply chains in the short- and medium-term, customers are advised to plan ahead with accurate inventory and order forecasts, and consider long-term agreements with carriers,” said von Orelli.

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Ongoing port congestion, and the limited success of efforts to ease bottlenecks, have dampened hopes of a brighter outlook for ocean freight in 2022.

Although the upcoming Chinese New Year may help ease some of the backlog, supply is likely to remain volatile through the remainder of the year, with conditions improving only in 2023.

“We’re expecting 2022 to be volatile, and while there will be improvements, I would expect the market conditions will remain pretty much the same as 2021, if not more challenging,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

At the turn of the year, prospects for trade and economic growth in 2022 were expected to brighten. However ports remain congested, taking a heavy toll on the reliability of liner services.

DHL’s Ocean Freight Market Outlook 2022-2024 report notes that carrier schedule reliability is now at an all-time low, with even the best performing carriers barely managing 45 percent ‘on-time’ performance and the worst falling below the 20 percent mark.

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Covid-19’s long shadow

Covid-19 itself remains a key antagonist. The spread of the highly infectious Omicron variant has led to numerous flights being cancelled due to new travel restrictions that impacted major cargo hubs including Hong Kong.

More damaging for container shipping stakeholders was a spate of Covid-19 cases in the Chinese industrial hub of Ningbo in late December. Ningbo had already suffered a string of partial lockdowns under China’s strict zero-Covid policy during the second half of 2021.

The latest outbreak, in this case of the Delta variant according to various reports, took place at a clothing company in the Beilun District, a significant hub for both manufacturers as well as home to a string of container terminals.

The latest lockdown in Ningbo threatened the region’s ability to keep its manufacturing output at full pelt ahead of Chinese New Year factory closures. It also impacted the efficiency of trucking services and the operation of Ningbo-Zhoushan port, the world’s third largest container hub by volume.

Elsewhere in China, shipping on the Yangtze River, a key artery between industrial conurbations inland and coastal ports, was thrown into disarray at the turn of the year when some 200 vessel pilots were placed in 14-day quarantines after two pilots tested positive for Covid-19 in late 2021.

With so much capacity tied up at ports, the container shipping freight market tightened once again at the turn of the year. The Shanghai Containerized Freight Index (SCFI), a bellwether of container freight markets ex-China, broke through the 5,000 mark for the first time in its history. This is a huge annual rise when compared to the 2,783 points recorded on 31 December 2020.

Moving the problem

Atop that, other forces are challenging any quick recovery. Supply chains have also been buffeted by heavy rain fall across South East Asia, with flash flooding in Malaysia resulting in delays costing millions at Port Klang.

Efforts to alleviate bottlenecks have in some cases contributed to the uncertainty. Some carriers have opted to omit some ports but this has had significant consequences for customers shipping via these ports. Multiple port omissions have also made it difficult to measure the reliability of liner services.

Measures have been put in place to alleviate port congestion at the ports of Long Beach and Los Angeles, which includes additional charges for containers that stay beyond a stipulated timeline. This, however, have only served to move vessels to anchorages outside ports or had resulted in vessels slow steaming or being diverted to alternative ports.

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The rail network will place Laos as a land-linked hub, connecting China to more regions with viable alternatives from ocean and air options.

Until recently, Laos lacked a national rail network. But on 2 December 2021 – the country’s national day – all that changed. That’s when freight and passenger trains started running along the new China–Laos railway line, providing the fastest and most modern transport route yet into the Southeast Asian state.

The high-speed rail link stretches 414km from Laos’ capital Vientiane – located near Thailand’s border – to Boten, which borders China in the north. From there, another 522km-long section runs to the Chinese city of Kunming in Yunnan Province, giving Laos additional land links to global and regional supply chains.

Supporting China’s Belt and Road Initiative

The railway is the largest infrastructure project yet seen in Laos, with a price tag of about US$6 billion (€5.31 billion) – or about a third of the country’s GDP.

The Chinese government, however, has placed substantial financial backing to the project as part of its Belt and Road Initiative (BRI). The initiative is planned as the first step in China’s ambitious plan to build a transnational railway link extending south through Thailand and the Malay peninsula all the way to Singapore.

Beijing’s willingness to underwrite the new line highlights the priority it places on resource-rich Laos as part of its BRI plans.

China has also outlined other investment plans for the country, including a motorway between Vientiane and Boten, and a cross-border Mohan-Boten economic zone, which Laos hopes could emulate some of the success of the southern Chinese technology hub of Shenzhen.

China-Laos railway service launch

A viable and affordable land-linked transport system

Leveraging on the new China-Laos railway, DHL Global Forwarding is the first international forwarder to provide a two-way rail freight service between Kunming, China and Vientiane, Laos.

The two-way service combines trucking from all over China to the hub in Kunming, running through the China-Laos railroad, then onward with DHL’s established road network service  and back.

The multi-modal service brings with it significant cost savings and transit times that are on par with airfreight. For example, a road/rail service along Bangkok to Shanghai comes with the same transit time as an airfreight along the same route, and is 84 percent cheaper.

“Businesses moving goods between China and ASEAN countries now have a strong viable alternative between air and ocean freight, and can tap further into DHL’s robust road freight and multimodal network in the Southeast Asia region,” said Thomas Tieber, CEO, DHL Global Forwarding Southeast Asia.

Accelerating Laos’ push to become a ‘land-linked’ economy

China’s regional rail connectivity plans and other BRI-backed development dovetail neatly with Vientiane’s long-held strategy of evolving the landlocked country into a ‘land-linked’ hub for the wider region.

With a population of less than 8 million people, Laos is among the least industrialized states in Southeast Asia. The country’s north, where the railway line runs, has until now been relatively removed from centers of commerce.

But as Greg Raymond, a Southeast Asia expert at the Australian National University, recently told the South China Morning Post, the Laotian government is determined to pull the country from the ranks of least-developed countries, and sees large-scale infrastructure as a central part of the solution.

Laos’ new railway line leaves it well-positioned to take advantage of its strategic location in the midst of emerging economies, including Thailand and Vietnam, and reinvent itself as a multi-modal goods and services distribution hub for the region. If successful, it stands to reap tremendous benefits from regional trade.

The China-Laos rail network will essentially make the country more attractive to investors, create new jobs, and accelerate its post-pandemic economic recovery. According to the World Bank, the new railway line could potentially help Laos increase its aggregate income by up to 21 percent in the long term.

As a result, Laos will now be seeking ways to further improve infrastructure connectivity and enable cutting-edge multi-modal transport services. “The [Laotian] government has the policy to support business people. The country is also improving its business regulations and infrastructure to support business operations,” commented Laotian political journalist Ekaphone Phouthonesy in a recent article in The Straits Times.

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Bringing new opportunities to ASEAN markets

The new railway will also create closer trade linkages between all the countries covered by China’s BRI, including those within the ASEAN trade bloc.

China is already ASEAN’s largest trading partner, growing close to 40 percent year on year. Recently, however, the Chinese government has been directing more BRI infrastructure investments towards the region to build greater trade connectivity within ASEAN member countries.

Despite a sharp drop in total BRI investments due to the disruptions of the COVID-19 pandemic, Southeast Asia became China’s largest BRI destination in 2020, accounting for 36 percent of total investment.

This investment is fostering greater cooperation in sectors such as manufacturing, agriculture, infrastructure, high-tech, the digital economy, and the green economy.

2020 also saw China and ASEAN countries sign the Regional Comprehensive Economic Partnership, which is expected to further boost mutual trade and investment, along with economic integration.

“ASEAN has a combined GDP of US$2.55 trillion and is predicted to be the fourth-largest single market in the world by 2030. We see a very bright future for trade and economic activity in the region, which will translate to increased demand for logistics,” said Steve Huang, Managing Director, DHL Global Forwarding, Greater China.

Currently, trade flows between China and ASEAN rely mainly on maritime routes, with trade between Laos and China representing less than two percent of total China–ASEAN trade.

According to the World Bank, the opening of the Laos line could increase trade flows between China and Laos from 1.2 million tonnes in 2016 to 3.9 million tonnes by 2030.

This would include a shift of an estimated 1.5 million tonnes of trade from maritime transport to the railway and significantly reduce land transport prices by up to 50 percent between Vientiane and Kunming.

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Global trade: the biggest winner

In the short term, the China–Laos railway puts Laos on the fast track to realize its vision of becoming a ‘land bridge,’ providing the most direct overland transportation routes between its coastal neighbors.

In the longer term, with trade, retail, and tourism all now high on the agenda for foreign investment opportunities, the new infrastructure makes it possible for Laos to reimagine its economic future.

Above all, however, the rail project demonstrates enormous potential in bringing ASEAN countries closer together and transforming the region’s logistic capabilities.

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Expected recovery to a new normal from 2023

But there are reasons for some cautious optimism. Carriers have been trying to fill gaps in the schedule by organizing extra sailings. Many businesses, on the other hand, have learned to plan their orders as far as possible to secure capacity.

There are hopes that the usual slowdown in manufacturing over Chinese New Year in February may help. “We are hopeful that the reduction in demand will ease the congestion situation at some ports, and help bring the reliability of the carrier schedules to a more normal situation,” said Leung.

But bottlenecks at ports are likely to play a major role in the efficiency and reliability of ocean supply chains for most of 2022. Jefferies analyst Randy Giveans calculated that in November last year, an average of 36.2 percent of total boxship capacity was stuck at ports.

Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding, notes that the supply and demand situation, at least for the first half of the year, will remain similar to last year. ”We are expecting volatility in supply in the first half of 2022 to continue largely along similar lines as 2021,” said von Orelli.

Jefferies’ Giveans also believes efforts to reduce bottlenecks may yield fruit later in the year. “It is likely that freight rates will soften from these peak levels during 2022 as congestion problems ease,” he noted.

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Global recovery is starting, despite China’s power cuts and zero Covid strategy having an impact.

As we enter the middle of the northern hemisphere winter, there has been some deflation in spot freight and container charter rates, although both metrics remain at historically inflated levels.

But perhaps the most significant trend emerging for container shipping and global supply chains is evident in China, where strict zero Covid strategy quarantines and electricity blackouts are disrupting manufacturing.

Both could play a huge role in determining output levels from ‘the world’s factory’ in the months ahead and the drop in output may already be a factor in the softening of freight rates.

Certainly, September port statistics indicate that box volumes at key Chinese hubs slowed just as the first rounds of power cuts started to disrupt output. Anecdotal evidence suggests power cuts have also been biting hard in the fourth quarter, with some ports suffering reported double-digit monthly volume drops.

The impact of China’s zero covid strategy and power cuts

Power shortages and outages have been unevenly dispersed across the Chinese cities, and often imposed at short notice. This has been exacerbated by an ongoing trade spat with Australia – previously a key coal supplier – which has hit coal availability and driven up prices for the fuel which provides the lion’s share of China’s electricity.

Nonetheless, the central and central west provinces are relying heavily on renewable energy sources, which alleviates the current situation. “We are observing an improvement in the power shortage, amidst strong export levels,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

On the energy consumption front, the country has shown little sign that it might pull back from its longstanding reduction targets. Certainly, in the Beijing area, it seems highly likely that efforts to reduce emissions will continue through the Beijing Winter Olympics in February 2022.

Its zero Covid strategy, meanwhile, has seen entire regions placed under curfew and international borders closed for over 18 months. This has worked through 2020 and most of 2021, with its economy being the only to grow by 2.3 percent in 2020.

The prolonged strategy, however, is starting to show signs of a slowing domestic economy. “China’s GDP grew by 4.9% in the third quarter, so there was a clear loss of momentum compared to the 7.9% recorded by the National Bureau of Statistics in the second quarter,” noted Leung.

As gains are likely to diminish while pains could rapidly rise, China’s overall strategy has global implications owing to its role in global production and supply chains. Stringent import measures due to Covid over the past few weeks, and the expected closure of factories ahead of Chinese New Year, will constrain manufacturing output while global inventory levels are again on the rise.

“We are working with our customers in China to ensure their supply chains are as flexible as possible and they can adapt to any policy changes as they arise,” added Leung.

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US consumption on the rise

The flipside of constrained production in China is buoyant demand from the US, the market which has taken a bulk of the vessel capacity and equipment away from other global container trades over the last year. This is mainly due to the crunch of the holiday season, with shippers desperate to get cargo into the U.S. as inventory levels remain low.

Analyst firm Sea-Intelligence highlights that consumption of goods in September was still “fast outpacing” that of services. “The consumption boom driving container volumes showed no signs of abating in September,” reported the analyst firm. “Whilst there was some element of decline in the growth rate, this was to a large degree driven by motor vehicles and not by typically containerised consumer commodities.”

Sea-Intelligence also notes that while demand is shifting from durable to non-durable goods, this will not materially alter the boom in container volumes. “This means we should not expect a decline in demand to ‘rescue’ the congestion and bottleneck situation in the short to medium term,” it added.

Consulting firm Hackett Associates now expects year-on-year US container import volume growth to continue throughout the November-February period, which will make it difficult to clear supply chain bottlenecks, not least at ports.

On top of that, global ocean supply chains remain afflicted by multiple headwinds that will continue to affect businesses in the months ahead.

“From power outages and port shutdowns in Asia to backed-up ships and shortages of truck drivers in the United States, there are few positive signs that the movement of consumer goods or the supply of inputs needed for industrial production is getting better,” said Hackett Associates founder Ben Hackett.

DHL’s November Ocean Freight Market Update notes that the backlog of container ships at the ports of Los Angeles and Long Beach, counted on 19 October, was 100 ships waiting to enter and unload, with another 45 ships expected to arrive at the ports shortly.

Ports are running out of space and containers are piling up at docks because delivery is heavily delayed due to lack of rail cars, shortage of truckers and a chassis deficit.

The US East Coast port of Savannah is also suffering heavy congestion. Between 22 and 27 vessels have been anchored per day outside Savannah harbour. Waiting times average eight to 10 days.

Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding, said port congestion was not confined to the US. “We’re also seeing carriers diverting ships away from Europe’s northern range ports including Felixstowe, Antwerp, Rotterdam and Hamburg to smaller alternative ports to avoid delays,” he added. “Ports are struggling with too many containers, which are congesting stacking areas, and also with labor shortages.

“We expect further schedule changes and adjustments from carriers on Asia-Europe and trans-Pacific services in the months ahead.”

Maintaining a low schedule reliability

As the holiday season approaches, container markets have turned almost Shakespearean as service reliability remains anchored at historically low levels.

Schedule reliability improved marginally in September by 0.6 percent to 34.0 percent, maintaining the range of 34%-40% seen throughout the year, according to Sea-Intelligence.

The only “positive”, said the analyst firm, was that schedule reliability was not plummeting further. On a year-on-year level, schedule reliability in September 2021 was down by 22 percent.

The average delay for late vessel arrivals also improved marginally in September, dropping to 7.27 days.

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However, it will only be when pent-up demand is satisfied – in part by an influx of new capacity – that global GDP growth will settle into a more regular pattern, according to the DHL Ocean Freight Market Outlook 2022-2024 report. The report noted that container vessel order books are at the highest level in 10 years, with the majority of container vessels being built in China. Should container production remain stable, supply growth will overtake demand growth in 2023 as recent orders start to be delivered.

In 2023 and 2024, when the availability of equipment has improved, and global port congestion has eased, freight rates will gradually stabilize. The caveat, however, is that rates will be at far higher levels than pre-Covid days.

In the meantime, customers should work closely with their shipping partners to protect themselves from the worst of the crisis. “To secure ocean freight supply chains in the short- and medium-term, customers are advised to plan ahead with accurate inventory and order forecasts, and consider long-term agreements with carriers,” said von Orelli.

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