COVID-19 lockdowns trigger container crisis

Global trade routes that were buzzing with activity before Covid-19 pandemic went almost silent during the pandemic period. Many global-scale consequences that stemmed out of this pandemic have created chaos and uncertainty on the road back to normalcy. Once such consequence is the sudden crunch in availability of empty containers for exporting goods. This is not limited to just one country, but has its impact around the world as global supply chains have suffered severely due to the pandemic.

How the container crisis started?

Covid-19 pandemic was totally unforeseen and unwarranted as far as the global trade is concerned. It caused an unfortunate cascade of events resulting in acute shortage of shipping containers worldwide. The crisis has been so intense that its ripple effects were felt all along the supply chains on a global scale. Everybody in the trade has the same question: Where have the containers gone? To understand where they are and why the entire world is facing this shortage, it is necessary to understand the domino effect that was set into motion two years ago. 

Precursor to crisis: The current container shortage is a result of mismatch in demand for and supply of empty containers. 2019 laid the precursor to the current crisis as production and sales of new containers dropped in that year. Shipping lines placed fewer orders than normal given the surplus container inventory in all trade lanes. Container manufacturers thus produced a mere 2.5 million TEUs in 2019 as against 4 million TEUs in 2018. Enter 2020, shipping lines didn’t place further box orders expecting the global trade to drop as the tremors of Covid-19 pandemic were already felt in many countries. 

Countries go into lockdown mode: By February 2020, one by one, countries around the world began shutting down their borders and went into self-lockdowns. Factories that kept feeding the economic engines all these years went silent and as a result the supply chains too that fed these factories went limp. Shipping lines had no other alternative but to do blank sailings in the absence of exports. They were forced to reduce their vessel calls as well as vessel sizes to minimize operating costs. In the process, considerable volumes of empties were left out at ports / cargo depots. 

Trade resumes: China was the first country to be hit by pandemic and the first to come out of lockdown as well. They started exports well in advance compared to other exporting nations. Albeit unidirectional, China-US trade lane opened once again. As the US was still reeling under pandemic effect, cargo in this trade lane was moving only from East to West and not the vice versa. Shutdown of brick-and-mortar stores helped online sales thrive around the world and skyrocketed especially in the US and European countries. According to Insider Intelligence / eMarketer, global e-commerce in 2020 grew by a brisk 16.5% and accounted for a staggering US$ 3.9 trillion in value. Most of these products originated from the Asian countries and were shipped to North America and Europe. In November 2020, Chinese imports to US increased 46% compared to same period in 2019. 

But container terminals weren’t ready: Given the unidirectional flow of trade, almost all the containers that were available were routed to North America and Europe. However, disruptions in the workforce caused by Covid-19 restrictions slowed down the rates at which boxes were cleared. Ports and terminals were running with reduced manpower at that time. Covid protocols for vessels entering ports and changes in Customs procedures further increased the lead times and worsened the situation – thus creating port congestions and massive container backlogs. This also brought rapidly changing demands in various trade lanes, making life difficult for shipping lines. On their return hauls, shipping lines didn't pick up more empties as they were focusing on the lucrative East to West hauls and bringing empties back only added to their costs. As the trade volumes picked up, the situation became worse in most major terminals like Los Angeles, Felixstowe, Rotterdam, Colombo, Singapore, Hong Kong, Shanghai, etc.

More than 34 vessels were queued at the anchor of the Los Angeles / Long Beach terminals at one point. It was not just the ports that were affected, but also cargo depots, inland transport services and consumption centers (factories, etc.) were affected. A massive 40% imbalance prevailed in North America towards the end of 2020. For every 100 containers entering US ports, only 40 returned, which means 60 boxes got stuck either at ports or in the cargo depots or at consumption centers. This is a staggering figure given the average China-US container trade of 900,000 TEUs per month. By the first quarter of 2021, China-US volumes increased by 23.3% compared to the same period in 2020, making the situation extremely grave. 

Clearing the backlogs was a gargantuan task for the limited workers at ports and it became a nightmare as more containers started arriving before the backlogs were cleared. As days turned into weeks and months, these delays snowballed into severe imbalances in the demand for and supply of empty containers. Huge quantities of containers got piled up at almost all the container terminals globally – leading to chaos and uncertainty among the maritime stakeholders.  

These imbalances and bottlenecks had only compounded the already existing shortage of containers due to lower production in 2019 and further production drops in 2020 as the pandemic kicked in. Scrapping of old containers exceeded the production of new ones. Shipping lines as well as container manufacturers in china were caught unawares with the unexpected boom in trade. Eventually, new box production started on war footing in China, with production figures rising to 300,000 TEUs from September 2020 and touching 440,000 TEUs in January 2021. Despite this, normalizing of markets is not expected until second half of 2021. 

The cumulative impact of all this is the unprecedented rise in ocean freight rates to levels that were never seen before. By the end of 2020, the rates were three to four times more than usual across all trade lanes including Asia to North America and Asia to Europe. It was as though the exporters were being squeezed from both the sides viz. non-availability of containers and freight rates hitting the roof. 

Impact on India

Exports play a crucial role in driving the Indian economy as they provide employment to millions of people and bring in the much-required foreign exchange. In the fiscal 2019-20, total value of Indian exports stood at US$ 313.36 billion. Such an important growth driver was badly hit due to the pandemic. 

On the other hand, India is traditionally a net importer of goods, meaning more containers come in than that go out. There was always a surplus of boxes that were readily available for Indian exporters. In 2017-18, imports stood at 4.7 million TEUs, while the exports were 4.4 million TEUs. The corresponding figures for 2018-19 were 5.1 million TEUs and 4.7 million TEUs respectively. In 2020, onset of pandemic disrupted this routine. 

Empties repositioned: In India, lockdown was announced in late March prompting the stoppage of all economic activity, barring essential commodities and services. This forced exporters to shut down their factories. Pre-pandemic export volumes were radically reduced to just a trickle during the first quarter of 2020-21. 

In the face of negligible exports from India, shipping lines that were doing blank sailings, had repositioned / shifted considerable quantities of empty containers from India to regions where they could find demand for them.

On the imports side, vessels arriving from China or any other Covid-19 affected country were subjected to 14 days quarantine period. Chinese vessels particularly were put to stringent checks before allowing them into Indian ports. Between March 23 and April 15, practically no containers were cleared. Boxes that came in during the lockdown down period were either not picked by the importers (mostly left in container freight stations) or took lot of time to transport, destuff and send back. 

Road to recovery: However, as the country slowly came out of the lockdown in a phased manner, exports began to pick up pace and recovered much faster than expected. During the period July to October 2020, exports grew 24% in terms of volumes compared to the same period previous year. Imports, however, reduced 28% during the same period compared to the previous year. 

Reduced imports may not be just due to the pandemic, but also can be attributed to increased self-reliance through the ‘Make in India’ initiative. The Federation of Indian Export Organizations (FIEO) felt that this initiative launched six years ago to increase domestic manufacturing came to fruition. Imports of raw materials mainly from China have reduced considerably, according to FIEO. The “Atmanirbhar Bharat” initiative launched in 2020 may also play its part in reduced imports in the coming years. On the flip side, this has a negative impact on the availability of empty containers. 

Mounting distress: With imports dropping and shipping lines repositioning the empties, things turned worse for exporters, causing acute shortage of empties. As more than 90% of India’s global trade by volume is moved by the sea – with containers being a large part of this – it was indeed bad news for the Indian exporters. 

On top of this, the transshipment port at Colombo got choked beyond its capacity during September to December quarter in 2020, leading to vessels waiting up to 4 weeks to get a berth in that port. This further delayed the incoming empties into India. Import boxes that came into Indian ports were subjected to CAROTAR Rules 2020 implemented by Customs, thus adding to the list of delays.

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Immediate measures adopted to ease the situation

Ministry of Shipping along with various stakeholders had worked in their capacities to improve this situation and make available more empty containers for exporters. Below are some prominent measures that were adopted in this direction:

Reduction of free time at ports: As an immediate measure, Indian ports and container terminals had reduced the free time for in-transit containers dwelling at the port. The shipping lines too were advised to reduce their detention times as they had extended the free time on import containers during the lockdown period. Government’s implementation of Direct Port Delivery (DPD) scheme for import containers too had helped in its own way to clear the containers in a speedy manner. 

Railways allowed free movement of empties: Indian Railways had allowed free haulage of empty containers between ports and hinterlands in December 2020 for a limited period of time. This eased the cost burden on shipping lines to an extent in repositioning their empty containers and helped in quicker movement to the areas where they were need. Under normal circumstances, shipping lines must pay for moving their empties and would pass on this cost to exporters. Post the limited free haulage period, Indian Railways had offered 25% discount on the haulage charges for moving empty containers till 30 April 2021.

Short to medium-term measures

Clearing abandoned / long pending containers: Ports across India have huge stockpiles of containers that are either abandoned or pending clearance due to various reasons. According to Container Shipping Lines Association, there are about 50,000 containers lying in various ports in India belonging to this category. Some of them are lying there for many years at a stretch. The Customs department has taken this up on priority to clear as many containers as possible.  

Shipping lines to bring back more empties into the country: Shipping lines that repositioned empties out of India during lockdown started bringing them back (albeit in lower quantities) as soon as the need was felt here. As those empties nowhere matched the growing demand, the Indian government urged the shipping lines to bring back more empties as quickly as possible. Stakeholders like FIEO, who represented the affected export community, worked in close coordination with shipping lines in bringing back about 3,00,000 empties into India.

Long-term measures

Manufacturing containers in India: Almost all containers available in circulation in India are not manufactured in this country, as India has always relied on imported containers. China, on the other hand, is the market leader in container manufacturing with 95% global market share. Having a manufacturing base in India can go a long way in ensuring the availability of containers during periods of crisis like the present one. Ministry of Shipping has recently formed a committee as part of the “Atmanirbhar Bharat” initiative to study the feasibility of establishing container manufacturing units in the Saurashtra region in Gujarat. It is proposed to use recycled steel from shipbreaking activity in the nearby Alang as raw material for this purpose.

Maritime India Vision (MIV) 2030, launched by the Ministry of Shipping, has identified container manufacturing as a key issue in securing supply chains and making them resilient. The ministry is looking at drafting a policy in the second quarter of 2021 to promote container manufacturing in India.

Increasing vessel tonnage under Indian flag: India lags behind other maritime nations in having owned fleet of container vessels. Government had wisely invested in oil tankers to secure the country’s energy requirements as it is crucial for survival of the economy. However, the same foresight was not implemented in case of container vessels. While Indian oil tankers take care of energy security, having Indian container vessels can assure supply chain security and bring stability in ocean freight rates during times of crisis like this. 

Government is working on easing rules and procedures for registering ships under the Indian flag as part of MIV 2030. It is also working towards developing the domestic shipbuilding activity under “Atmanirbhar Bharat” initiative. These reforms should hopefully bring in more domestic tonnage in the long term. 

The way ahead

We have a full-blown container crisis on our hands, and this is severely impacting our current shipping demands. Any available containers are booked out immediately, which is why we, Cogoport, strongly urge our customers to book cargo as early as possible.

Honestly, we don’t see normalcy returning any time soon. It might be into second half of 2021 before any improvement can be seen in the container crisis and port congestions. Unfortunately, it is also predicted that contract freight rates will remain high throughout next year.

The Covid-19 pandemic has laid bare the vulnerabilities in supply chains and how they can affect us in times of crisis. Going forward, India as a country must improve its self-sufficiency in maritime infrastructure (both sea-based and land-based) to absorb the impact created by such crises. Planning for long term investments in container inventory and increasing the container vessel tonnage under the Indian flag are some of the sure shot ways to protect the economy from such a turmoil.