The Shipping Crisis: A case study

The world faces a dramatic crisis in its fight to bring society back on its legs in the face of the Covid-19 pandemic. As the countries started containing and navigating their way through the pandemic, borders and trade began to open up, and with it, a new economic crisis arose. The demand for all goods saw massive needs across all markets. While suppliers were happy to provide, the transportation infrastructure was unprepared to tackle the unprecedented quantity of items to be shipped, leading to a global shipping crisis.

Lack of containers and vessels saw the shipping industry exploiting their position. Canceled contracts, multiple fold increases in price, and delays sandbagged global markets. While major markets like the US, China and EU continued to prevail, other markets like India and Brazil suffered major setbacks. It is necessary for us to examine this situation and what led India to be caught in such a position and to use the learning to come up with ways to solve the issue short term and ensure such circumstances do not plague us again in the long term.

1. Unavailability of containers due to most of it returning to China post-delivery

1.1. The effect of the problem

The unprecedented buildup of ships and containers resulted in a container shortage in every major port in the world. Shipping companies find moving stuffed boxes from east to west more lucrative than hauling empty ones in the reverse direction. Transporting empty boxes is less profitable. According to the Drewry World Container Index, spot rates in the east-bound routes is a fraction for those on ships sailing westward. For instance, the spot freight rate for 40 feet containers on the Shanghai-Los Angeles route was over $10,000 but under $1,300 in the reverse direction in the recent weeks. Similarly, it was $13,400 on the Shanghai-Rotterdam route and $1,600 reverse. With consumption still very strong in the US and Europe, it might be months before ships start accepting empty boxes.

Container Index Value Chart

1.2. Analyzing the causes

1.2.1. Incessant and sudden shutdowns of major ports

In August 2021, Ningbo-Zhoushan port was closed after one employee tested positive for the Delta virus. A single COVID case can be enough to put the entire industry segment on hold as China continues to pursue a zero-tolerance COVID policy. The terminal shutdown in Ningbo added to the bottlenecks arising from the closure in June of Yantian, a port about 50 miles north of Hong Kong after coronavirus infections were detected among dock workers. While a partial reopening of Yantian took only a few days, a return to routine services took nearly a month to achieve, according to S&P Global Market Intelligence, as the congestion spilled over to other ports.

Congestion at Shenzhen port

1.2.2. Labour and Facility Shortage

Since the pandemic’s beginning, import operations have exceeded export, except for China. The incoming cargo volumes are high, and the labor and equipment shortages only worsen matters. This has caused containers to stack up in China and around Chinese ports. The last-minute change of the dropout points due to constantly changing COVID restrictions and regulations makes truck drivers go the extra mile to deliver containers. The BBC says that few transportation companies are willing to fulfill such orders, resulting in a shortage of available drivers around ports, further stifling the movement of containers and goods.

1.2.3. Changing Business Patterns

Companies and consumers increasingly count on just-in-time inventory systems to order goods. That makes for lower inventories, which reduces costs for companies and allows consumers unprecedented immediate gratification from a global cornucopia of goods. Example: If Ikea needs 50 couches from China, the company orders them, and two or three weeks later, the couches are in any part of the world as required

1.2.4. Low Tolerance in Capacity

The shipping business over the past decade has not been very profitable (until now). This meant there was minimal incentive to buy and order new ships. Moreover, the fall in demand during the lockdown, many planned ships and shipbuilding operations were halted, resulting in fewer boats on the waters than planned.

1.2.5. Panic

Fear of shortages has caused businesses big and small to engage in preventive orders (hoarding) in anticipation of delays. This, of course, only exacerbates the problem by stifling more containers and schedules.

1.3. Solutions to tackle the problem and causes

1. Companies can shift their production sites and supply chains closer to their end consumers for the time being to reduce dependency on ocean freight. This might not seem very favorable in the short term given the cost of setting up, but since markets are growing and several governments favor manufacturing industries, it will be beneficial in the long run for the companies

2. Consumers should be made aware of the present situation and should be informed of the shipping delays before their orders, reducing the amount of dissatisfaction and frustration for them.

2. Intervention by the government

2.1. Factors in play

2.1.1. Fuel costs

Some shipping companies include a fuel cost component in the freight cost pricing model. The cost of road and maritime shipping is dependent on the cost of fuel, and the final price charged to the consumer must factor in the cost of fuel at the time of shipping. If the fuel price is low, road and maritime transport will be cheaper to use, and the benefit will be passed on to the consumer as cost savings. However, if the price of fuel increases, road and maritime transport prices will increase, and the additional cost will be passed on to the consumer.

2.1.2. Demand for freight

The cost of freight is also affected by the demand for freight services. There will be large volumes of products for shipping during periods of higher demand for shipping space, and users will be competing for the limited space. As a result, shipping companies can sell the limited space at a premium price. On the other hand, when the demand for freight services is low, shipping companies will lower their costs to compete for the fewer users looking to ship cargo.

2.1.3. Emerging events

Emerging events such as terrorism, piracy, and a rogue government can increase freight costs as shipping companies recover losses. Prices may also increase due to shippers opting to use longer shipping routes that offer more safety. For example, maritime shipping passing through pirate-prone shipping routes such as Somalia are forced to charge a higher cost to cover the increased risk, higher insurance premiums, and longer shipping routes. When using trucks to transport cargo through areas prone to terrorism and criminal gangs, shipping companies may charge a higher fee to hire security or shift load to safer modes of transport in such areas.

2.1.4. Government regulations

In some countries, the government may introduce a policy that directly affects shipping companies. For example, government authorities may limit truck drivers’ maximum driving hours at specific year periods. This means that the cargo will take longer to get to the destination. Shipping companies raise the freight costs charged to their customers to cover expected losses. Other government regulations that may affect freight costs include a ban on night driving, emission tax laws, limiting the cargo volume that trucks can carry, etc.

2.2. Causes of the problem

2.2.1. Increase in Freight Cost

Pandemic is a big reason that affected all the Factors, i.e., fuel cost, demand, emerging events, regulations. Fuel prices skyrocketed, the need for a large volume of specific products increased as everyone was forced to stay at home, unexpected labor requirements, markets crashed, leading to a lesser cash flow in the economy. This directly affected the supply chain process, and planes were banned in a few countries leading to a sudden hike in freight rates.

2.2.2. External factors and manipulations

People involved in the business played petty games as their profits are their huge concerns which made many Govts regulate their freight prices to save their country’s firms. Many uncertainties like the Evergreen ship in the Suez Canal added fuel to the fire.

2.3 Need for interference

Several trade bodies have urged the center is to set up a regulator to deal with the rising freight charges amid the container shortages facing exporters. Engineering Export Promotion Council of India (EEPC) claimed that shipping lines demand high freight charges as inward traffic from different countries, particularly China, has declined. The exporters are required to pay a higher amount for outbound consignments.

“Imports from China have fallen, and the liners have increased freight rates. No shipping company likes to sail empty after delivery of export consignments,” Sanjay Budhia, chairman of CII national committee on exports and imports, told PTI. He said all the exporters across the country are facing this problem. “This is leading to a situation where cargo is lying at ports. We urged the government to set up a shipping regulator to control the freight rates,” Budhia said, adding that exports have started to pick up despite the coronavirus crisis. After contracting for six months in a row, the country’s exports grew by 5.27 percent to USD 27.4 billion in September. The shipping companies have raised freight rates due to falling imports from China as liners do not have much cargo while returning, an official of the engineering exporters’ body said. “This is making Indian exports uncompetitive in the global markets,” an EEPC official said. After witnessing a sharp fall, he added that engineering exports have somewhat steadied, though the contraction continues. (Business Standard)

2.4. Possible effects of interference

Sunil Vaswani, executive director of the Container Shipping Lines Association (India), said: “Freight rates are a bilateral agreement between the merchant and the shipping line; it would therefore not be suitable for the government to regulate such private business transactions. “He said it would mean Indian exporters and importers would have a competitive disadvantage. Confidential contracts with shipping lines would be made public and visible to their competitors as shipping documents pass through multiple agencies.

“Commodities such as textiles, garments, leather, handicrafts, tea, coffee, seafood, rice and so on, move on FOB terms, where the foreign buyers and sellers pay the freight. They would not want to disclose their contracts with lines and will not allow freight costs to be admitted to their competition. “About 40% of exports and 80% of imports will be affected — business is likely to be diverted to other countries if this is regulated,” added Mr. Vaswani. Freight forwarders doubt whether government regulation and all-inclusive rates would reduce costs.

Naveen Prakash, director at Global Logistics Solutions India, said: “Increasing freight rates and equipment shortages are not a localized matter; shipping lines are global businesses and will allocate their assets where they earn maximum yield.” “If the global supply of containers increases and demand falls, then Indian consignees and shippers can again enjoy much lower rates and extra free days of up to 21 days,” added Mr. Prakash.

Rakesh Pandit, CEO of Conbox Logistics, also questioned whether all-inclusive rates would solve India’s high freight and logistics costs, given the “various malpractices associated with the entire EXIM ecosystem.” He accused operators of container freight stations (CFSs) of being “politically linked” and issuing arbitrary pricing. Another problem keeping costs high is the widespread use of cash in supply chains, according to Mr. Pandit. “Most of the time, this cash is black money,” he claimed. “Because of this, many traders and service providers get undue advantage over others. Unfortunately, this issue is never looked into by the government, as often this cash belongs to politicians who invest in supply chains to convert it into ‘white’ money.”

2.5 Solution to the prices from the government side

The government has regulated the freight charges in the latter part of the 2020s. They were pretty late as that must be done at the pandemic as it is well known that these industries will take a hit if the situation continues. Those measures were not as reasonable as likely to be followed due to incidents that required timely regulations changes. One possible solution can be a contract-based tie-up with companies exporting for a variable price fixed by the government considering the timely activities or requirements. A forum or an association can be made with members of the supply chain, the government, and others involved in the industry for making decisions to balance the needs of one another. In our opinion, the government should regulate the freight charges to save local businesses. As the earlier context said, it should not expose the prices, affecting many other companies. Moreover, many governments regulate the prices, so we can take that as an example and form an agreement with the exporter/importer countries regarding the issue. Government regulating this can be a double-edged sword. So, this must be done with utmost importance to satisfy both the manufacturers and the cargo transporters.

3. Effect on manufacturing industries:

3.1. Importance of the problem

As the world opens up its trade gateways, there has been a massive influx in demand for goods across global markets. Unfortunately, the world lacks the shipping capabilities to meet this demand. As a result, shipping costs have skyrocketed, many countries cannot export their goods, manufacturers are losing out on potential profits. All this means the countries’ manufacturers that are unable to export suffer major setbacks and cannot reap the profits of growing markets. This further aggravates the losses they have been facing due to COVID-19. The collective failure in the manufacturing industry affects the country’s economy, further plunging their economy into deeper financial troubles.

Not only manufacturers but also consumers have to pay the price for this situation. Most companies that have to pay for this expensive shipping have to increase the final cost of their product to remain profitable. Ultimately the consumer pays the price and their buying power decreases. This, means fewer sales for the manufacturer. Thus, it is unhealthy for both the consumer and the manufacturer.

3.2. Analyzing the root cause of the problem

As COVID-19 began to spread rapidly worldwide, transport gateways across the world started to shut themselves down fully or partially to curb the spread. The demand and supply for all sorts of products fell due to this. While essential items were being manufactured and sold at the same rate or even more in the case of electronics, non-essentials found their sales declined. The increased restrictions meant businesses could only afford to transport essential items, and thus sales and profit took critical hits.

All this began to change in 2021 as the countries opened up borders. All sorts of goods that previously were not prioritized suddenly saw a massive jump in demands, and all the companies were eager to fulfill it. These sales could offset their previous FY losses.

3.2.1. Lack of shipping capability:

This massive surge in supply and demand was suitable for the market, but there was a problem. The supply chain: There were not enough vessels and containers to ship the unprecedented volume of goods. The situation was made worse because all the major vessel and container companies were owned by the top 3 markets in the world- US, Europe and China. These countries indirectly asked the companies to prioritize their routes to boost their economies. That is routes connecting US, Europe and China. This meant countries like India did not have sufficient means to export their goods to other markets, hence missing out on major profit scopes.

3.2.2. Increase in shipping costs:

This inequality has led to another problem; the shipping cost has increased by multiple folds. The lack of containers and vessels and lack of priority means the shipping companies can charge unreasonable rates as the markets have no option but to pay if they want to export. While some companies can afford to do so, most companies cannot. Even for the companies who can afford this shipping cost, their profit margin is greatly decreased, making it harder for them to recover from the losses and see some profits.

3.3. Solution the existing problem

While this might be a big issue for India’s economy, it is currently a short-term problem. As the demands in the market slowly decrease after the post-covid surge, the shipping industry will again be at par with the market needs. Subsidizing costs for smaller exporters and taking up the issue to international trade bodies like the World Trade Organization are great short-term solutions.

The greater challenge for India is its long-term stability. The current situation has highlighted a key weakness for the Indian market: they depend heavily on China, US and EU based shipping carriers for their export. This weakness could be exploited to destabilize the economy; Thus, India must focus on a long-term solution more so than the short term.

Two of the most effective ways could be:

  1. Providing incentives to larger private corporations that own and run shipping, shipbuilding and container manufacturing businesses. The incentives could be reduced import tax which would be proportional to the capacity of containers, ships built or operated. This would encourage major corporations like Reliance, Tata and Adani to produce and expand production of these items. A similar system was previously utilized when India wished to open up to international market and boost exports for the first time after gaining independence. Import tax incentives were awarded based on the capacity exported; This system helped encourage exports in previously conservative Indian market.
  2. Funding the Shipping Corporation of India to expand its inventory. The SCI is India’s nationalized shipping vessel corporation that currently owns and operates 80 vessels. Funding them to expand their fleet and encouraging them to offer cheaper fares for the domestic producers will help reduce the dependence on international carriers. Implementing both these methods will improve India’s exports and strengthen India’s position in the international market and make it more self-sustained. It also helps the Indian economy to save billions of dollars that it pays these international carriers.

4. Indian shipping companies failing to compete with others:

The shipping companies rushed to fulfill this demand, focusing on US-China-Europe’s three biggest markets, which left a shipping crisis issue for other markets. This situation exposed a weakness in India’s international presence, they depend too heavily on foreign companies to serve their shipping demands. This begs the question, “How can India, a rising superpower, depend so heavily on other nations for shipping their trade? Why have Indian companies not been able to suffice the need of their nation?”

4.1. Importance of the problem

While major international shipping companies like P. Moller–Maersk, Mediterranean Shipping Company, COSCO Shipping Lines were thriving under the massive demand, Indian shipping companies did not even make the top 10 list in terms of capacity. Worse was the fact that the Indian shipping industry could not suffice their nation’s need. For comparison, while P. Moller–Maersk had revenue of $12,439 million in Q1 2021, India’s top shipping company, Cochin Shipyard ltd, had a revenue of $1415.65 million during the same period.

4.2. Analyzing the root cause of the problem

India is the world’s 6th largest economy, is strategically placed in the Indian ocean with a long coastline of about 7,516.6 km is in a prime spot for a thriving shipping industry. India has not been able to exploit these strengths due to a few reasons.

4.2.1. Lack of capacity, High-capacity ship, High-capacity shipbuilding and repairing facility.

India, throughout its history, has focused more on acting as a layover point for international trade routes owing to its strategic location rather than fully optimizing its potential to become the center of trade in the location. Thus, most of India’s shipments go through international shipping companies during these layovers. Most of the revenue generated from these ports is lost to operating costs, leaving minimal, often not enough funds to direct towards development projects. This means that most shipping and shipping building facilities in India do not receive enough funds to increase India’s capacity. Between 2011–12 to 2014–15, the Indian shipping industry received orders to manufacture 1,398 ships but only managed to deliver 237; this goes to show the scale of the problem.

4.2.2. Trade wars

India, Sri Lanka, Singapore, and China all operate major ports in the Indian Ocean and South China sea region, which are vital to global trade. These countries compete for contracts along these crucial trade routes, which splits up the revenue. Due to the presence of major ports in the same region, India has not fully capitalized on its location perks. Furthermore, political tensions in this region have made increasing India’s domestic shipping lines complicated, affecting the demand of indigenous ships and shipping routes.

4.2.3. International alliances

All the top shipping companies in the world have alliances with ports, shipping companies, trade bodies, and governments across the globe. This strengthens their position economically and diplomatically, bringing in more options and offers to benefit and help in times of crisis. India’s weak shipping industry has not established such relations as the under scaled industry does not hold the same values as the other larger shipping companies. This has seen Indian companies largely exempted from forming international alliances, further weakening the industry’s position.

4.2.4. Government policies

India’s government, primarily focused on developing India’s transit capacity to boost India’s position as a transit hub and manage import of raw materials such as petroleum and coal. While most countries offer major concessions and guarantees to their local shipping companies for operation, India’s government has lacked in taking these steps to support their industry. They have also not provided the needed financial aid during crisis which has further crippled the industry. This combined with lack of investment from private and government institutions, has meant that the growth has primarily been stagnant while the global demand has multiplied.

4.3. Solution to the existing problem

It is crucial for India to realize that their shipping industry is in desperate need of revitalization and change of goal. India needs to transform from a transit point to a major global importer and self-sufficient distributor and does not require heavy dependence on international corporations for its development.

Few major steps towards this goal are:

1) Introducing and changing government policies to reduce economic burdens and liabilities

2) Introduce policies that promote the use of native shipping companies

3) Increase government funding to develop shipbuilding and repair facilities actively

4) Improve international ties with neighboring countries and major global markets

This general change in the direction of the shipping industry’s future is key to strengthening the nation.

5. Stock price perspective:

Supply chains were discussed on nearly two-thirds (66%) of some 7,000 company earnings calls globally in July 2021, up from 59% in the same month last year (42% the year before), according to an analysis by S&P Global.

The revenue and financial results of some of the major shipping companies are listed below:

Revenue and financial results of major shipping companies

5.1. Stock charts

Stock price of MAERSK group
  • Price on Dec 31, 2019: 8920
  • Price on Dec 31, 2021: 21780
  • Total Change: 144.2 %
Stock price of Hapang Lloyd
  • Price on Dec 31, 2019: 74.6
  • Price on Dec 31, 2021: 277
  • Total Change: 271.3 %
Evergreen Marine Corp
  • Price on Dec 31, 2019: 13.0
  • Price on Dec 31, 2021: 142.5
  • Total Change: 996 %

All the above three companies had their stock prices stagnating or even falling before the pandemic struck. However, at around mid-2021, all their stock prices depicted a meteoric rise in price and demand. To compare, in the same period of time (Dec 2019 — Dec 2021), the world market had grown at around 42% — 85%.

6.How Adani can start a good shipping company since he has bagged contracts for ports

Adani has been keeping up his sectors well and is also known for running a monopoly in his industries, mainly government-based sectors. Adani Ports (APSEZ) is a listed company running profitably. He has been managing a lot of industries, so there is no reason in stopping him from starting a good shipping Company where he could fix affordable prices compared to other cargo shipments. However, the main problem comes when he establishes an absolute monopoly, wherein he could change the rates according to his gains after eliminating other Companies in the Sector.

We will see a few reasons why he should/should not start a Shipping Company.

Why they should:

1. Well, managing qualities of his companies.

2. Easy establishing of ports and shipments, being the largest private port operator in the country, covering

3. Cargo price reduction can be expected.

4. Could easily manage free cash flows. Adani is in a lot of different industries; he could easily have a better cash flow within his companies

Why they shouldn’t:

1. Bad relations with few countries due to other issues in his company. E.g.: — Coal mines in Australia.

2. Illegal goods in his major port gives bad reputation (Mundra Port- One of his Major Ports)

3. The ports don’t have the power to check the goods, but the company gets terrible reputation leading to bad decisions. Bad decisions by the management like banning a few countries imports which could affect the country as APSEZ is the largest port operator in the country.

4. He might beat his competitors easily, and it is dangerous for a country where there is a need for competition in such sectors.

6.1. Steps taken by Adani in starting a shipping industry

After ports, shipbuilding and SEZ, the Adani group is now planning to own a fleet of ships and set up its own shipping company. The company is planning to buy two or three bulk cargo Panamax ships. Currently, the Adani group has nearly 300 ships in a year on charter. Adani Enterprises plans to raise $250 million through a foreign currency convertible bond (FCCB) issue to fund this project and a few of his other businesses.

The group is already in the process of setting up a shipbuilding and repair yard in Mundra. When order books of all leading shipbuilding companies across the globe are full, the Adani group has already completed a feasibility study carried out by a leading consultant for the project. There is vast scope for a ship repair yard in Gujarat as an estimated 900 ships visit the Gujarat coast every year. Company sources say the group aims at a yard with a capacity to treat around 100 vessels a year. However, it will take some time before the project goes on stream, and hence it wants to buy ships for the shipping company, said an executive.




The Business Club Of NITT

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