I’ve been in this industry long enough to know that there is no easy solution to the current situation in the sea freight market.
Cost blowouts, container vessel availability issues and increased demand are negatively impacting the heavy industry supply chain.
I’ve outlined what I see happening across the current market in the short to medium term, and what I believe needs to happen as an immediate and interim remedy.
The impact of the pandemic
When COVID-19 first impacted global trade in 2020, there was an immediate drop in global demand for tonnage across all vessels.
As a result, a large number of shipping lines chose to accelerate their vessel and container scrapping timelines. Containers older than ten years were scrapped and scheduled scrapping of older vessels was bought forward. Some vessels were also sent into dry dock (reactivating these back into service takes on average three months).
No one could have predicted the rising level of demand that has occurred due to COVID. Increased discretionary spending is heavily impacting vessel tonnage availability. This has put the shipping world into a negative tonnage scenario.
Sea freight cost blowouts
Consider this: a normal sailing rotation of a vessel from China to Australia and back is approximately 45 days. You can add another 20 days where there is a disruption (such as a COVID outbreak) and the vessel is left sitting outside a port. At the current estimated day rate of USD 45,000 to 85,000, the vessel operator incurs significant cost increases. The operator has to absorb these costs or attempt to recover them.
This situation is seriously impacting heavy industries. There are significant cost overruns in projects already committed to in infrastructure, mining and gas. Another major factor is the impact that state-wide lockdowns are having on national freight, and on labour management costs as companies attempt to manage their labour skill distribution state to state. There is also limited stock-on-hand for projects currently underway.
In addition, vehicle and original equipment manufacturers (OEMs) have all returned to higher levels of production at the same time. We have some feedback that there are pre-order scenarios of around three to nine months, and most OEMs have indicated there will be price increases of approximately 20%. However, current cost structures have not factored in freight increases by shipping lines on top of that.
The effect of vessel space shortages
The pressure across container, RoRo (Roll-on-Roll-off) and breakbulk vessels all relates directly back to container vessel space shortages. Due to the severe and volatile container spot rate increase, heavy industry has been forced to look outside the traditional methods of containerised shipping.
For example, there is currently a significant increase in demand for steel due to government stimulus packages, and 90% of finished steel products move via container sea freight. When you combine this increased demand with the current very low interest rates, higher-than-usual discretionary spending patterns, and a 400% increase for freight costs, there is a natural tendency to attempt to move more cargo onto RoRo and breakbulk shipping. This doesn’t solve the problem – it just shifts it around.
Freight costs blowing out mid-project
For SMEs ordering products such as machinery, steel or specialised tools three months in advance, there is no visibility on the freight costs post-production in the current market. Businesses that might have previously factored in USD 3,500 for the freight are finding this has now blown out to USD 10,000 – causing a severe impact on the sale price to the end user. And if a SME is locked into a supply contract with a Tier 1 company, passing on the extra cost may not be possible.
The situation also jeopardises the SMEs that directly feed the supply chain in civil construction, infrastructure, mining and gas. It fundamentally threatens the continued viability of the supply chain into those industries. For example, with the cost of freight now being disproportionate to the cost-of-goods midway through delivery, costs have increased by 30-40% on some products, which is leading to cost overruns. The end result is that every aspect of essential industries in Australia is being impacted.
Controlling international freight costs
Unless international freight costs for Australian businesses become more controlled there will continue to be accelerated inflationary issues, certainly much faster than SMEs can manage. This is already evident in the residential housing market. In Queensland for instance, some building companies are paying contract holders AUD 10,000 to walk away from their existing contracts simply because they can no longer build the houses for the same price as before.
And now – stevedore strikes!
On top of that, stevedores are now planning strike action in the lead-up to Christmas. This will result in further disruptions, in addition to shipping lines limiting the number of vessels coming to Australia. Strikes will lead to shipping lines electing to have even fewer port calls, to avoid vessels sitting idle at a cost of up to 85,000 a day!
According to a report in the Australian Financial Review, industrial action has already resulted in container ships waiting up to 18 days to berth in Sydney, nine days in Melbourne and eight days in Brisbane.
As a statement from Patrick Terminals says:
“Australians have been through enough this year. Now is not the time to bring the economy to a halt for a dispute that relates to the MUA wanting to control an organisation’s operations.”
This is impacting global shipping lines’ decisions to even call at our ports! And as bad as it might be for retail goods left sitting on ships before Christmas, the more severe impact is on the heavy building construction materials we need right now.
So what action is needed?
Forcing shipping lines to instantly adhere to a federal maritime commission is unlikely to work. ACCC regulations are unlikely to be introduced at the speed necessary to lessen the financial impact of sea freight cost volatility to SMEs in heavy industry. Especially not while global tonnage shortages are under such heavy pressure from increased demand. Industry feedback suggests that more vessels are not likely to come to market until 2023 – 2026, and that shipbuilding yards worldwide are at capacity.
In the interim, an immediate response from the federal government is needed, in the form of sea freight subsidies for heavy industry material suppliers. Suppliers should be subsidised in the same manner as the agricultural sector has been for air freight costs through the International Freight Assistance Mechanism (IFAM).
This will give heavy industry the time it needs to adjust its price structures to end users in a more controlled manner.