SHIPPING AND SUPPLY CHAIN

Failure in global shipping is hurting Australian exporters

Background

A crisis is unfolding in international trade, as supply of containerised shipping services fail to meet increased global demand.  The situation is especially hurting Australian exporters – they are facing unwarranted fees and charges, and unable to book container space on ships.

Ongoing restrictions in air transport, uneven global economic recovery, and a swelling of e-commerce purchases, have led to overwhelming demand for containerised sea freight.

Shipping lines are, however, not adequately increasing services to meet the demand.

This deficiency in shipping services is painfully affecting Australian exporters.  They are experiencing:

  • increases in shipping rates that are 4-5 times more than just a few months ago, with price rises being imposed more often and with little notice;
  • delays of 3-5 months, if not more, on previous delivery timelines;
  • changes in routes and transit ports that add further to delays and costs;
  • substantial penalty fees resulting from unanticipated changes in shipping schedules or cancellations; and/or
  • problems with securing bookings or space on ships.

Many exporters are now feeling the pain – a vegetable grower has been unable to secure a container or space on vessels, a regionally-based manufacturer was hit with detention charges as rail and sea freight schedules do not line up, a canola grower paid tens of thousands of dollars in penalties as its cargo failed to be loaded on to the ship and was left on the port, an auto component business has lost contracts, and a small skincare supplier has given up on exporting because it has become completely unaffordable.

Early indications suggest that exporters have already lost tens of millions of dollars due to delays, additional charges, penalties and loss of business.  This is likely to be just the tip of the iceberg.

This condition is getting worse, and it is unclear when or how this might resolve itself.  If nothing is done to improve the situation, Australian businesses (especially smaller exporters) will continue to lose international competitiveness, cease to do international trade, or move their operations out of Australia and in to markets overseas.  Clearly, these are costs and risks that we, as a country, must avoid.

Recommendations

While there are many causes for the problems and the changed environment, the shipping lines are now profiteering from it.  They will have no incentive to give up those gains.  The shipping industry is not competitive and so we cannot expect a natural return to market equilibrium any time soon.

We believe the Government can take meaningful action.

Firstly, we should open a dialogue with the shipping industry, with the Government strongly but politely requesting the industry proposes immediate solutions.

In parallel, the Government should pursue efforts that increase competition in the shipping industry, especially for sailings to and from Australia.  We can do this by:

  • imposing tougher monitoring, investigation and enforcement of competition laws;
  • enticing shipping lines not currently operating in Australia (such as the Shipping Corporation of India) to establish sailings here;
  • facilitating permissions that allow new shipping lines to operate at select ports.

Separately, the Government should prohibit penalties (such as detention and demurrage charges) when delays are not the fault of exporters or importers.

We encourage the Government to establish an IFAM-like support for containerised sea freight, which might include chartering of vessels, prioritising smaller exporters, and making it available to more than just perishables or agrifood.

As the challenges we face are shared by trade partners, we should work with governments overseas (such as with the US, India, New Zealand and South Korea) to create a global consensus on regulation of shipping lines, including through the coordinated action of competition enforcement agencies.

We should request Export Finance Australia to investigate what new financial products (e.g. credit and insurance) that could be made available to minimise risks and ease financial burdens of exporters.

Finally, we should establish a platform for coordination of rail, road and shipping schedules (as well as related regulations), because regionally-based exporters face greater logistics challenges.

Additional reading

Academic papers – Shipping industry is oligopolistic

https://unctad.org/news/competition-watchdogs-and-forces-shaping-shipping

https://www.econstor.eu/bitstream/10419/195194/1/100141733X.pdf

https://www.joc.com/maritime-news/shippers’-shift-integrated-services-will-last-post-pandemic-maersk_20210513.html

Freight rates have gone up considerably

https://www.drewry.co.uk/supply-chain-advisors/supply-chain-expertise/world-container-index-assessed-by-drewry

Orderbooks for new ships have increased but remain constrained

These will not meet current high levels of demand.

https://www.joc.com/maritime-news/demand-growth-outstrip-container-ship-capacity-despite-new-orders_20210323.html

The above table indicates shipping lines’ orderbooks for new ships remain generally low, apart from Evergreen’s.  Maersk’s investments represent just 1.4% of its current fleet.  And with global blank sailings remaining high, averaging 128 per month between January and May 2021, the problems exporters and importers currently face are unlikely to change in the near future.

Data is sourced from:

https://www.statista.com/statistics/197643/total-number-of-ships-of-worldwide-leading-container-ship-operators-in-2011/

https://www.statista.com/statistics/197675/orderbook-ships-of-worldwide-leading-container-ship-operators-in-2014/

https://www.statista.com/statistics/1223853/blank-and-skipped-sailings-worldwide/

US President Joe Biden signs executive order

The order encourages the US Federal Maritime Commission “to ensure vigorous enforcement against shippers charging American exporters exorbitant charges,”

https://www.spglobal.com/platts/en/market-insights/latest-news/shipping/070921-biden-executive-order-could-bring-more-scrutiny-to-rising-container-shipping-costs

Blank sailings remain high

Intentionally or not this situation will further limit supply

https://www.maritime-executive.com/article/blank-sailing-schedules-creating-further-delays-for-shippers

Detention and demurrage fees doubled in 2021

For many exporters and importers, delays are just one of the challenges

https://www.joc.com/international-logistics/global-sourcing/detention-demurrage-fees-doubled-2021-report_20210629.html

India provides subsidy to its shipping industry

https://economictimes.indiatimes.com/industry/transportation/cabinet-clears-subsidy-scheme-for-shipping-industry/articleshow/84411208.cms?from=mdr

Home Depot chartering its own ships

https://www.cnbc.com/2021/06/13/home-depot-contracted-its-own-container-ship-to-avoid-shipping-delays.html

Shipping and Supply Chain