The global supply chain is like a well-oiled machine. Starting from raw material producers such as farmers or miners, it progresses to manufacturers, extends to logistics operations (storage, transport and distribution), and finally reaches retailers and end users.
When working properly, this supply chain drives the global economy by providing everything we need for our daily lives. Most people are unaware of the complexity – and potentially fragility – of a supply chain. Things change quickly when there is a disruption, as they have for the past two years. Although there were always localized misfires, overall the system worked well until Covid-19 hit.
Whether or not the various restrictions put in place by governments have helped prevent the spread of the virus (I am not addressing that argument here), they have certainly put a bag of keys in the supply chain, with shortages of labour, truck drivers and computer chips for cars are all in the headlines. This resulted in runaway inflation.
Misfortune also played a role. When the Ever Given, one of the largest container ships on the planet, got stuck in the Suez Canal in March 2021, it delayed hundreds of ships and significantly affected global trade. “A host of production and shipping disruptions have interacted with a growing demand for goods to produce bare shelves and rising prices,” says The Economist in summary. “While the goods are scarce, the number of measures tracking supply chain issues has proliferated at an impressive rate in recent months. All paint a picture of historically high levels of disruption and an uncertain path ahead. .
Container rates are still robust
Although restrictions have lessened (though not entirely disappeared), the situation has clearly not returned to pre-pandemic norms. US logistics company Flexport has an “ocean speed indicator” that shows how long shipments took to travel from a supplier’s warehouse to their destination port’s gate on freight routes from China to Europe and America. Three years ago, these trips took just under 60 days to Europe and just under 50 days to America.
Due to pandemic restrictions, transport times have since increased to 108 days and 114 days respectively for Europe and America, according to Flexport. We’ve all seen scenes of freighters queuing to unload their payloads. In turn, this has been a recipe for skyrocketing freight rates. But the table of shipping costs is quite mixed.
Now let’s look at it in more detail. The Freightos Baltic Index (FBX) measures the daily shipping rates for a 40ft container (known as Forty Foot Equivalent Units or FEUs) charged by freight forwarders for 12 major shipping routes across Asia, Europe and Americas. After stalling at around $1,500/FEU since its launch three years prior, FBX took off in early 2020 and peaked in mid-September 2021 above $11,000 (actual numbers are smaller than the magnitude of the increase).
The FBX currently stands at around $9,500. Even though the order book for new container ships doubled last year, deliveries have not yet been sufficient to make a difference, and sentiment and freight rates in this part of the shipping market remain strong. .
Pessimism in the dry bulk market
However, a different story is told by the Baltic Dry Index (BDI). This measures daily changes in the cost of transporting raw materials such as coal and steel by evaluating multiple shipping rates over more than 20 routes for each of the BDI’s component ships.
The index is made up of three sub-indexes that monitor different dry bulk carriers. Capesize ships are so big that they have to cross oceans around the capes of South Africa or Chile. Panamaxes can pass the locks of the Panama Canal and normally carry coal or grain. The smaller Supramax vessels are generally used for less bulky materials and have a loading capacity of around 50,000 to 60,000 deadweight tons (DWT). By comparison, the largest Capesize ore vessels range up to 400,000 DWT, although the average capacity is closer to 150,000 DWT.
The BDI is often considered a leading indicator of economic activity, as it reflects changes in supply and demand for major manufacturing and building materials, but it can be very volatile. From the first months of 2020, as the Covid-19 pandemic developed, the BDI increased more than tenfold, broadly matching the movement of the FBX. But since October 2021, it has fallen by more than 60%. Why? Part of the story is that China capped steel production in October and prevented over-borrowed property developers from taking on more loans, dampening demand for commodities.
Yet it is not that simple. “Brokers and traders blame weak market on blockages in China, decongestion of ports in China, ban on Indonesian coal export, easing of Indonesian export ban, Olympics in winter, Christmas and the Western New Year holidays, a sudden glut of ballast [suppliers of ballast], rains in Brazil, lack of rain in Brazil and Argentina, and even fog in the Bosphorus,” explains Splash247, a maritime news site. “In other words, the sentiment is almost universally negative, but there is no hard evidence, no single cause that everyone can agree on for the market’s fall.”
At least at first glance, “the fundamentals of supply and demand remain in favor of owners”. Last year, the fleet only grew by 4%, which “was barely enough to cause this market collapse due to such strong growth in demand in 2021”. In short, there is a lot of pessimism in the dry bulk market, even though fleet growth is expected to slow to less than 2% this year and next. Thus, dry bulk has “the best supply and demand picture” of any shipping segment in 2022, says Randy Giveans of investment bank Jefferies on FreightWaves. “It’s hard to imagine a situation where demand doesn’t exceed supply.
Tankers come out from a low base
The third major part of the maritime transport sector also looks interesting. Freight rates in the tanker market also spiked in early 2020 with the onset of Covid-19, then fell, but are now picking up again. “Do I think tanker prices are going to be unbelievable [in 2022]?” said Giveans. “No. Will they be much better than in 2021? Sure. It has literally been the worst year in decades. I’m still conservative compared to most people, but it’s about the rate of change. We are on our way to a recovery. Certainly, the growth of the “dirty” tanker fleet could exceed 5% in 2022, according to Braemar Research (dirty tankers carry crude, clean ones carry refined fuels).
But there is also the unpredictable impact of shocks on the oil market. When Russia invaded Ukraine, the Baltic Dirty Tanker Index dropped from around 700 to around 1500 (these are standardized units rather than monetary amounts). It has since fallen back to around 1,100, but it is still as high as it has been since April 2020. The gain is mainly due to higher rates for medium-sized Aframax tankers plying the areas directly affected by geopolitical tensions (the Black Sea, the Mediterranean and the Baltic Sea).
Demand for Suezmax tankers (capable of transiting the Suez Canal) has increased less, while fares from self-explanatory Very Large Crude Oil Carriers (VLCCs) serving long-haul routes remain depressed. If global oil supply remains tight, additional demand for non-Russian crude due to sanctions could drive up the cost of chartering tankers.