• Sebastian Korporal, Senior Manager |

Highlights

  • Freight rates for sea transport have recently seen a sharp rise.

  • This is due to logistical problems caused by the coronavirus measures and shifts in demand.

  • The shipping alliances will likely try to push through permanently higher prices.

In a three-part blog series, we take a close look at the transport of goods between Europe and Asia. How are freight rates developing? What are the emerging infrastructures? We assess developments and estimate trends. In the first article, we look at container transport by ship and train. In the second part, we look at air freight. A shift to road appears to be a possible future alternative and is therefore analysed in more detail in the last part of the blog series.

Sea freight: Will the coronavirus price increases be sustained?

Demand for consumer goods has developed very positively worldwide. This also has an impact on the movement of goods. The demand for transport capacity is rising and causing freight rates to skyrocket. A temporary high triggered by the coronavirus crisis? Or are there other triggers, and was the trend towards higher freight rates only anticipated based on the events? 

Trade with China quickly overcame coronavirus slump

The surge in demand could not have been foreseen. In 2020, China was Germany's second largest export customer. Germany imported more goods from China that year than ever before. European exports to China rose by 2.2 per cent to 202.5 billion euros in 2020 compared to 2019 [1]. Similarly, European imports from China increased by 5.6 per cent to 383.5 billion euros [1]. China had already become Germany's most important trading partner in 2016. Most traders were not prepared for this sudden increase, which came about despite the coronavirus pandemic.

Shipping companies shut down too many ships

The shipping companies in particular felt compelled to react promptly to the sharp downturn. They cut important connections for a limited period of time and shut down ships. Globally, about 310 container ships were affected at the beginning of February [2]. This inevitably led to a bottleneck when the subsequent boom in demand arrived. If demand continues to rise, there is no end in sight to the bottleneck.

Many shipping companies have ordered fewer new ships in recent years, with new ship orders already down 10 per cent in 2019 and 50 per cent in 2020 [3]. This means that a rapid increase in ship capacity is not on the horizon, as an order for container ships placed today will lead to delivery in about 3 years. 

Container congestion

The movement of goods is also hampered by the limited availability of containers. There are not enough containers to absorb fluctuations in demand such as those caused by the Covid-19 crisis. In addition, at the beginning of the pandemic, many containers were congested in the West. In the lockdown at the end of February and beginning of March 2020, European buyers were still ordering large quantities of supplies despite the lockdown. As a result, containers arrived from China at this time that were not collected or transported onwards and instead jammed up in the container terminals.

A similar development can be observed with the return transports. Quarantine measures for ship crews and employees in container handling led to a lack of personnel in the ports and for onward transport to the hinterland. The storage of containers increased and with it the return times.

Meanwhile, container demand was rising. And as a result, freight rates were increasing too. In March and April, the rates per FEU remained constant. Since May 2021, however, they have been rising rapidly again. 

Shipping companies order new containers

The shipping lines are now counteracting this development to some extent. Hapag-Lloyd is responding to this shortage with new container orders. In April 2021, 150,000 TEU dry boxes and state-of-the-art reefer containers were ordered from China. In addition, 8,000 TEU special containers were ordered, resulting in a total investment of 550 million US dollars [4]. The shipping company Wan Hai Lines has also purchased new containers. In January 2021, 50,000 FEU were purchased [5].

Orders from shipping companies will lead to increased capacity on the market and accordingly give hope for discounted offers for customers. 

Alliances: the key to controlling freight rates?

However, the decision-making power of the large shipping companies and their alliances plays a decisive role in pricing. They could keep freight rates at a higher level than before the crisis in order to increase earnings.

The shipping companies are forming alliances to improve their service offerings. This helps not only to better coordinate the utilisation of ships, but also to reduce costs. As the largest shipping companies cooperate, the alliances generate even greater turnover.

The following chart shows the enormous container capacities and the large number of ships of the ten largest shipping companies.

Top shipping companies

The shipping companies of the largest alliances are among the top 10 market players. On the Far East route, they alone dominate the market. The "2M Alliance" (Maersk, MSC) comprises about 1,300 ships, the "Ocean Alliance" (CMA, COSCO, Evergreen) about 1,260 ships and the "THE Alliance" (Hapag-Lloyd, ONE, Yang Ming) almost 570 ships. 

The following diagram shows the capacity shares of the largest shipping alliances worldwide by trade lanes in January 2021. Ultra-large container ships are used in particular on the Far East-North Europe route. As such ships are newly acquired or commissioned, "smaller" ships rotate to other trade lanes and are deployed, for example, on other routes such as South America-Europe. Under certain circumstances, these shifts can lead to an increase in supply, which puts pressure on freight prices. This is something that shipping companies will take into account in their decisions to purchase new supercargo vessels in the future. Stabilising the supply-demand balance is the long-term goal. 

Capacity share of sea freight in far east, transpacific and atlantic

Goods transport: Rail to be the price-performance winner of the future?

In 2019, over 95 per cent of goods between Germany and China were transported mainly by sea [6]. The reason for this is the lower costs. While it costs around 75 USD/FEU per day for the sea route with 19.22 billion tonnes, this would be in the range of 397 USD/FEU per day for rail [6]. At the present time, the sea route is therefore the cheapest transport mode of the most common options.

Nevertheless, the choice of the sea route in German-Chinese goods traffic has a major disadvantage: the transport time of about one month. Transport by rail takes only about two weeks to cover the same distance [6].

The Chinese infrastructure project "One Belt, One Road" or "New Silk Road" is intended to improve the trade network between Europe, Asia and Africa and could increase capacity on the railways in the long term and lead to price reductions. However, this comes at a time of steadily increasing demand.

Rising demand for rail transport from China to Germany

Due to the "New Silk Road" project, rail freight traffic between Germany and China grew strongly in 2013 by almost 760 per cent to 430,952 tonnes [6].

The International Union of Railways (UIC) has estimated that transport volume of rail freight traffic between China and Europe will grow from 145,000 TEU in 2016 to 640,000 TEU by 2027 [7]. This corresponds to an increase of about 440 percent. However, due to the Covid-19 crisis and the subsequent boom in demand for goods, approximately 1.135 million standard containers (TEU) were transported via China-Europe trains in 2020 [8].

Outlook: Freight rates to stabilise at a higher level than before the Covid-19 crisis

The shipping companies' long-term goal is stable, profitable rates. After the first Covid-19 wave, it became apparent that there is too little capacity to meet the rapid increase in demand. The shipping companies lacked available containers, and prices exploded. The market is too sluggish to react to the various capacity bottlenecks in the short or medium term. The alliances can therefore control the market and enforce their interest in stability at a higher price level. And rail transport is not expected to exert any pressure on prices.

Parallel developments can also be seen in air freight transport. Here, too, there are capacity bottlenecks and increased demand. You can read an assessment of how this market is developing in the next article.

Sources:

[1] https://www.gtai.de/gtai-de/trade/wirtschaftsumfeld/bericht-wirtschaftsumfeld/china/chinas-aussenhandel-schreibt-in-der-coronakrise-neue-rekorde-616472

[2] https://www.statista.com/statistics/1106576/inactive-container-ships-due-to-covid-19/

[3] https://www.dw.com/de/container-schifffahrt-reeder-export-handel/a-56663481 23.02.21, Insa Wrede

[4] https://www.hapag-lloyd.com/en/press/releases/2021/04/hapag-lloyd-orders-150-000-teu-of-standard-and-reefer-containers.html 14.04.2021

[5] https://www.hellenicshippingnews.com/wan-hai-orders-50000-containers-amid-shortage/

[6] https://www.boell.de/sites/default/files/2020-11/Infrastrukturatlas%202020.pdf?dimension1=ds_infrastrukturatlas

[7] https://www.hk24.de/blueprint/servlet/resource/blob/4399366/acf8e888a003f7440d01bea9541679c6/hamburg-europa-hub-auf-der-neuen-seidenstrasse-data.pdf 2018

[8] http://de.china-embassy.org/det/sshsz/t1847543.htm 20.01.2021

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