What are the reasons for the global port congestion? What has caused the record-high freight rates? What are the expectations and estimations for 2022?
Dr. Philip Blumenthal, the Chief Transformation Officer (CTO) of ECU Worldwide, an international cargo & air freight logistics company, has shared his views on the shipping industry’s developments in an exclusive interview with Container News.
- What are the main causes of the continuing global port congestion?
Several factors have contributed to global port congestion. Some of which are out of the control of the industry such as the Covid-19 pandemic. However, one major cause of the continued congestion is a lack of preparation and investment in digitalisation.
Although many companies, such as ECU Worldwide, have been at the forefront of digitalisation for several years, it requires a coordinated effort across the board to ensure that data and information are shared where relevant. This can help counteract the current lack of space, resources, equipment, and specialised crews at certain choke points.
- How could the shipping industry mitigate the effects of this situation?
The industry is constantly learning and evolving to try and reduce risk, wherever possible. However, some risks cannot be foreseen and pre-emptively mitigated, as demonstrated through a variety of challenges faced over the past two years.
However, a key lesson learned from the continuing global port congestion is the importance of prioritising cargo by segments and having more storage capacity around key ports in order to reduce the likelihood of congestion. This would require the industry to further invest in additional smart storage facilities in ports.
- Could the digitalisation of the industry assist in providing some solutions to the problem?
Digitalisation is at the forefront of the industry’s continued growth and development. One industry-wide initiative we will likely see on this front is an investment in digitalisation for single-window clearances which would likely reduce wait times when there is an expected overflow in traffic.
Generally, booking and tracking packages have been one of the more complex issues for customers in the industry. This is an issue ECU Worldwide has been prioritising with our ECU360 service. The ability to track and estimate delivery times would reduce the burden on many customers and companies during high waves in customer demand and provide realistic timelines to support not only customers but all involved in the door-to-door logistics chain.
- What are your estimations/expectations for 2022 regarding the port congestion issue?
With an unprecedented e-commerce boom and import levels hitting record highs in 2021, the logistics infrastructure has been as close to capacity as it has ever been, however, congestion will eventually subside as the backlog slowly clears and we see a decrease in demand for consumer goods following Christmas, arguably the busiest time of the year and the return to some form of normality since the pandemic began.
We expect that ocean carriers and ports will be able to fully catch up on their backlog in the first few months of this year, with a return to a sense of normality by the end of spring.
- 2021 was the year of record-high freight rates. What is your comment?
The last year has shown us the effects of an imbalanced supply and demand. Like most other free markets, asset owners benefit from a sudden change. The total net profit among all container carriers could surpass the US$200 billion mark, with an average profit margin between 40 and 45%.
However, like in any other market, these margins are catalysts for new entrants to harvest this profitable situation. Traditionally this industry showed little innovation, which resulted in those providers with large scale economies being the more profitable ones.
Low innovation now allows an equally low entry barrier for either new providers or a sudden drop back into commoditization once the spike in demand disappears. While 2021 was a record year for profitability, we should be careful in drawing conclusions for what the future looks like.
- What are the main reasons for this massive rates’ increase?
UNCTAD’s analysis shows that the current surge in container freight rates, if sustained, could increase global import price levels by 11% and consumer price levels by 1.5% between now and 2023. However, the cause of record high freight is complex and there is a myriad of factors that affect it.
First and foremost, we cannot ignore the impact of the pandemic on freight rates. With worldwide travel restrictions imposed in 2020 and vast fluctuations in shipping demand, a massive backlog of goods waiting to ship was seen. This caused a ripple effect of port congestion, equipment shortages, and port scheduling conflicts, specifically involving the number of blank sailings – ships sent without cargo.
As operations resumed and the industry tried to reduce the shortage of blank sailings, it impacted the freight rates for the year in a deep way. Further port congestions, shipment rollovers and trucker turn times were a few of the infrastructural challenges that also impacted the rates.
- What are your estimations/expectations for 2022 freight rates levels?
What goes up must come down. This random walk can be experienced in many situations in life, starting from waves in a lake to stock prices nearing their average in the long run. Nothing else will happen with freight rates. The open question is when? Current estimates are that supply and demand will come back into the 15% volatility range before mid-year. However, factors like the West Coast Ports Union Contract expiration, the Beijing Winter Olympics and Covid-19 might accelerate or extend this movement. Nevertheless, shippers should focus on a volatile 2022 but not get overly cautious and extend their exposure beyond this year.
