Mục ý kiến chuyên gia SCFI Surge Causes and Improvement in Liner Bargaining Power

People can use several indices to quantify shipping freight rates and analyze trends in the container shipping market. Among them, the Shanghai Containerized Freight Index (SCFI) is the most reliable container shipping freight rate index released weekly based on the spot freight rates of export containers at the Port of Shanghai.

The Composite SCFI for January 2024 was 2130.34 points, up 73.17% from 1230.22 points in December 2023. Compared to January 2023's score of 1040.77, this is a 105% increase. The SCFI continued its upward trend, reaching 3438.50 points in June 2024 and 3650.37 points in July, an increase of 257% and 274%, respectively, compared to January 2023. The main reasons for the rise in the SCFI are the Red Sea crisis and the widely publicized cargo pushing from China. In this column, we will discuss the reasons for the increase in SCFI, as well as the improvement in the bargaining power of liner carriers.

1. Red Sea Crisis Since late 2023, Yemeni Houthi rebels have occupied the Red Sea, blocking the Egyptian Suez Canal, a vital shipping route between Europe and Asia. This caused major disruptions to global shipping logistics, the aftermath of which is still being felt as of August 2024.

Since the Houthi rebels took over the Red Sea, attacks on merchant ships have been frequent, forcing liners to reroute to the Cape of Good Hope at the southern tip of Africa. Bypassing the Cape of Good Hope in exchange for the Suez Canal adds about two weeks to the voyage. This has led to a decrease in the supply of cargo capacity (CLF), which in turn has led to higher freight rates.

Since the Red Sea crisis, the number of ships transiting the Suez Canal has been sharply declining, leading to a bottleneck in shipping logistics. In December 2023, the number of ships transiting the Suez Canal was 3,662,180 TEUs, but by June 2024, it had plummeted to 394,060 TEUs. On the other hand, shipments bypassing the Cape of Good Hope exploded from 288,000 TEUs to 9,362,000 TEUs over the same period.

In the process, cargo is being concentrated in feeder ports not just traditional hub ports such as Singapore and the Port of Rotterdam in the Netherlands. Feeder ports lack the capacity and loading/unloading facilities to handle the high volumes of cargo compared to hub ports, resulting in port congestion. For example, let’s take a look at the Port Congestion Index for the Southeast Asia region, which includes Singapore, Port Klang and Tanjung Pelepas in Malaysia, and Jakarta in Indonesia. During COVID-19, port congestion rose by up to 1.08 points due to global logistics disruption. While port congestion has decreased post-COVID-19, the Red Sea disruption resulted in a Port Congestion Index of 1.11 points and 1.13 points in June and July 2024, respectively, higher than the 1.08 points recorded during COVID-19.

Rerouting to the Cape of Good Hope instead of the Suez Canal has increased the SCFI due to longer transit times and port congestion. This leads to an increase in global logistics costs, which in turn affects consumer prices. In particular, rising prices of raw materials and essential consumer goods are contributing to overall inflationary pressures. The rising SCFI also adds to the burden of logistics costs, which can hit SMEs harder. While large shippers can leverage capital and resources to bear the burden of higher costs, small and medium-sized shippers cannot. This could lead to a weakening of their competitiveness in the global market. 2. China’s Cargo Pushing and Other Factors In May 2024, the United States announced that it would increase tariffs on Chinese imports by two to four times starting in August 2024. In response, China has been pushing exports of key items such as electric vehicles, batteries, and semiconductors. As a result, the Port of Los Angeles handled 4.7 million containers in the first half of 2024, up 14.4% year-over-year. In June, import volumes were down 1.5% year-over-year, but exports were up more than 13%. (Bloomberg ^[2]).

China's export strategy is more than just a reaction to trade policy changes; it's affecting the global logistics system. Liners are concentrating their fleets on the China-North America route, where they can handle higher volumes, and avoiding calling at smaller, less profitable ports. As a result, small and medium-sized shippers are struggling to secure space, and China is pre-empting containers globally to dramatically increase its export volumes. Container boxes are supposed to rotate along specific routes, but the concentration on the China-North America route is causing rental rates to skyrocket. It's also having an impact elsewhere, with both container ships and vessels flocking to China.

For example, container ships from China have become more fully loaded, reducing the need to call at South Korea and load cargo. This container shortage is devastating for small and medium-sized exporters. While larger companies can leverage their capital and resources to secure containers at a higher cost, small and medium-sized companies cannot, which can make them less competitive in the global market.

As container traffic from China has surged, so has congestion at Port of Shanghai. Since May 2024, the Port Congestion Index for the Port of Shanghai has been recorded at 421.21 points in May, 403.87 points in June, and 459.00 points in July. This is an increase of 16%, 11%, and 26% respectively compared to the average Port Congestion Index of 364.33 points in 2021 during COVID-19.

A shortage of ship capacity, a shortage of container boxes, and increased congestion at the Port of Shanghai will eventually lead to higher logistics costs. Shipping companies are raising freight rates to make the most of limited resources, which could lead to higher commodity prices globally. In particular, rising prices of raw materials and essential consumer goods are likely to contribute to overall inflationary pressures.

Other factors and potential drivers of shipping freight rate increases are as follows:

First, the third quarter is the peak season for the liner market. The third quarter sees a significant increase in cargo volumes as distributors do large-scale stocking operations ahead of the Thanksgiving (fourth Thursday of November) and Christmas (December) periods in the U.S. This tends to drive up shipping freight rates. The average Asia-North America voyage is about 67 days.

Second, the possibility of a U.S. East Coast dockworker strike. In June 2024, labor contract negotiations between U.S. port workers and operating authorities broke down, raising the possibility of a strike at terminals along the U.S. East Coast and Mexico. The International Longshoremen's Association (ILA) broke off negotiations with the United States Maritime Alliance (USMX) over the use of automated technology in trucking operations at port terminals. The union claims that the automation violates the labor-management agreement. If the dockworkers go on strike, it could cause port congestion, which could drive up shipping freight rates. 3. Liners’ Bargaining Power Improvement The shipping industry has developed resilience through different adaptation mechanisms during the financial crisis and pandemic shocks. In terms of capacity management, the industry has seen very different results during those two crises in terms of adjusting capacity to market changes. During the financial crisis, liners collectively failed to manage capacity effectively, leading to falling freight rates, low vessel utilization, and bailouts. Hanjin Shipping, for instance, struggled badly in the years following the financial crisis and eventually went bankrupt despite receiving financial support. Major Japanese carriers like NYK Line, MOL, and K Line also received support from the Japanese government. However, during the COVID-19 pandemic, liners have strengthened their market position and bargaining power, leading to higher freight rates and stronger earnings. (Notteboom et al. ^[3]).

During the 2008-2009 financial crisis, the shipping industry adopted a strategy of slow steaming to counteract the overcapacity of ships. This played an important role in reducing fuel consumption and absorbing excess capacity by reducing vessel speeds. However, during the pandemic, slow steaming was not effectively utilized. Instead, the strategy of realizing economies of scale by injecting larger vessels and idling smaller vessels was more effective. M&A and global alliance formation among liners from 2014 to 2017 facilitated the deployment of this strategy. For example, Maersk acquired Hamburg Süd, COSCO acquired OOCL, and Japan's three largest container carriers (MOL, NYK, and K Line) combined their container businesses to form ONE (Ocean Network Express). The bankruptcy of Hanjin Shipping led to changes in the global alliance, which was reorganized in 2017 into 2M (Maersk, MSC), Ocean Alliance (OOCL, COSCO, Evergreen, CMA-CGM), and The Alliance (NYK, Hapag-Lloyd, MOL, K-Line, Yang Ming) (The Significance and Impact of the Abolition of CBER ^[4]).

The shipping industry has learned from the financial crisis and the pandemic that capacity management is critical. During the financial crisis, shipping companies experienced significant freight rate declines due to ineffective capacity management, but during the pandemic, more effective capacity management and collective capacity management through global alliances led to higher freight rates and historically unprecedented performance.

According to a study by Notteboom et al. ^[3], the shipping industry was better prepared for the pandemic thanks to lessons learned from the financial crisis. In addition, collective capacity management through global alliances, such as cancellations, blank sailings, slow steaming, and idling of vessels, helped liners effectively deal with the disruptions caused by the pandemic (Freight Rate Defense Strategy of Ocean Shipping Companies ^[5]). These changes significantly improved liners' bargaining power. Through the financial crisis and the pandemic, liners have learned how to deal with oversupply and manage costs efficiently. In particular, the effective use of vessel capacity during the pandemic has optimized their cost structure and strengthened their ability to respond to market volatility with stability. This can also lead to higher freight rates. 4. Conclusion The rising SCFI and the global logistics crisis pose many challenges and obstacles for shippers. In this context, shippers should consider using shipping freight rate forecasts to come up with strategies. Strategies should be based on the predicted freight rates, which can take into account the following factors:

The first is the contractual freight rate level. Based on the forecasted freight rates, the appropriate level of transportation contracts can be signed.

The second is the duration of the contract. Depending on the forecasted freight rates and market conditions, a shipper should choose either a long-term or short-term contract to secure vessel capacity. Long-term contracts help to reduce the risk of rapid freight rate fluctuations. Long-term contracts allow shippers and distributors to reduce the uncertainty caused by market volatility with fixed freight rates, and to plan and operate their budgets more accurately. Short-term contracts, on the other hand, allow them to react quickly when market conditions or demand change rapidly. Shippers often utilize short-term contracts to respond to rapidly changing demand, giving them the flexibility to adjust their logistics operations.

The third is pricing options. Shippers can choose between a fixed-rate contract and an index-linked contract when signing a contract. Fixed-rate contracts guarantee predictable costs but may be inefficient if freight rates decline. For example, shippers and distributors may enter into fixed-rate contracts to ensure that their transportation costs are stable despite spikes in freight rates. A fixed-rate contract with a shipping company allows a shipper to manage their transportation costs predictably, which can contribute to reducing the risk of increased logistics costs. However, a shipper may not benefit if freight rates fall.

Index-linked contracts, on the other hand, are more flexible, with prices adjusting in response to changes in freight rates. With index-linked contracts, a shipper can reduce their transportation costs at a time when freight rates are falling, which can contribute to lower overall logistics costs. However, there is a risk of increased costs when freight rates rise. Therefore, shippers should consider the current market conditions and freight rate forecasts as a whole to choose the appropriate pricing option. # Reference [1] Clarksons, Shipping Intelligence Network.
[2] Bloomberg, https://www.bloomberg.com/news/articles/2024-07-17/port-of-la-container-volumes-climb-14-on-strong-trade-activity?embedded-checkout=true
[3] Notteboom, T., Pallis, T., & Rodrigue, J. P. (2021). Disruptions and resilience in global container shipping and ports: the COVID-19 pandemic versus the 2008–2009 financial crisis. Maritime Economics & Logistics, 23(2), 179.
[4] The Significance and Impact of the Abolition of CBER, https://www.cello-square.com/kr/blog/view-1210.do?metaSeqNo=5173.
[5] Freight Rate Defense Strategy of Ocean Shipping Companies, https://www.cello-square.com/kr/blog/view-833.do?metaSeqNo=4138

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