Post-pandemic Supply Chains: Unlocking Shipping Bottlenecks

The coronavirus pandemic has upended global supply chains and brought much of global economic activity to a halt. Widespread lockdowns and factory closures swept across the world in the wake of the first widespread outbreak of the virus in early 2020. The pandemic’s long tail and the emergence of more contagious variants are increasingly threatening the hard-won gains made across the world in the fight against Covid-19.

Perhaps the best illustration of the complexity of global supply chains, and how they were affected by the events of 2020, is to compare them to the human vascular system. Any bottleneck, no matter how small, can create a major disruption – and it may be extremely difficult, if not completely impossible, to mimic the course of the flow or bypass the blockage, especially in regions where the circulation is disturbed, without causing chaos and unpredictability.

The problem was especially acute in the case of air and container traffic. On the one hand, the precipitous decline in passenger flights due to widespread travel bans have severely constricted the belly cargo capacity, while almost all manufactured goods, from processed food and electronics to gym equipment and auto parts, are shipped in containers. With supply lines blocked, more than 550 container vessels (accounting for about 3m TEUs or 11% of global container capacity) ended up sitting idle during the first half of 2020, and some 7.5 million flights being cancelled between January and July.

As a result, container and air freight rates were driven sky-high, while the shortage of belly capacity on passenger flights set the stage for tight capacity and port congestion across the globe meant that the aircraft and container vessels remaining in operation faced long waits due to ongoing delays and overbooking.

The urgent demand for PPE and medical supplies, together with a strong vaccine-boosted rebound in global trade following the initial slowdown, has boosted cargo yields and made them a bright spot in an otherwise bleak picture for the industry. With demand above pre-crisis levels for virtually all modes of logistics – road, rail, maritime and air – the principal challenge for both traders and logistics industry players is finding sufficient aircraft (cargo and passenger) and vessel and container capacity amid the constantly changing situations caused by the pandemic, and other unforeseeable disruptions such as the blockage of the Suez Canal by the Ever Given grounding and the closure of Shenzhen-Yantian and Ningbo-Zhoushan ports.

The global scale of the coronavirus disaster has magnified the vulnerabilities of our interconnected world, leading to a 5.3% slide in the volume of world merchandise trade in 2020 as countries around the world imposed lockdowns and travel restrictions to stem the spread of the virus. It has also reshaped the logistics industry, promoting a shift from “just-in-time” efficiency to “just-in-case” preparedness.

This research aims to bring traders up to speed with the challenges facing them regarding both the huge shipping backlog and the rising numbers of orders ahead of the peak shopping season; while also presenting a forward-looking perspective on the way to unlock the current bottlenecks amid an expected world trade comeback.

Where are we now?

Since the advent of the Covid-19 pandemic, global traders and logistics industry players – shippers, airlines, railways, trucking companies and freight forwarders – have been trying to navigate the choppy waters of demand-supply mismatches.

Widespread travel restrictions, primarily on passenger flights and cross-border travel, and extensive blank sailing programmes (when vessels skip one or more ports along a planned route or cancel the entire voyage) have been implemented by almost all carriers to and from Asia, due to the reduction in available passenger traffic and export volumes caused by the strict lockdown measures put into place at the start of the pandemic.

Many believe that the significant impact of the pandemic-led shutdowns and the ensuing global logistics adaptions will cause lasting changes to the industry, which considers any blockage or shutdown of more than two weeks structurally consequential to their operations. With shipping being the life blood of the global economy, the clots, partial or complete, in global sailings rapidly spread out to other industries and the effects were amplified through highly interconnected international supply chains. This, coupled with the shutdown of major ports and the shortage of dock workers due to the coronavirus outbreak, has resulted in longer delays and a bigger backlog, hence a higher freight cost.

The global coronavirus pandemic has, however, been no bar to the emergence of new demand for logistics services. The global scramble for PPE, plus the extensive stay-at-home measures implemented in many countries, have made e-commerce even more ubiquitous than before. It goes without saying that the uneven recovery and resumption of economic activities have further exacerbated the disarray in global trade logistics, creating a growing imbalance in container traffic with many empty containers stuck and piled up at unloading ports.

On the one hand, the online shopping spree has thrown a lifeline to many ailing airlines, which have seen the sharpest traffic decline [1] in aviation history. In 2020, international passenger traffic demand, measured in RPKs (revenue passenger kilometres, or the distance travelled by paying passengers), fell by 75.6% compared to the year before. On the other hand, it has placed huge strains on already restive global supply chains.

Compounding matters further is the global Covid-19 vaccine race – the sourcing of inputs, manufacturing and distribution – and the gradual resumption of economic activities, both of which require significant logistics support. In contrast with the 7.6% slide in the value of world merchandise trade in 2020, imports and exports of medical goods grew by 16% from the year before, to US$2.3 trillion.

Most, if not all, logistics companies across the world have been gearing up to transport vaccines and the relevant active pharmaceutical ingredients (APIs) [2], alongside other therapeutics, pharmaceuticals and diagnostic devices, while making ends meet with the help of the unprecedented pent-up demand for raw materials, parts and components, equipment and other industrial inputs needed to reboot industrial production.

With all idle capacity – including destroyed and aged containers – being deployed and in-fleeted at speed, all holiday (China National Day and Chinese New Year) blankings cancelled, the repositioning of vessels and containers from trades with lower utilisation and other modes of transportation such as barges and overland transport (rail and trucking) being fully exploited, space remains tight on all trade routes due to high demand and lingering supply bottlenecks caused by port congestion, berthing delays and container shortages.

As a result, many port operators have implemented various surcharges motivated by the overdraft at terminals and the congestion on the landside. This has pushed spot rates for 40-foot containers, for example, to fresh highs. Until new capacity (including vessels, containers, cargo handling facilities and equipment) is made available according to the orderbook, the container rate hike is not likely to show any sign of abating. This is especially so given the coming holiday season – one of the peak times of the year for logistics.

Before the pandemic, the lion’s share of international trade was shipped across the oceans – 75% in volume and 55% in value, while air transport was insignificant in terms of tonnage but carried 35% in value terms. Noting how the global shake-up is likely to change the face of the logistics industry, new business and logistics models, however, are expected to appear after the grave pandemic shock as many people are looking for more resilient and multimodal alternatives.

Where are we heading?

The current extreme situation – tight space and high freight cost – is likely to persist through 2021, before progressively reverting to normal. The increase in vessel capacity during 2021 as per the current orderbook and the expected arrival of new containers and better circulation of existing empties are reasons for optimism – not to mention the concerted efforts among port/customs authorities, terminal operators and shipping lines to resolve port congestion and infrastructure bottlenecks constraining the efficient repositioning of empty containers.

Skyrocketing freight costs and the aggravating shipping delays have compelled struggling traders and logistics firms to try out new sales avenues in both local and overseas markets, by turning to other possible modes of transport, although this approach cannot always provide a complete answer.

For example, while China-Europe rail freight is continuing to benefit from the overstretched container shipping market, with the number of trains increasing by 50% to hit an all-time high of 12,406 last year, this contingent model of transport cannot solve all the problems arising from the upended intercontinental logistics. It can only serve as a partial cushion to the crazy freight rates amid the global pandemic. And this is not to mention the mounting pressure – and, in turn, bottlenecks – seen at train hubs on the China-Kazakhstan (Alashankou and Khorgas) and Poland-Belarus (Małaszewicze and Brest) borders.

Trucking is another option to help alleviate the current extreme situation, but it cannot provide enough assistance because of the slew of travel bans and border control measures different countries have put into place. This adds little to the clearance of the backlog of freight piled up at seaports, airports and inland dry ports.

Another acceleration in the transformation of global supply chains concerns the rise of nearshoring, onshoring and/or de-offshoring. This is when businesses consider moving their operations home or to a nearby destination from one further away.

The exorbitant freight rates have driven manufacturers to look for alternative production bases and sources of supply closer to home and/or the target markets. As an illustration, more than 80% of businesses in North America, which may also have been swayed by the Sino-US trade feud, were found to be likely, or extremely likely, to reshore sourcing, as one way of reducing the likelihood of facing a similar plight in the future. That’s up from 54% in March 2020.

In order to future-proof global supply chains, the logistics industry is promoting the change from “just-in-time” efficiency to “just-in-case” preparedness. To achieve this, as highlighted by the United Nations Conference on Trade and Development (UNCTAD), policymakers would have to fast-track trade facilitation reforms to make trade easier and less costly through trade procedure modernisation. At the same time, they would also need to improve trade tracking, oversight and forecasting by promoting transparency and encouraging collaboration along the maritime supply chain, so as to improve the monitoring of port calls and liner schedules and avoid abusive and unproductive practices in the shipping industry.

Misinformation and disinformation fuels chaos and panic, but reliable intelligence can help people – traders and logistics players – make informed decisions. Many believe there is an urgent need for a trustworthy database providing timely information about country/port lockdowns, trucking/railway/container statuses, and the daily productivity of ports, airports and inland ports, in order to empower global traders looking to optimise their supply chain strategies and logistics solutions.

To make the reforms a success, crossovers between the business world and various international intergovernmental organisations such as the UNCTAD, the WTO, the International Maritime Organization (IMO), the Universal Postal Union (UPU) and the International Civil Aviation Organization (ICAO) have never been more pivotal.

[1] The decline in air passengers transported in 2020 was the largest recorded since global RPKs started being tracked around 1950.

[2] WTO Director-General Ngozi Okonjo‑Iweala once mentioned in her remarks that “One leading Covid-19 vaccine includes 280 components sourced from 19 different countries.”

[3] The Freightos Baltic Global Container Index (FBX) tracks ocean container transport spot freight rates across 12 global trade lanes. It was jointly established by Freightos and the Baltic Exchange.