By: Fenech & Fenech Advocates | Author: Peter Grima, Senior Associate within the Ship Finance Department
In order to satisfy the exigencies of international trade, merchant vessels are inevitably required to navigate through inclement conditions across continental shipping routes under tight time constraints.
Indeed, the shipping sector is not without its harrowing incidents. The temporary blocking of the Suez Canal by the container vessel ‘Ever Given’ in 2021 is one such example where one of the world’s busiest shipping routes was choked for six long days by the grounding of the 400m vessel.
The blocking of the Suez Canal led to the creation of major bottlenecks in the canal, forcing the re-routing of various vessels and gave rise to major losses for carriers and shippers, some of which are still being computed today. Taken in the context of the current pandemic, the ‘Ever Given’ incident was another blow in a period of struggle for the shipping sector and ushered a steady rise in the costs of container and bulk shipping. Two years on from the start of the Covid-19 pandemic, and what has been described as a perfect storm, has resulted in severe disruption to the timing, costs, and certainty of container and bulk shipping operations.
As talk of the end of the pandemic grows louder and people become more accustomed to the nuances that impact supply and logistics, it is opportune to consider the Covid-19 prevention measures and market realities that have affected the shipping industry and the way in which businesses and consumers may continue to be impacted in unsuspecting ways. Order cancellations, capacity cuts in manufacturing, port congestion, port closures and stranded vessels are just some of the effects that internationally adopted policy measures, centred around lockdowns, strict quarantine measures and vaccination requirements, have had on shipping and commerce.
These initial stultifying effects, brought about by Covid-19-containment measures on international trade, were reversed in 2021 as the resurgence of economic growth led to a surging demand for goods notwithstanding the limited supply, with the result that freight and bulk shipping rates soared significantly. The reason behind this irregularity was down to basic economics: amidst the height of the pandemic, people bought less, and in response, industries curbed production. When governments subsequently lifted pandemic restrictions, consumption increased until businesses were constrained to play catch-up. While these changes in demand were driven primarily by changes in the market, issues in supply and demand may be said to have been circumscribed, at least partly, by severe Covid-19-containment measures, which inevitably affected labour, immigration, and trade.
The general increase in demand for goods, coupled with a shortage of available containers, has further contributed towards rising shipping costs. The ongoing container shortage is largely driven by an unrelenting demand for containers in China, being the largest manufacturer in the world, and which is in turn fuelled by the dependence of North America and Europe on China for the supply of various goods. This lack of containers is exacerbated both by a scarcity of labour at ports due to workers being routinely quarantined, as well as the general lack of attractiveness of such labour due to the imposition of severe Covid-19 restrictions.
According to collected data on the popular shipping routes of Shanghai to Rotterdam and Shanghai to the US West Coast, there has been a significant rise in freight rates from a previous average of approximately $2,000-$2,500 per twenty-foot equivalent unit (TEU), up to short-term market highs of above $23,000. Similarly, Maltese shippers have also noted that a TEU container which would have ordinarily costed €2,000-€3,000 prior to the pandemic, can now cost up to as much as €17,000. Bulk shipping rates have likewise reflected the surges of container shipping.
Another consideration to be made is the increased volatility of the price of oil. Since the start of the pandemic, market supply and demand dynamics led to an initial reduction in oil production, which had an immediate impact on the price of brent crude. In 2020, the price of brent crude plummeted to a low of approximately $14 a barrel from a pre-covid average fee of approximately $65, only to rebound to the current average price of between $80 to $90. This increase in the cost of fuel is subsequently passed down by carriers to shippers and eventually to end consumers.
The dilemma for shippers is a simple one – either accept highly inflated rates or wait it out in the hope that the market will normalise. The market has, however, not normalised. It has rather been averaging an upward curve since the first quarter of 2021. One year on, the effects are now being felt by consumers through higher fees levied on imported goods and the indicative signs are that this trend will not change in the short term.
2021 will undoubtedly be a year to remember for carriers yet one to forget for shippers and consumers. Ultimately, market forces of supply and demand have been the main driving factors behind freight and bulk shipping rate fluctuations, while immigration restrictions on workers, port closures and an increase in the price of oil contribute to destabilise the cost and availability of carriers further. It is therefore essential to understand the contractual chain between carriers, shippers and end consumers, and to potentially revisit and revise policy measures in this light, with a view to addressing certain restrictions to help curb inflation across international shipping markets.
How can we help?
Should you require any further information or assistance on the matter, please do not hesitate to reach out to us personally on peter.grima@fenechlaw.com
©Fenech & Fenech Advocates 2022
Disclaimer │ The information provided on this Update does not, and is not intended to, constitute legal advice. All information, content, and materials available are for general informational purposes only. This Update may not constitute the most up-to-date legal or other information and you are advised to seek updated advice.