Maritime Freight rates have been on an upward trend since the second half of 2020. The Drewry’s composite World Container Index (WCI) as at 30th September 2021 increased to USD 10,361 per 40ft container, which is 292% higher than the same period in 2020. The average composite index of the WCI (Drewry), for year-to-date, was about three times higher than the five-year average of USD 2,430 per 40ft container.
The causes of the historic highs in shipping freight rates have been owing to a multitude of factors. These include COVID-19 disruptions, container inventory imbalances, Suez Canal blockage and lack of competition in the shipping industry, which has been weighing into the growing trend of freight rates. Industry experts believe that the freight rates would not recover to pre-pandemic levels in the 6 to 12-month period. However, recently, two of the world’s top container lines (CMA CGM Group and HAPAG-Lloyd) have pledged to freeze their spot rates and put off any further increases in spot freight rates for containerised cargo. This may persuade other carriers to follow suit and lead to an improvement in freight rates.
In the second half of 2020, global economic activity and trade witnessed a sharp rebound driven mainly by the manufacturing sector. However, the services sector and especially the most contact-intensive activities such as port operations lagged behind owing to the continued need for social distancing, labour shortages and other limitations of the pandemic. This resulted in delays and congestions at ports particularly in Europe, USA and recently in China with the outbreak of the Delta variant. This led to increased turnaround time for vessels causing disruptions to regular schedules of carriers and also created a large-scale container imbalance. The outbreak of the Delta variant can also further disrupt trade in Asia where around 42% of global exports are sourced according to United Nations estimates. These disruptions are coming at a time when the industry is preparing to ramp up for the Christmas holiday season, which could cause a further acceleration of freight rates in the near future.
As lockdowns and limitations on movement became the new normal, consumers opted for electronic modes of purchasing goods and services and, businesses followed suit by improving their e-commerce channels. E-commerce retailers have been relying on split shipments where when an online order that contains multiple products is broken down into separate shipments to enable fast and efficient delivery. These factors coupled with the shortage of containers have further aggravated the freight rates while also creating a harmful ecosystem of increased shipments and freight costs.
The limitations on belly capacity in passenger aircraft due to the decline in passengers travelling by air has led to the lack of alternatives for ocean freight. This has led to capacity constraints in the shipping industry as opposed to the overcapacity seen in the industry prior to 2020 and the difficulty in avoiding soaring freight rates. However, at present, the strong earnings of the shipping industry have triggered new orders for ships this year, doubling the orders received for all of 2019 and 2020 according to Baltic and International Maritime Council (BIMCO). These new ships that are scheduled to be added to the fleet from 2023 onwards, could ease capacity constraints.
Globally we are witnessing an accelerated effort towards decarbonisation measures such as the International Maritime Organisation (IMO) measures to reduce the Greenhouse Gas (GHG) emissions by ships, which are to be in force on November 2022. A study done by UNCTAD on the impact of these measures by IMO revealed that this will lead to slightly higher freight rates as a result of internalizing external costs and also as a result of going at lower speeds to reduce CO2 emissions. While the magnitude of these increases are relatively small when compared to current fluctuations in freight rates, these will be relevant for many years to come until the sector has reached an energy-efficient level.
The container ship that was wedged in the Suez Canal at the start of the year, though for a short period, had ripple effects on the industry. This further aggravated the already stretched shipping market. As the ships took longer to reach their destinations, the shortage of empty containers increased further in this period. This led to high pressure and increased freight rates not only for the routes passing through the Suez Canal but also for the routes nearby.
Full report can be accessed at – Navigating through High Maritime Freight Rates
This article is part of the Strategic Insight Series, which focuses on key contemporary topics that matter to the private sector. Topics such as Renewable Energy, REITS, State-Owned Enterprises and FinTech Regulatory Sandbox amongst others have been covered by the briefs to date.
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