Freight and supply chains: A year in review

Features - Transportation & Logistics

A look at how macro trends shaped the freight market in 2021 and what 2022 could have in store.

January 6, 2022

© Maksym Yemelyanov / stock.adobe.com

The world shifted with the COVID-19 pandemic that began affecting China in late 2019 and overwhelmed economies in the first half of 2020 with lockdowns, strict travel policies, production halts, interrupted supply chains and contractions in consumption.

As economies reopened in the summer of 2020 and into 2021, consumer and business needs surged beyond what most imagined. Pent-up demand was reinforced by government stimulus worldwide. As 2021 came to an end, world economies were facing logistics bottlenecks and inflation. “The economies came back roaring quicker than anyone anticipated, resulting in not enough of anything through the supply chain,” says Anton C. Posner, chief executive officer of logistics firm Mercury Resources, Commack, New York.

Ocean freight and trucking rates and, to a lesser extent, rail, swelled for more than a year on strong demand, and now heightened shipping costs are adding to concerns that inflation across the U.S. economy will be slow to dissipate.

Ships at the center of trade

Shipping vessels are at the center of worldwide logistics with more than 80 percent of global trade by volume moved via the sea. The lack of demand and oversupply of space have plagued freight rates in recent years. However, the tide shifted mid-2020, and the supply chain issues have been exacerbated since by a shortage of ships.

In light of uncertainty injected by the pandemic-influenced slowdown in 2020, many ship owners retired older vessels to scrap yards and postponed new ship orders. With the surge in business, ship owners have placed orders for a variety of ship categories that will trickle to the work list by late 2022, though most ships are anticipated for 2023 deliveries. The new ship building prices in Chinese shipyards for handysize, Suezmax and capsize vessels have risen by 20 to 30 percent annually, according to a weekly report from Banchero Costa, an Italy-based maritime brokerage house. In the meantime, it has been a ship operator’s market.

The surge in freight pricing is influenced by commodity, vessel type, route and port congestion. Freight brokers are finding themselves extraordinarily busy negotiating prices, engaging volumes and redirecting loads as new roadblocks frequently appear. As Chad Hansen, director of export commodities at Sealink International, headquartered in Plano, Texas, notes, “Shipping is definitely burying us with work. With shipping dynamics today, it is difficult to predict what is going to happen in the short term let alone in 2022, but we are staying on top of the latest information to serve our customers.”

Still, market participants agree high freight prices will continue into the first half of 2022, with some easing anticipated in the latter part of the year. Freight level predictability is difficult in the face of the latest news on coronavirus variants and the potential for countries to tighten policies and close borders. Freight rates could find a more balanced scenario in 2023 and as bulk vessel fleet plans become clearer.

Events that shaped the 2021 freight market

All commodities and vessel types are interactively influencing the supply chain constraints and resulting rate hikes, making it difficult to single out factors that are affecting only recyclables. But here are a few factors that have overall affected freight rates as well as supply chains globally:

Fuel prices. A surge in fuel prices not only directly increased shipping costs but also added to congestion. For instance, congestion in the Panama Canal for competing containers, liquefied natural gas (LNG) and liquefied petroleum gas (LPG) vessels worsened this year, triggering longer routes eastward around the Cape of Good Hope, resulting in increased costs.

Tanker rates to ship LNG have been driven to record high prices given the demand for oil vessels after gas and oil prices plummeted in early 2020, contracting exploration, drilling and processing.

Energy costs. Higher charter rates are further pushing energy costs as well. European companies have announced production curtailments in light of high electricity prices, while Chinese firms have faced stoppages in response to the lack of reliable energy supply to plants. The threat of stoppages has companies in the West reassessing supply chains. Electricity woes are not being felt in the U.S. market given the strong infrastructure, though most states are passing on electricity rate hikes year on year.

Port closures. At the Port of Vancouver, operations were affected by the recent flooding in late November that disrupted rail and truck flows. Inbound and outbound shipments were delayed, and a few rail lines required rebuilding as they were washed away during mudslides. The state of emergency into December and intermittent openings of highway routes in the area are anticipated to add to the global delays into the first quarter of 2022.

The shutdown of a key port in southern China in May and June 2021 dislocated about 350,000 containers and added to the strains. Shanghai’s Ningbo Zhoushan and Hong Kong’s Shenzhen have led the way with more than 200 container ships at sea pending unloading, while Los Angeles and Long Beach have been drifting between 70 to 90 ships.

In March 2021, the EverGiven container ship blocked the Suez Canal for a week by getting stuck in shallow water. The Suez Canal handles 12 to 15 percent of global shipping as a thoroughfare between the Mediterranean Sea and Red Sea. The blockage worsened global trade, which already was disrupted by the pandemic. The rerouting of Asia-Europe ships added to congestion at new destination ports. The rules of engagement at sea also expanded liability. Egypt signed a multimillion-dollar compensation deal with the owners of EverGiven after being impounded for three months postevent.

The great container congestion

The record number of container ships awaiting berths at ports in the Los Angeles area shows limited signs of resolution, though some are being rerouted to smaller ports. The container logistics issues in Los Angeles also are affected by the sheer volume of containers to unload, the availability of equipment and chassis units for container transfer, truck shortages and the domestic flow of filled containers for return to Asia.

Penalties imposed at ports are encouraging the return of empty containers to Asia to be filled rapidly at higher inbound prices to the U.S. “Ferrous and nonferrous scrap trading via containers is being negatively affected by container availability, rail line problems, trucking, archaic container booking procedures, port penalties and reliability,” says Parminder Bajwa, vice president at GDB International, New Brunswick, New Jersey.

With lags at the ports in Los Angeles, containers were redirected to Houston and Florida. The selection of either the Panama Canal or a longer southern route naturally increased freight cost.

Recyclers are competing with big box retailers for space on container vessels. Considering difficult shipment flows, big box retailers are taking in-house logistics measures and vertically integrating solutions. Container vessels are being rerouted to smaller ports, a benefit of the free-market dynamics, Posner of Mercury Resources says. The strategy is taking containers out of the larger ports and redistributing activity.

A large metals exporter out of Los Angeles, speaking under the condition of anonymity, says U.S. exporters were working on a different dynamic during the fourth quarter of 2021. Asian buyers have options from cheaper regions, such as Europe, at times, and the higher U.S. prices cannot be pushed to these buyers easily. Moreover, export has a two-month outlook, while domestic is about a month out, thereby, incentivizing the flow of scrap metals to the domestic market at strong prices and easier logistics.

Bajwa concurs that flows of goods were influenced by the logistics challenge and that when closer domestic options were possible, North American buyers could reap benefits. The higher business costs along the supply chain inherently increased product prices to end consumers.

Banchero Costa’s weekly market report notes that freight rates for containers could have peaked and could fall from their all-time recent highs. Still, resetting to prior levels could take up to two years, according to Sea-Intelligence. Small declines have been recorded on the Asia-West Coast route and some lines from Europe, though most lines continue to see weekly gains as of early December 2021.

The China containerized freight index (CCFI) tripled in 2021 compared with 2020, according to data from Shanghai Shipping Exchange. Annually, the CCFI rose by 10 percent to 854 in November 2018, fell by 5 percent in November 2019, rose by 42 percent the following November and surged by 180 percent to about 3,232 in late November 2021. Overall, the CCFI has more than quadrupled since November 2017, when it was 780.

Bulk shipping

The possibility of chartering space is not a bulk issue but primarily a container issue, Posner says. It has become a shipowner’s market, but not all lines are facing backlogs if the budget to pay exists.

Handysize bulk ships’ daily costs have doubled and tripled compared with pre-COVID-19 to meet the new supply and demand dynamics, with daily rates rising from about $15,000 in early 2020 to $28,000–$35,000 as of early December 2021, he observes.

Speaking with shippers importing bulk copper via Florida ports from South America, few problems were reported beyond pricing, with most of the backlog pointing back to the U.S.-Asian lines seeking to land in Los Angeles.

“As consumer markets are fighting for space in containers, more retailers are booking bulk break cargoes via handysize vessels,” Posner says. Additionally, the slowdown in China has allowed for some reduction in overall bulk prices in the fourth quarter of 2021. Fewer seaborne thermal coal and iron ore movements eased congestion in Chinese ports and saw ocean freight rates dropped by $10 to $15 per metric ton in November 2021, says Raj S Vaidhyanathan, group director, commercial division, at Dubai, United Arab Emirates-based Indicaa Group Ltd.

Bulk freight rates were less likely to drop significantly in December 2021 amid stockpiling ahead of the Chinese holidays, winter conditions and year-end holidays worldwide, Vaidhyanathan says. Prices are anticipated to continue strong into the first half of 2022 with some easing in the year but no promise of prepandemic levels in the short term.

The bulk Davis Index for Supramax (40,000 metric ton) ex Los Angeles cif (cost, insurance and freight) to South Korea port more than doubled to $57 per metric ton in November compared with $26 per metric ton in the same month in 2020.

 

The bulk Davis Index cargo size 40/10 ex New York cif to Turkey more than doubled, too, over the past year to near $44 per metric ton in November from less than $22 per metric ton in the same month in 2020.

The issue with ground transportation

U.S. domestic cargo movements are facing higher trucking rates, while the industry also is confronting an aging workforce and increased regulations. U.S. trucking supply will be restricted beyond historical averages in light of restocking, continued economic recovery and limited driver availability, but the labor shortage in trucking is not a pandemic issue, Posner says.

Bajwa adds, “U.S. Department of Transportation (DOT) regulation concerns, along with few new entrants into the market and high retirement rates have been voiced over the past 10 years.”

Daniel K. Titus, president of Page Trucking, Weedsport, New York, says, “The challenge in the trucking market has changed. No longer are drivers learning the trade via family-owned businesses, but most are entering the industry via driving schools.”

With the shutdown of on-site education during the COVID-19 lockdown in early 2020, the pipeline of graduating students was affected severely.

“Unlike other learning content, the lack of hands-on learning curtailed new drivers,” Titus says. Foreign workers with vast experience have become an asset and were drawn by the high earning potential over the past several years, which also is diversifying the industry’s workforce.

Retailers such as Amazon and Walmart, along with downstream transportation providers such as UPS, are competing heavily for driving talent with hefty bonuses and offers of localized routes. The continued vertical integration of big box retailers is forecast to continue placing pressure on the trucking labor market.

Scott Sakajian, president Express Metal Recycling in Los Angeles, says, “The LA port is definitely congested. In the past, truckers were able to do three to four runs to the pier in a day, but now with the delays, they may only do one or two trips, and costs have increased significantly.”

He adds that margins were being squeezed by the additional labor costs, port passes, potential penalties and unpredictability, which can waste more time.

Vince Pappas, chief executive officer at Stone Steel in Baltimore, says, “Trucking problems were more evident in midsummer, but prices in freight are normalizing slowly.”

Pappas says finding truckers was not impossible, but those facing difficulties likely were shopping around extensively and unwilling to pay amid a new supply and demand curve. He adds that he does not foresee the global logistics challenges resolving until late in the second quarter of 2022.

Regarding logistics costs, Bill Soffer, general manager, rebar division, at New York City-based Ferrosource, says, “Volume would need to fall off on ships and trucks before prices get adjusted down.”

He adds that the tight outbid process where truck brokers drop loads for more lucrative opportunities has become the norm.

The U.S. Producer Price Index (PPI) for freight trucking rose by 20 to 21 percent in the third quarter compared with the third quarter of 2020. It rose by 22 percent in October, with minimum annual growth of 20 to 22 percent projected for November and December.

The U.S. PPI for rail transportation rose by 7 percent for each of the past three months of 2021 in annual terms and is anticipated to continue into early 2022. The subsector PPI results are consistent with the Cass Information Systems (CIS) freight audit and payments indexes developed from Fortune 500 logistics transactions.

A green future?

Posner says shippers are pushing for clean fuel in line with sustainability goals. While discourse about low-sulfur fuel regulations has been negligible over the past one-and-a-half years, public commitments by shippers could impede prequalification of ships and limit access to the bidding process for those that do not update their fleets. According to the Maersk website, “The emphasis in the automotive industry on shrinking the carbon footprints across the supply chain has influenced a model shift towards sustainable sourcing.”

A report from the shipping line notes a 43 percent level of digitalization in the average supply chain with opportunity to grow. U.S. Customs and Border Protection is looking for internal controls over manufacturing processes and alignment with the nation’s rules. Continuous status updates to plan functional actions are necessary.

Additionally, 33 percent of supply chain leaders in Asia say they plan to diversify their supply chains by 2023 while building resilience and agility into their networks. Just-in-time operations were strained over the past two years, which will lead to near-shoring and increased inventories.

Along the same lines of sustainability, the carbon-offset market, which offers financial instruments to offset emissions on a per-shipments system, is growing exponentially. Shippers can buy carbon offsetting credits for internal use and to trade. Of interest, Posner says, is what portion of the net-zero production and delivery will be insourced with reduction of emissions at the source via process and material efficiencies and what percentage will be outsourced via offset credits.

Zulma Herrera is ferrous analyst, Americas, at Davis Index and can be reached at zulma.herrera@davisindex.com.