When will supply chain woes end?
Mediterranean Shipping Company chief executive Soren Toft may lead the second-largest shipping line in the world, but when he speaks during London Shipping Week he sounds a little powerless.
“What we are seeing, of course, is that our freight rates are elevated, it’s causing a lot of agony to our customers.
“Not only are the prices higher but, perhaps more importantly, the service levels are poorer.
“And right now everybody’s waiting and asking the fundamental question: when will things change?”
Transport Minister Michael Wood says the answer to Toft’s question may be a year to 18 months from now, but he also warns the world’s supply chains may never go back to the way they were before Covid-19.
”I will work with the ministry to continue to engage with freight companies and cargo owners to see where our Government can support market-led mitigations.”
Wood is expecting the Ministry of Transport to produce the first draft of the New Zealand Freight and Supply Chain Strategy by the end of next year.
It will involve a plan for Government to invest in ports, rail and roads for the next 15 to 30 years, with the idea of optimising the supply chain, and a plan for a sustainable coastal shipping sector (coastal shipping has traditionally been dominated by foreign shipping lines).
”The strategy will also be useful for businesses looking for clarity from Government to guide their own investment decisions.”
Recently analysts have observed a change in shipping prices, giving them cause for hope. The Drewry World Container index has seen a dip since Toft gave that speech, from over US$10,000 per container in September to over US$9100 in November.
Kiwibank chief economist Jarrod Kerr says this a sign freight rates are coming down. Other financial analysts express similar hopes that the recent turn might be a sign of more dips to come.
Even with this dip, shipping rates are two-and-a-half times higher than what people were paying a year ago, and Customs Brokers and Freight Forwarders president Chris Edwards thinks it may not end up being the long-term trend people are hoping for.
“Look at the situation in China: you’ve got issues with power, meaning some factories are not operating at full capacity, you’ve got big delays in producing goods.
“So I actually think what happened then, and probably we’ve seen it a bit more again [in November] is there’s a lack of goods to export, meaning there are some empty slots on those ships.
“When the shipping companies have got empty slots they discount them or drop the price on the spot market to fill the vessel, I think that’s what we’re seeing, I don’t necessarily believe it’s a trend.”
McGrathNicol partner Kare Johnstone says supply chain disruptions continue. There are high shipping costs, long delays and orders which sometimes arrive with a smaller number of goods than firms originally ordered.
In New Zealand, furniture deliveries now take more than six months when they used to take four weeks, bicycle parts can take a year to arrive.
Firms have been fighting back against these disruptions and cost increases by paying for their own ships, or holding more stock, but next year could well see more firms pass on more price increases to consumers in order to maintain their own profit margins.
“The conversation we’re hearing around the board table around retailers is this isn’t sustainable, how long are we going to have to keep carrying these costs?”
Air freight rates seem to be the real thing worrying Edwards, and it is a problem he sees getting worse in the new year for New Zealand if there isn’t more clarity around when more people might be able to practically travel via air.
Prior to the pandemic most airfreight was carried in the belly of passenger planes. The world’s tourists and travellers subsidised global transport of goods.
With cross-border movements drying up it became uneconomic to ship things via airfreight. The US postal service has suspended mail deliveries to 21 countries, including New Zealand, due to a lack of airfreight availability.
The Government stepped in, as other Governments have, and propped the whole thing up with an airfreight subsidy.
However, Edwards says the cost of airfreight shipping is going up even with this subsidy in place, and now other countries are getting greater choices as they re-open their borders and airlines put on more passenger services.
While the vast majority of freight in and out of New Zealand is being transported by ship, Edwards says airfreight is still a critical link for our exports of fresh produce.
“Those airfreight rates are up 40 per cent from the start of the year, if not more ... airfreight rates are four to five times higher than they would normally be because of this constrained capacity.”
Wood says the airfreight subsidy will run until at least the end of March, and believes many airlines will start to become commercially viable on their own as New Zealand starts to open up in 2022.
“The number of passenger flights into New Zealand is only a quarter of its pre-Covid levels and many of those planes carry very few passengers, which shows how critical our Government’s aviation support has been for keeping us connected currently.”
Air freight is also important for our trade with the United States. Edwards says direct sea links to the world’s largest economy have effectively dried up during the pandemic.
Speaking to Stuff in November, he said the next ship to the United States would not arrive until January.
“The sea freight supply chain has completely broken from the States. There hasn't been any viable sea freight options really for months and months, maybe as long as four or five months, there’s been a whole lot of cancellation of vessels coming to New Zealand.”
Air Tahiti Nui, which Edwards says provides an important airfreight link between New Zealand and the United States, is already cutting back its services to Auckland due to uncertainty around when New Zealand’s borders will reopen.
The airline is rumoured to be considering a full pull-out from New Zealand next year. In a statement, it acknowledged there was a “risk" of its aircraft being redeployed to other travel markets next year.
Air Tahiti Nui general manager Daniel Eggenberger said recent changes to isolation requirements were a step in the right direction, but not enough.
Despite the importance of airfreight links, a lot of the public’s focus on supply chain disruptions has not been on air freight so much as sea freight, perhaps due to the images of massive container ships anchored off the coast of Auckland or the West Coast of the United States, or even the Ever Given clogging up the Suez Canal.
Sea freight’s woes stretch right back to the beginning of the pandemic. During the first wave of global lockdowns demand for container space dropped 20 per cent to 30 per cent as countries around the world started shutting their ports.
The shipping industry then did something it had not managed to do in the past: It cut capacity to match this drop.
But the lack of shipping services meant fewer empty containers were being shipped to China. Containers are normally filled with goods in China and shipped across the United States, with empty containers returned after they’ve been unloaded.
The lockdowns led to a surge in online ordering, and factories in Southeast Asia also started firing up again as their countries started to eliminate the virus.
But the empty containers needed for those goods were still on the wrong side of the Pacific Ocean, so the initial shortages came not from a lack of ships but a lack of empty containers.
This drove container rates through the roof and shipping lines started responding by putting on more ships.
That led to a huge increase in the number of ships sailing to ports like Long Beach, in the United States, just as many port workers started to catch Covid-19.
Predictably, this created a logjam which took more ships and containers out of circulation, because now they were spending weeks at sea waiting for a slot at the port and unable to offload their cargo.
The delays drove freight rates up even further, attracting ships away from markets like New Zealand towards the now very lucrative trans-Pacific routes between Asia and the United States.
Land-side port infrastructure in the United States (trucks, roads, rail) was already struggling to deal with the “lumpiness” of unloading large containerships, it could not cope with several additional ones arriving at the same time.
We have experienced a similar problem in New Zealand at the Ports of Auckland. A half-finished automation project has been blamed for delays in unloading goods. The delays have meant ships started offloading their cargo Northport or Tauranga instead.
However, sending ships to Northport or Tauranga has not proven to be much of a solution. There is no more rail capacity between Tauranga and Auckland. On a fixed rail line you can only run so many trains, so shipping delays have blown out. Edwards says it used to take two days to get a container from Tauranga to Auckland via rail, now it takes two weeks.
The road freight network has picked up the slack but, like trucking companies overseas, the industry is also suffering from a shortage of drivers thanks to the international border situation.
Cutbacks in the number of foreign shipping lines visiting have also placed extra strain on the trucking industry, trucks must now transport things that were once transported by international shipping lines engaged in coastal shipping.
They were effectively our domestic shipping network, some have suggested this as an area the Government could have intervened to take a little pressure off domestic supply chains.
Wood seems to have taken these suggestions on board. The Government has allocated $30m to a new “coastal shipping activity class” in the National Land Transport Programme, a three-year plan for allocating transport funding.
The Waka Kotahi board is expected to receive proposals for investment in maritime infrastructure and port expansions next year, but the money could be used for any initiative that enhances domestic shipping services with new services.
Edwards says while increased demand for goods has been a big factor in the recent disruptions to supply chains, it is more about the timing of this demand.
“The increase in demand isn’t as significant as you would think, I’m reading reports of around 5 to 7 per cent only, but it’s come at times that people couldn’t predict when there wasn’t capacity or availability and that’s thrown the whole thing into disarray,
“If we jump in a time machine and go back to 2018, and backwards, in the shipping world we could predict peaks and troughs, we knew we would have Chinese New Year, Black Friday, Cyber Monday, and Christmas.
“And you set your calendar to that, and even the ports around the world they operated their labour requirements and that sort of stuff on that sort of calendar, Covid came along and completely missed up that forecasting, and they haven’t really recovered.”
Lyttelton port general manager container operations Simon Munt says most of the time none of the international services will arrive on time at port.
Fewer vessels are visiting, visits are 20 percent down on the number the port had planned on receiving, but ships are offloading 10 per cent higher volumes of containers on each visit.
“It’s a little bit feast or famine, so you’ve got no ships or you’ve got too many ships.”
The high loads of containers which arrive all at once put more pressure on transport companies, and also on importers who are having to deal with a lot of containers one week, none the next.
Munt says this disruption sometimes causes queues of trucks to form at Lyttelton port. The large volumes of freight received during weekends add to the complications because trucking firms servicing Lyttleton don’t operate on weekends, so the containers pile up.
This year’s disruptions have also been exacerbated by five major unpredictable international disruptions: the Ever Given blocking the Suez Canal, the closure of Yantian port, the shutdown at Ningbo container terminal, an outbreak at China’s largest air cargo port, and factory closures in South East Asia.
All of those disruptions, except the Suez Canal, are a consequence of “zero Covid” policies. which lead to ports and factories being locked down when cases are detected. These disruptions could continue if China’s policy continues, vaccine immunity wanes too quickly, or booster shots don’t make their way around the globe fast enough.
Other shipping disruptions could be on the horizon too, South Korea based shipping line HMM, which plays a key role in transporting semiconductor chips, face the prospect of strikes, while seafarers who have been kept at sea for too long under trying conditions could create safety concerns at sea next year. Closer to home port strikes in Australia are possible too.
On the demand side, a study by the International Monetary Fund indicates the increased demand for goods over services in Europe may turn out to be a permanent change of behaviour rather than a lockdown fad.
That means the world may need more cargo ships in the long-term, but significant extra capacity isn’t forecast to come online until 2023.
It is not all bad news for New Zealand. While we have lost shipping services we have also gained some.
Taiwanese carrier TS lines has started carrying goods between Asian ports and New Zealand, and Neptune Orient will start shipping goods between Shanghai, Auckland and Lyttleton.
And while inflation is a regrettable consequence of supply chain issues, it might also cause people to reduce their demand for goods.
Edwards says if the Government stick to its Reconnecting NZ timeline we could also see the airfreight situation improve next year too.
“Even if we had two or three more airlines operating would make a big difference to the air freight supply chain here, that’s for sure.”