EVP, Global Head of Engineering and Construction, Sonnedix, overseeing the design and construction of assets for global solar PV platform.
When Covid-19 hit the world in early 2020, beginning in China, but spreading out to the rest of the world in a short timeframe, the first consequence was an important disruption in the upstream supply chain in China, where factories and cities were in lockdown, with workers not being able to go to their work in the factories or transportation between inland regions being interrupted. Once the lockdown situation also reached Europe and America some weeks after China, the focus was on health goods and groceries, with the entertainment, leisure and travel industries being heavily affected.
To keep the viability, with vessels not being profitable due to not optimized loading and lack of short-term demand or incapacity to send goods, shipping companies tried to recover their balance sheets by scrapping off vessels in large numbers. According to Hellenic Shipping News, up to 630 ships were sent to demolition during 2020.
The difference between the impact of Covid-19 on consumer habits and subsequently the industry has been remarkable between China and the rest of the world.
While in China the recovery has been relatively fast, and industrial and construction activity has mostly recovered, in Europe and the U.S., the lockdowns and curfews have extended in time for over one year, with a very slow pace in the vaccination program. In Europe and the U.S., consumers had fewer options to spend money outside (e.g., traveling, entertainment, restaurants), and staying at home skyrocketed the demand for online purchasing to be able to work remotely and live in a digital world.
According to JPMorgan, some categories experienced growth between 19% and 35% in the third quarter of 2020. Also, according to McKinsey, the e-commerce space has grown in double digits, with an acceleration of a decade of adoption of digital trends in a very short time span.
The very high dependency of goods being manufactured in Southeast Asia, where labor costs and other factors make industrial production processes more cost competitive, comes with the need to transport such goods to the markets where the customers are. Roughly 90% of the goods worldwide are transported by sea, with over 70% being transported in containers.
This worldwide good transport system is a very coordinated and interconnected machine, where if one piece stops, it has a knock-on effect on all the other pieces. The demand peak downstream of certain goods once the lockdown situation extended in time, combined with a shortage of available vessels, generated a bottleneck due to the lack of available capacity to deliver the demanded goods.
Inefficiencies at port operations, equipment availability and vessel-free capacity have caused relevant constraints and bottlenecks.
The first issue has been the sheer lack of available vessels. The existing ones have been utilized with optimized capacity, which translates into a 500% to 600% increase in freight costs. According to Drewry, the Shanghai-to-Rotterdam route has increased by 640%.
Shipping companies are making double-digit profits (login required), with an operating margin of 13%. To maximize the actual positive market environment, shipping companies have ordered additional vessels to increase their capacity. The combined capacity of the new vessels ordered in only three months would add 1.45 million TEU containers. CMA CGM group, the third group worldwide in capacity, with a market share of 12%, has ordered 22 additional vessels.
The second issue has been the lack of available containers. The containers are shipped from China but are not returning, as there is not the same demand from goods in China, and empty return trips are not attractive. Hapag-Lloyd is investing $550 million in an additional 150.000 containers to cover the demand, but until the new container capacity arrives, there are goods ready to be shipped waiting at the factories or docks due to lack of containers to load them.
The third big hurdle is port congestion. The knock-on effect of delays, lack of equipment and issues due to Covid-19 are piling up. The port of Yantian in China is experiencing several weeks of delays due to Covid-19 lockdowns. According to Maersk, this could have an effect bigger than the Suez canal closure.
On the other end of the supply chain, the issues are not very different. West Coast ports in the U.S. have been suffering from several weeks of congestion and delays for several months.
The combination of all these elements has been a burden on global supply chains. The high demand of some commodities and components, as industries slowly resume activity, combined with the bottlenecks and issues to transport such commodities and components in a time and cost-efficient manner have been affecting various industries depending on components or finished goods coming from Southeast Asia.
One specific example is the automotive industry, which has had to shut down some assembly lines due to a lack of components. Other sectors that have been heavily affected are chemical producers and the construction industry. Lack of chemical components to manufacture their products and components to build are creating delays and price surges.
With a slow improvement during 2022, the real turning point is expected for 2023, where most of the vessels, with a construction lead-time of 12 to 18 months, will be delivered and adding capacity to the global fleet. It will be a challenge for shipping companies to maintain profitability if we enter into an over-capacity scenario.
Covid-19 has revealed the high dependency of American and European industries and consumer markets on the Southeast Asia production hub — and the limited capacity to adapt short term from the actual supply chain. In the future, some industries might consider de-risking their supply chains by diversifying their upstream supply chain locations, including local or regional-based suppliers to de-risk future similar scenarios.
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Joern HackbarthEVP, Global Head of Engineering and Construction, Sonnedix, overseeing the design and construction of assets for global solar PV platform.
As seen on Forbes
