The Truth behind the Global Shipping Crisis
- Kanchan Dandwani
- Dec 4, 2021
- 9 min read
Updated: Mar 19, 2022
Dec 4, 2021
Global trade plays a major role in the prosperity of the world economy. More than 80% of global trade is shipped by sea. It is the key mode of transport that allows for long distances and efficiency. Approximately 11 billion tons of goods are transported by sea per year. Transport companies are major players in the industry as their practices affect transport costs, and imports and exports.
Currently, global shipping and supply chains are facing significant pressure. Many blame the COVID pandemic for causing havoc in supply chains which are impacting numerous communities. During the past several months, we've seen increasing delays and heavy traffic in global shipping. The congestion is compounded by different factors, including rapid growth in e-commerce. However, the problem goes beyond that, with the maritime industry facing fundamental challenges well before 2020.
Significant Pre-existing Challenges
Environmental
The Maritime Industry faces significant environmental obstacles. Cargo ships are notorious for releasing carbon emissions; it's estimated that global shipping accounts for 3% of international carbon emissions. The EEA reported that sulphur dioxide emissions from ships traveling through European ports amounted to around 1.6 million tonnes in 2019. The International Maritime Organisation (IMO) have set out a number of regulations, including one calling for a 40% reduction in emissions by 2030. In short, to meet new environmental standards, such as global sulphur caps of 0.5%, shipping companies need to innovate and implement new, expensive solutions which include alternative fuels and onshore power supplies
Geopolitics
Geopolitical tensions have always directly affected global trade. Political rivalries and tensions are often exhausted on the seas, impacting transport routes. Several case studies exemplify this. Take tensions between the United States and Iran, for example, which led to a number of incursions against vessels in the seas surrounding Oman and Yemen. In May 2019, Saudi oil tankers were attacked near Fujairah in the United Arab Emirates. During the following month, two tankers were destroyed in the Gulf of Oman. Both vessels, the Front Altair and the Kokuka Courageous, sustained explosions. Fortunately, there were no serious injuries. However, the incident led to a temporary spike in world oil prices, up to as much as 4%. It seemed that tensions in the Middle Eastern seas were running too high. Insurance prices are on the rise as maritime transportation is easily susceptible to damage amidst ongoing political tensions.
New Challenges
The Long-Lasting Impact of the Coronavirus
When COVID first hit, no one really could have predicted the deep repercussions that would follow. Like wildfire, it spread from country to country, followed by internal lockdowns, border closures and social distancing. The nature of supply and demand was reshuffled. While there was a slowdown in the retail and entertainment industry, the need for medical supplies, household goods and food spiked. The world economy needed to quickly readjust and reorganise priorities while restrictions were continuously evolving in implementation. A handful of regions in China for instance, in early 2020, stopped crew from disembarking and required that all vessels seeking berth provide health declarations for all crew. In Australia, border screening and isolation procedures were implemented in February that year. Many other countries had their own procedures which initially challenged efficient interaction and communication. The Bank of England reported that in the first quarter of 2020, global trade fell by almost 9%, gradually recovering toward the end of the year.
The new challenge is the huge bottleneck in shipping. Even though countries like China recovered relatively swiftly in general factory production, other regions still face greater disruption due to Covid-19. In places like the United States, containers have not been able to leave their ports to circle back to Asia to collect goods. There is an increasing backlog and availability of containers in contrast to growing demand for items such as household appliances and furniture, a lot of which are manufactured in Asia. After individual country lockdowns and berthing restrictions, the world is playing a game of catch-up.
A Spike in E-Commerce
Once Covid-19 settled down into our lives, the growth of electronic commerce took on a new energy. Consumer demand sharply increased. According to the BBC, demand for consumer goods was 33% higher in August 2021 than in February 2020.
Analysts explore various explanations for this growth. Perhaps the most logical one, is that due to lockdowns and a shift in spending habits, people had to rely on the internet for their retail and entertainment needs. More importantly, with communities under lockdown, demand for household products increased. Instead of spending on travel and restaurants, families spent money online to enhance their indoor lifestyle. Door-to-door services, express deliveries and free shipping has never been more valuable than it is now.
It can't be generalised that consumers are excessively shopping online. Nevertheless, consumers are more drawn into purchases online while working from home, for example. This is not only to do with panic buying household products, masks or food due to fears of shortages. It also includes emotional impulse buying. Monique Moore, a journalist for the Financial Times, noted that a number of people reached out to her for advice on how to curb shopping addictions. It seems that perhaps the excitement of new products so readily available on internet browsers creates an alternative sense of excitement and exploration.
Our spending habits may be coming full circle. The costs of transporting cargo have gone through the roof. It was reported in Hellenic Shipping News that a 40-foot container from Shanghai to Rotterdam now costs $10,522, which is up by 547% from the five-year average. Bloomberg reported that the increasing freight charges companies have to pay are going to mean the items we purchase from them are going to be more expensive. Bigger companies (i.e. Walmart) have had to hire their own private ships to ensure goods get delivered on time this year, which will lead to higher price tags. These private chartered ships begin somewhere from $40,000 per day. Most smaller businesses obviously can't afford to adopt this solution.
Coffee products have been particularly affected, with most arabica beans being shipped by sea. Considering how important our morning coffee is to most of us, either being unable to afford coffee or not having access altogether would be devastating (in our opinion). While the coffee bean crops and their harvest were originally negatively impacted by adverse weather and labor shortages, the current shipping issues add further obstacles.
Maritime Industry: Shortage of Workers & Low Morale
More immediate factors are directly related to problems in the shipping industry itself. Currently, the industry faces issues such as increasing freight rates due to pressure on freight capacity, as previously explained. In addition, there are worker shortages. For instance, the United States has been facing a shortage of around 80,000 truck drivers who are responsible for transporting cargo from docks to warehouses safely. The reasons behind this include the impact of Covid-19 and retired truck drivers. Warehouse jobs also involve a lot of turnover, and with the risk of injuries and long working hours, there isn't a huge supply of new staff to face the upcoming challenges. The new dynamics that come with these positions have made the industry less appealing to those seeking employment.
Seafarers employed in maritime transport have also undergone numerous challenges. It is estimated that over 200,000 of them were confined to ships as a result of Covid-19 restrictions. Fatigue is on the rise, and the maritime industry is becoming an undesirable career path. Those who continue to work in the industry are often exhausted which, on occasion, leads to incidents and thus inefficiency.
Large vessels are also a problem, with an example being the blockage of the 399 meter Ever Given in the Suez Canal earlier in March this year. As global trade expands, so does the need for large vessels. The larger the ships, the higher the stakes. Not only do they carry more goods, but the size of them creates more risks in maintenance and berthing. If the goods in them are negatively impacted or blocked, the costs associated with recovery are very high. The cost of disruption due to the Suez Canal blockage was estimated at almost $100 million.
Onboard Safety
According to the International Maritime Bureau (IMB) there were reports of 195 cases of piracy in 2020, an increase from the 162 reported in 2019. Approximately 30% of piracy takes place in the Gulf of Guinea, as well as 50% of kidnappings. The cause of piracy is usually due to the economic and political conditions of African regions, problems which are further compounded by Covid-19.
According to Allianz Global, the South China, Indochina, Indonesia and Philippines, East Mediterranean and Black Sea, and Japan, Korea and North China regions account for half of the 876 shipping losses in the past 10 years. These are usually due to factors such as old ships, congestion or weather.
Possible Solutions
Government:
Governments, particularly in the West, are being encouraged to spend more on enhancing different aspects of supply chains, such as allocating funds to the transformation of railways, ports warehouses, roads, and workers' salaries. Right now, shipping infrastructure requires urgent attention.
Governments can also share more resources and find ways to collaborate with other countries that are undergoing more serious and challenging issues as a result of Covid-19, which will allow everyone to recover steadily. Part of this process may include working with African regions in an attempt the secure the stability of the seas. The whole world is involved in the global supply chain. If one link is broken, it impacts the whole process. For instance, during the Summer of this year, the decision of 11 wealthier countries such as France and the United States to provide third booster vaccine shots sparked outrage. It was estimated all these booster shots offered to those over 50 and with underlying health conditions in rich countries amounted to a potential 440 million doses. The reason for the outrage is that every booster shot is a potential first or second vaccine to those in developing nations. The idea that some countries can recover first fully is an illusion. If anything, the degree of global exchange and trade shows this is just not possible. If less wealthy nations do not recover, it will, without a shadow of a doubt, extend the pandemic and its effects for all of us.
Businesses:
The 'Just-In-Time' approach is common practice wherein retail businesses maintain lower product inventories to reduce the costs of storage and warehouse space. They keep a minimum of the product, and if demand increases, they order goods when required. Retail and demand are closely monitored and the business will just put in a new order with their factories, which are often located in Asia. This becomes a problem if global shipping supplies are congested.
Thankfully, companies and businesses are now looking at more sustainable solutions through either finding local suppliers, or at least suppliers that are much closer to their main operating space. In addition, instead of higher shipping rates, businesses are now considering investing in bigger warehouse spaces to reduce the frequency of shipping.
Shipping:
Shipping companies can work with governments. Perhaps the most important aspect of their coordination would be to ensure that upon receiving government support, a significant amount is allocated to reflect the value of crucial employment, i.e. truck drivers.
Greater collaboration is also required in the industry. The Washington Post recently explored this issue in detail. The shipping bottlenecks in California are, according to the exposé, "calling into question the global economic model that has prevailed for three decades". For goods to reach private residential addresses, greater coordination is required. Instead of shipping companies working together and sharing information, maintaining privacy and security is prioritized. Key stakeholders involved in the transportation of important cargo such as the importers, exporters, carriers, terminal operators and others are actually losing out on useful data insight due to a lack of transparency and clarity around their shipments. For example, when logistics partners cannot view where a cargo is in transit, it causes significant delays because they cannot prepare, or perhaps save time by grouping it with other shipments. Technology that allows the real-time sharing of cargo information is growing, with places such as Rotterdam already using a platform called PortXchange.
Consumers/Individuals:
Prior to placing a number of online orders, a useful contribution would be an individual/consumer asking themselves, "Do I really need or want this?" "Will it hold value for me over time?", and "Am I getting more than one set of this because I am afraid of it running out?".
If even only a thousand start to shift their way of thinking, it could have a very powerful effect. Fear of scarcity was clearly demonstrated when everyone was rushing out to hoard toilet paper. The truth is that if we had not bought into the herd mentality at the time, the shelves would not have been wiped out. Arguments would not have broken out in supermarkets. In retrospect, it was ridiculous. At the time however, the fear seemed so real.
Trust has to start somewhere, and we can't keep pointing fingers instead of taking a sincere look in the mirror as to how we can positively contribute just by changing the way we think.
It's evident greater awareness and collaboration are required to overcome these challenges. Initially, Covid-19 seemed to rip us apart from the pleasures we encountered on a daily basis, particularly freedom of movement. Without any real introspection, a lack of vigilance in our lifestyles and how we're conducting our businesses, the current global shipping crisis will probably just lead to further restrictions in our lives. It seems it will only look different because it's the same opportunity in another form, the opportunity to move away from excess and waste and into balance and coordination.
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