Volatile ocean freight capacity set to continue for some months

Drewry analysis indicates carriers will continue their practice of tactical sailing cancellations for the foreseeable future, suggesting shippers and forwarders extend lead times in case of operational delays.

Container shipping and supply chain consultancy Drewry believes ocean freight carriers will continue their practice of tactical sailing cancellations for the foreseeable future, due to the “still uncertain and risky outlook for trade and for the global shipping network”, recommending that shippers and forwarders carefully monitor the market and extend lead times to take account of potential operational delays.

The analysis follows a series of weekly discussions by Drewry Supply Chain Advisors with its shipper customers over the past few months. As well as informing the consultancy about how the COVID-19 health crisis has impacted shipping schedules, cancelled sailings and port operations, it said the sessions have helped encourage the exchange of views on how to best respond to the situation and mitigate risks from a logistics perspective.

It highlighted that one common issue faced by shippers has been the major disruptions to the shipping and transport network, first in China and then in the rest of the world, and the associated operational problems that have resulted from space shortage, delays and roll-overs.

For example, in a survey of shippers in April, Drewry reports that 83% of shippers who responded had cargo rolled, with the proportion of containers rolled varying from region to region, up to 20%. From Europe, the percentage of containers rolled was 10-15%; from North America, the percentage of containers rolled were <5% to 10%; from Asia, the percentage of containers rolled were <5% to 20%.

Meanwhile, Drewry’s survey of carrier schedules in April, May and June found that the three major carrier global alliances cancelled at least four times as many East-West sailings in the second quarter of 2020 (2Q20) as in the same quarter of 2019. Analysis of the cancelled sailings data shows that non-alliance carriers have not cut services as much as alliance carriers, Drewry noted, “and at least one niche carrier is positioning itself as a more reliable carrier even during the COVID-19 crisis”.

Carrier perspective

Drewry said conversations with several major ocean carriers had highlighted several key themes explaining why service reliability had deteriorated and roll-overs had worsened, although two main themes had emerged: unpredictable and volatile demand; and reduced demand, leading to a reduced service network.

Highlighting the unpredictable and volatile demand, feedback to Drewry from Maersk noted that “throughout the second quarter of 2020, the ongoing COVID-19 pandemic presented exceptional challenges to the container logistics industry, with a low, yet highly volatile demand putting strong pressure on our business. This environment made it very difficult to forecast demand volumes; customers have similar poor visibility and thus shipping needs changed with very short notice throughout the quarter.”

Hapag-Lloyd highlighted that with vessel utilisation key for any carrier, “what we are currently seeing is a response to the drop in demand caused by the pandemic. If demand picks up faster or more than expected, roll-overs may occur. But these will only be temporary, as carriers will respond quickly by reactivating capacities to meet customer demand.”

Meanwhile, Zim also highlighted that “the uncertainty and fluctuations may at times result in roll-overs”, also noting that “some of the volatility and uncertainty are caused by no-shows”.

And one Asia-based carrier told Drewry that cancelled sailings were “a consequence of trade forecasts”, although despite the cancellations, carriers have continued to offer all port pairs through other service offerings. It said the best example was the transpacific trade, “where BCOs this year have significantly under-forecasted their demand; and now demand is returning, carriers will accept only what was contractually agreed…”

The carrier told Drewry: “Roll-overs are an operational headache for carriers and represent potential extra costs. As such we would like to reduce them; but we need to be sure that containers show up. Any mechanism that supports certainty about the showing up [of booked] containers will be welcomed.”

Reduced demand

Highlighting the effects of reduced demand leading to a reduced service network

Hapag-Lloyd noted that the coronavirus pandemic “is impacting the entire logistics industry. In response, we had to adapt our network by reducing some sailing frequencies, making selected network adjustments for some of our services, and discontinuing some services in order to better match existing demand. Containers are now being distributed among fewer vessels to keep the ships full. But the rolling of cargo can still happen, either due to full vessels or cancelled voyages.”

Although contract beneficial cargo owners (BCOs) have told Drewry that they believe carriers are “prioritising much higher-paying spot cargoes and are providing less flexibility in capacity availability”, Drewry has said it believes “carriers are currently more focused on cost/capacity reductions, on raising state-backed loans and on self-preservation than on providing a reliable service to customers”.

But it noted that one of the carriers surveyed insisted that “despite these cancellations, carriers do offer all port pairs through other service offerings”, while another said: “We continue to work closely with our customers to address this situation and find solutions amid the volatility. To our understanding, these customer conversations are based on a mutual, constructive perception of the extraordinary circumstances and the need for agility in finding qualitative solutions with short notice.”

Drewry’s recent Container Forecaster analysis noted that “given the highly unpredictable outlook for demand, instances of capacity over-suppression in some trades were always likely. Lines are now starting to return capacity to the worst-affected trades such as the eastbound Transpacific to accommodate higher than expected demand with some previously blanked sailings being put back on to schedules.

“That makes previous capacity over-reductions look more like understandable misjudgements rather than anything more malicious. However, we might change our view if capacity continues to be kept significantly below market needs.”

Challenging months ahead

But it said the next few months will be challenging, noting: “Some ocean-borne volumes and some sailings have returned, but the outlook for trade and for the global shipping network are still uncertain and risky. Asked whether the worsening situation of cancelled sailings and roll-overs was a temporary situation, one of the carriers said that ‘it is difficult to say’, another said that is temporary; a third said that it is dependent on the uncertainty of demand and its consequences.”

Drewry said the request of most shippers is that ocean carriers bring back the required capacity at the right time and with the right scale, when volumes increase again, but the consultancy firm added: “This calls for shippers to share their volume forecasts with their core ocean carriers and for carriers to give sufficient advance notice of sailing cancellations and better information of equipment and slot availability.”

Drewry noted that a year ago, “all the talk in the shipping industry was how technology was going to provide unprecedented visibility into product flows and would enable stakeholders to react promptly to changes in logistics reactions or operational problems”, adding: “Although we know that some BCOs have used technology to manage the disruptions to the global transport system caused by COVID-19, it appears that ocean service capacity and forward schedules have become less, not more visible, this year.

“The crisis has also exposed that shippers are still making ‘ghost bookings’ in the hope of securing scarce capacity and that carriers are struggling to offer guaranteed capacity to customers.

“Maersk reports that its Maersk Spot application, which guarantees capacity and requires a penalty payment if the shipper cancels the bookings, has been very popular during the pandemic. If a sailing is cancelled, Maersk said that it provides a substitute sailing with an arrival within 3 days of the original scheduled date.”

Drewry said one of the main priorities for the international shipping sector in the next year should be to improve reliability and predictability, possibly on the basis of a reduced but more stable service network and more shipper-focused behaviour and better communication between parties.

While Drewry is urging carriers to bring capacity back into operation to enable trade to flow more freely and with fewer disruptions, it noted: “Savvy shippers can also use Drewry tools and resources – like the cancelled sailings and ship waiting times tracker and the Drewry COVID-19 management webinars – to anticipate cancelled sailings, look for alternative capacity and discuss how their and peer companies are reacting to operational transport challenges.

Drewry believes carriers “will continue their practice of tactical sailing cancellations for the foreseeable future and suggests shippers and forwarders carefully check the situation before booking and extend lead times in case of operational delays”.

The firm highlighted that, in order to support its clients further, “Drewry can provide customised analyses addressing specific needs by trade lane. For further information on our full range of ocean freight cost benchmarking, procurement and supply chain advisory services”.

Source: Lloyd’s