The year 2021 proved to be a very difficult year for shippers, but an exceptionally profitable one for ocean carriers and containership owners.
Rising freight rates – both short-term and contract – coupled with a dysfunctional and, at times, broken supply chain, heaped more misery on the shipper community over the past year.
After Chinese New Year in mid-February, there was a brief glimmer of hope that freight rates had peaked and shippers were beginning to regain some schedule reliability, but then came the ill-fated Ever Given, which attempted a three-point turn in the Suez Canal and blocked the waterway for a week in March.
Pent-up demand from the blocked Asia-Europe supply chain overloaded northern European container ports, and the effect of chronic vessel delays and equipment shortages spread around the world.
Particularly in the Southern California ports of Los Angeles and Long Beach, where disrupted schedules, container shortages and increased consumer demand conspired to cause ships to be held up waiting for berthing and labor for weeks at a time, reaching peaks of more than 80 idle vessels.
And even when ships did arrive at an unloading dock, onshore delays and trucker shortages in the U.S. and Europe led to reports of Halloween costumes arriving in mid-December.
Shippers, already on the ropes over carrier rate increases and de rigueur premium rates (essential to secure equipment and keep containers from shifting), took a below-the-belt hit with exorbitant demurrage and detention (D&D) charges.
Carriers continued to bill D&D to shippers, who were often unable to pick up containers at chronically congested terminals, or return boxes when they were empty.
And, despite a significant portion of D&D charges being pure profit, the shippers were under no commercial pressure to negotiate reductions and all protests fell on stony ground, with regulatory warnings largely dismissed.
The carriers didn’t really need the money: their record quarterly profits exceeded even their best-ever annual returns, and the cumulative 2021 result for the sector is expected to exceed $150 billion.
With only a third of their revenues going to new vessel purchases, carriers still have plenty of money to spend, so forays into the logistics sector, entry into the air cargo space, and terminal acquisitions – and, indeed, everything on the M&A radar screen is fair game.
With 20% of the cellular fleet idle in ports around the world, it was the turn of containership owners, many of whom had been on the verge of insolvency for years, to reverse the situation for their carrier customers and increase daily charter rates for chartered tonnage.
In fact, some 4,000 to 5,000 TEU panamax vessels that were destined for scrapping just a few years ago reached exorbitant rates of $100,000 per day or more, with long-term agreements at very high fixed rates becoming the norm.
Reflecting the control they had over shippers, the lines, concerned that shipowners were holding them to ransom, went on a buying frenzy for tonnage, thus skyrocketing asset values across the board, in some cases exceeding the original construction price.
It is not surprising, therefore, that the demolition market, which only a few years earlier had exceeded 750,000 teu per year of ship scrapping, was reduced to almost zero as “all that floats” was put into service.
As a consequence of much higher freight rates, for the first time in many years the economic barrier for new entrants to the routes was lowered, and a number of new services emerged from old-fashioned liner operators who still understood the value of looking after their shippers as customers.
Unfortunately, the outlook for shippers in 2022 is more of the same, at least until the second half of the year. They face a difficult choice between “the devil and the blue sea” of taking their chances in the spot market “casino,” or signing loaded multi-year contracts.
But for shippers, it appears that freight rates will remain high for some time to come.