For months, the world’s largest shipping conglomerates were under intense pressure. The industry seemed to have been sailing in treacherous waters. The introduction of IMO2020 alleviated costs, which although partially borne by customers, were significant. Disruptions stemming from the unprecedented coronavirus outbreak, impacted demand and thus their revenue streams.

Stringent capacity deployment through blank sailings – sustaining freight rates, lower-than-expected bunker fuel prices, and ultimately a less severe decline in global trade volumes than previously foreseen due to a shift of consumption in favour of goods rather than services, improved the then clouded outlook for the world’s largest shipping liners.

Prior expectations, pointing towards a gradual recovery in-line with global economic growth, were indeed exceeded. The outlook also remains optimistic, notwithstanding the recent pull-back in freight rates from extraordinary highs and rise in bunker costs.

Largely, record high freight rates have in Q3 led to the generation of abnormal profits. Supply disruptions are largely to blame.

Strong fundamentals; sustained demand aided by supply disruptions

The global pandemic situation, albeit less profound owing to vaccination programmes being well underway, continues to prevail consequent to the significantly more transmissible strains; notably the Delta variant, said to have first originated in India.

The health crisis and ensuing restrictions on movement to mitigate the spread, resulted in a shift of retail consumption in favour of goods rather than services. This, notably supported by the development of e-commerce. Consequent to this shift, the demand for transport and logistic services recovered quickly from the trough levels witnessed in 2Q 2020. Shipping liners have been operating at full or quasi-full capacity ever since.

Since the end of last year the level of demand combined with the disruptions relating to the pandemic, such as staff shortages which meant long delays in unloading cargo, have created a severe congestion in global supply chains. In container shipping, this translated into slower asset rotations and severe capacity shortages. The Suez incident towards the end of March, port closures in China, and a growing container shortage, worsened an already tensed situation.

Supply bottlenecks indeed remain. Maersk, the world’s largest container shipping company sees no end in sight to the global supply chain crisis. Chief executive Soren Skou stated that congestion outside leading ports, such as Los Angeles and Long Beach have become worse as retailers and manufacturers struggle to keep up with surging demand following the coronavirus pandemic.

Zero-tolerance approach may lead to further port closures in China

Efforts by Chinese authorities to reduce the spread of the coronavirus pandemic, through increased testing and enforcing quarantine measures, have in recent months led to labour shortages and port closures, disrupting global ship schedules and supply chains.

Risk of further port closures for “epidemic management” is certainly not far-fetched, despite improving vaccination rates amongst Chinese citizens. Most likely, vaccinated citizens have received the locally produced Sinovac and Sinopharm Coronavirus vaccines, which like others, may prevent deaths but not prevent the Delta variant’s transmission.

In line with Beijing’s zero-tolerance approach to the virus, the northern port of Dalian – the largest multi-purpose port in Northeast China, is undergoing a third round of lockdowns. All works at the cold-chain food operations have been suspended, after a worker at a warehouse in the port’s cold chain food operations tested positive. The cold-chain food operations at the port of Dalian handles approximately 70 per cent of the imported cold-chain goods entering China.

Rates possibly to remain high into 2022

The coronavirus pandemic and ensuing repercussions, notably supply bottlenecks – partly a result of mitigation measures to control the spread of the virus, proved to be a significant contributor to a surge in freight rates in 2021.

Although partially easing from record-high levels, rates remain at significant highs. Notably, the trans-Atlantic route; Shanghai to Rotterdam remains close to 400 per cent higher year-on-year.

The sustainability of such freight levels however remains in question.

In the short-term, we expect rates to remain historically high. Unprecedented conditions stemming from pandemic-fuelled supply bottlenecks, capacity constraints, and port congestion shall keep rates historically high into 2022. In the longer term, we view such elevated freight rates to be unsustainable.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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