What broke the global supply chain? 

Reading Time: 8 minutes

by Marcel Mizzi, Vice President (Finance & Admin), Malta Chamber of SMEs

A study into the increase in the cost of shipping 

During the last decade the cost of shipping was, on average, the lowest ever. Competition was fierce and carriers were losing money. Furthermore, wafer thin margins left little capital that could be invested into digitalization that could render carriers more cost effective. Problems with the international supply chain did not start with COVID-19. 

In the US, President Trump’s introduction of sanctions and tariffs against China led to companies on both sides rushing to stock up on their inventories before the tariffs came into effect. The unfortunate incident that resulted in blocking the Suez Canal also caused backlogs and thousands of stranded containers. 

At the height of the pandemic people resigned themselves to staying at home and rather than spending their money on travelling, restaurants and so on, they took to buying consumer products which they could enjoy at home. This resulted in a huge surge in demand for these products many of which are manufactured in China. This trend has continued even post pandemic with China trying to catch up on production. The frequent power outages currently happening in China are not helping. Beijing is planning to reach carbon neutrality by 2060 and coal production has been slowed down despite the country still relying on coal for more than half of its power requirements. Figures show that in September 2021, factory production in China shrunk to the lowest it has been since February 2020, when COVID lockdowns were in full force. 

Shipping costs have dramatically increased to over 4 to 5 times what they were pre pandemic. It is easy to point fingers at the ocean carriers, but the problem is far more complex than that. Post pandemic, the situation is now comparable to the morning rush hour traffic when it rains here in Malta. It’s total chaos and it cannot realistically be blamed on any one single factor. The reality is that there are more ships operating then at any other time in human history. The pandemic also caused significant crew shortages and other operational challenges. Even ships that were not designed to carry containers have been put in service. The long queues of ships waiting to enter clogged ports all over the world has exasperated the problem and the effective capacity is still 25% less than it should be. The pandemic also exposed other weaknesses such as issues at key ports and ineffective collaboration mechanisms between key players in the shipping industry. At the end of September 2021, there were 73 loaded ships anchored off California waiting to enter the port. 

Markus Grote, captain of a Hapag-Lloyd container ship stated: “From an economic point of view, it’s a disaster because cargo is waiting” Overland logistic issues in many countries especially in the US are adding fuel to the fire. In August 2021, real time data from Kuehne+Nagel showed that there were 353 container ships stuck outside ports around the world. In American ports, containers are stacked 50ft high waiting to be taken to already overloaded warehouses. Before these containers are shipped back to China, the 

shortage will continue. In Europe, and particularly in the UK, the shortage of truck drivers has certainly not helped and has resulted in even more full containers waiting to reach their final destinations. Needless, to say, before they do, this will mean fewer empty containers available. 

For business, what this means is that if you are an importer of building materials, for example, your competition is no longer businesses in your sector but also from other importers of goods who are willing to pay more for shipping. This factor alone is unprecedented in history and is contributing to skewing the market beyond recognition. This is especially worrying for lower margin businesses as they simply cannot absorb the increase. 

In response, China claims to have stepped up shipping container production, but this will take time to have a marked effect and is equally difficult to predict.

SOLUTIONS AND WHEN WILL IT END? 

It is very clear that before there is a decrease in demand or an increase in capacity, this is not going to go away. It is also clear that demand is not going to decrease any time soon. 

Therefore, the way forward is to increase capacity and devise ways to use existing capacity more efficiently. 

Adding more ships will obviously help in the long term but construction of a container ship takes two to three years so vessels that have been ordered now will not help in the short term. Furthermore, new emission regulations will come into effect in 2050 and so ship manufacturers are wary of expanding their fleets. It has been the norm in the last decades to construct bigger ships but now experts are arguing that perhaps it would be wiser to build fleets of medium sized ships that would require less heavy hardware and space at ports and make the supply chain more resilient. The current biggest ships can carry over 20,000 containers. If these were to be loaded onto trucks, the line would stretch from Paris to Amsterdam. Bigger ships also require deeper docks and bigger cranes and are thus restricted to the larger docks worldwide. In the 

first five months of 2021, 229 new ships were ordered with a combined capacity of 2.2 million TEU (twenty-foot equivalent unit). 

This will mean an increase of 6% capacity although some of it will be offset by scrapping old vessels. However, this increase will not realistically materialize before late 2023. 

Bigger businesses, such as Walmart, Home Depot and Ikea have even decided to procure their own containers. They are also chartering their own ships in response to the problem. This will inadvertently have a negative effect on small businesses who cannot afford to do the same and will be heavily outpriced. 

Throwing technology at the problem has certainly helped in other sectors and this case is no exception. The available shipping space is what it is, however, digitalization and machine learning can be utilized to make better use of container volume. There is often unused capacity which now comes at a high cost. Technology will also help in managing port congestion which is a major contributing factor.

Perhaps a lesser known solution is using the “Iron Silk Road” which is a network of trains that stretches between Europe and China. Whereas before the breakdown of the shipping supply chain, its cost was higher than shipping but lower than air freight, many are now looking into it because its use can now be justified because of the exaggerated shipping costs. In 2020 a total of 1,135,000 TEU were transported by rail, which is 56 % more than the previous year, although still miniscule when compared to shipping. 

THE LOCAL PERSPECTIVE 

Just like any other country, Malta is feeling the strain caused by the astronomical rise in shipping costs. Many businesses in Malta import goods from the European Union and the UK but this does lessen the impact of these rising costs. European importers have no other option but to include the increased costs of logistics in their product prices. Therefore, Maltese businesses suffer just the same regardless of where they import from. 

Furthermore, Malta being an island nation suffers further as overland haulage of freight is affected by the shortage of truck drivers. Malta’s long business history with the UK, were the driver shortage is being felt more since Brexit makes this even worse. 

At Chamber of SMEs, we have been discussing these problems since they started. Many of our members flagged the rapidly increasing costs immediately. Government has been sympathetic, however there is not much Government can really do in this situation. We discussed the possibility of deferring VAT on freight costs. In reality, the effect that this would have would be marginal and the charges would still need to be paid later. 

As part of our Budget 2022 proposals we suggested that Government would subsidize rent payments on new warehouses. The thinking behind this was that importers, all facing these exaggerated prices would be encouraged to import more volume and maximize the space they can get their hands on. This will mean that they will need larger local storage facilities. Admittedly, this cannot work for all products but at least it is a step in the right direction.

Government has taken up this proposal. We will continue monitoring the situation closely while listening attentively to what are members are saying. 

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