Guest opinion: A pandemic game-changer

Each year, we lament the relative instability of the international shipping industry, analyzing unpredicted challenges and looking for signs of smoother sailing in the months ahead. It goes without saying that 2020 set a new bar for instability across the board.

As the COVID-19 pandemic spread and lockdowns were implemented in the United States, importers quickly canceled orders and adjusted forecasts for the remainder of the year, anticipating poor sales amid the growing global recession. Ocean carriers responded by significantly reducing freight capacity through canceled sailings, a tactic they had been perfecting in recent years to combat the overcapacity and poor financial performance of the previous decade. The outlook was bleak until late spring, when the impact of the first U.S. economic stimulus was realized, coinciding with easing of initial restrictions.

What followed was an unprecedented shift in spending, from in-person services to tangible goods. Importers quickly drew down existing inventories and rushed to order more goods to satisfy massive demand. Ocean carriers reinserted capacity, eventually using all available vessel space during the summer.

Then, freight contract rates that were finalized in late spring were suddenly too low for the reality of the pandemic market. Rates soared, and importers were left with no choice but to pay significantly higher costs to keep cargo moving.

Compounding the space and cost challenges — which still are in play — are historic levels of port congestion, rail delays and trucker capacity shortages. West Coast ports have seen as many as 35 vessels at a time anchoring offshore while waiting for an available berth to load and unload containers.

Delays caused by port and rail congestion translate into completely unpredictable transit times. In an industry that has become accustomed to running lean, the disruptions to each leg of the cargo journey have been disastrous.

This pattern continued through the end of 2020 and into 2021, including the Ever Given container ship’s March blockage of the Suez Canal, which cost an estimated $1 billion in damage and losses, the Suez authority chairman estimates.

While the current import surge is expected to soften as vaccination rates increase and consumers shift some spending to service markets, the ocean freight market anticipates a very gradual lessening of pressure.

Most estimates point to the third and fourth quarters of 2021 as the earliest time that import volumes may begin to dip. The timeline for easing of space and container availability, as well as port congestion, is slightly longer. There may not be noticeable improvement in these areas until late 2021 or early 2022, if current forecasts hold.

In the long term, there will be lasting changes to the balance of power between ocean carriers and shippers. The events of 2020 very suddenly flipped the balance from a transportation buyer’s market to a seller’s market, giving carriers the upper hand. This reversed a decade long trend of keeping shippers in control and pushing freight rates to levels so low they were often unsustainable.

As a result, market power on the east-west trade lanes (trans-Pacific and trans-Atlantic) is now held by the 10 largest ocean carriers, operating in three major alliances that have become adept at controlling market capacity to align with demand. Carriers now prefer short-term deals and are limiting the volume they commit to carry at long-term fixed rates.

This year, shippers that wait too long to start the contracting process or hold out for the lowest rate may find capacity scarce. 

In our annual maritime shipping outlook, we routinely recommend a diversification strategy for ocean freight procurement. That approach has been reinforced by the extreme challenges of the past year, and large volume importers are increasingly partnering with non-vessel-operating common carriers, which perform services of ocean carriers except operating the vessels.

Maintaining a variety of strategic partnerships is essential for success in international shipping. The industry has seen its share of major disruptions over the last decade alone, from labor disputes to cyberattacks, trade wars and carrier bankruptcy. While we cannot predict the cause or timing of the next market disruption, we can take steps to prepare for it. 

Rachel Shames is director of pricing and procurement at CV International Inc., a freight forwarder, customs broker and non-vessel-operating common carrier headquartered in Norfolk.