BANGKOK/SINGAPORE -- Freight rates will remain elevated as China's dogged pursuit of a zero-COVID strategy continues to hold up international trade, the chiefs of two global logistics companies said. One warned that the situation could pose an existential threat to manufacturers that produce goods with little room in the pricing to absorb higher transportation costs.
The Chinese strategy has caused a shortage of labor at ports, preventing ships from quickly offloading cargo and sailing elsewhere. Labor issues have also clogged U.S. ports, where maritime companies and longshore unions are negotiating employment terms.
Export bans and frequently changing regulations are also keeping international trade from normalizing, the executives said.
"Even today, 10% of all container ships globally is actually delayed -- waiting at anchor, or waiting for port labor," Jeremy Nixon, CEO of Singapore's Ocean Network Express, told Nikkei Asia. "We still have this capacity restriction at the moment, so still, supply and demand is tight."
Deliveries are being further delayed by ports' constantly changing requirements.
"Systems take longer to change than regulations, and there's always a danger of what's going to happen if the regulation changes and the system can't support it," Tim Scharwath, CEO of DHL Global Forwarding, told Nikkei Asia in a separate interview.
Shipments are at higher risk of being impounded by local authorities as governments impose export bans on medical and food items, Scharwath explained. Coming the other way, even after cargo clears customs, truck drivers might not meet health requirements for the last leg of delivery, especially within China.
In April, the Shanghai port handled 3.1 million twenty-foot equivalent units (TEUs), or standard shipping containers, according to maritime analyst Lloyd's List Intelligence. The port handles 20% of all outbound Chinese cargo, and the April figure represented a 25% drop from the average monthly volume in the first three months of 2021.
Economists have downgraded China's annual GDP growth to the 3% to 4% range.
"It's clear that China has decided to prioritize its health situation of COVID above that of its economic growth, so that's led to some quite severe cutbacks," Nixon said, noting that companies which source manufactured goods from mainland China are concerned.
Scharwath does not see China's slowing growth or port congestion as a death knell for trade or globalization, least of all for DHL's international business. The German logistics company's revenue grew 22.5% in 2021, about a quarter of which came from its global forwarding segment, with the group netting a profit of 5.4 billion euros.
"If GDP is growing strongly, it's a nice wave that pushes you from behind," said Scharwath. "Our solution-driven approaches to different markets will help us grow market share in any country, and that can compensate for a weaker China."
"It's clear that China has decided to prioritize its health situation of COVID above that of its economic growth, so that's led to some quite severe cutbacks," ONE's Nixon said. (Photo by Takaki Kashiwabara)Similarly, the global supply crunch has been a windfall for ONE. The Singapore-headquartered Japanese shipper reported a record profit of $16.7 billion in the year ended March, an increase of $13.3 billion from the previous year.
ONE attributed the jump to record-high spot freight rates, pushed up by a lack of shipping capacity and strong consumption demand. Solid cargo demand persisted from January through March, even as China locked down major cities and Russia invaded Ukraine, the company noted.
Scharwath said DHL has advised customers to be flexible on routes and transit times, as shipping container rates may never go down to pre-pandemic levels. The Xeneta shipping index, a benchmark for container rates, saw an unprecedented rise of 30.1% in May.
"Sometimes, depending on the import, if it's a low value good, they cannot manage higher freight rates," he said. "Some of these businesses might have issues in being sustainable."
A trans-Russia route that became a good alternative for DHL customers in 2020, when container rates began rising, has since been affected by the Ukraine war. Although the German company has stopped inbound deliveries to Russia, it continues to arrange internal Russian cargo drops. Deliveries from China to Poland still traverse Russia without being offloaded, to avoid European sanctions.
"The link between Asia and Europe on rail is still working, but the volumes have gone down severely," Scharwath said.
Developing a rail route through Kazakhstan would help ease logistics roadblocks. "The Russian system has very good infrastructure that was developed over time," Scharwath said. "Now we need to develop the southern infrastructure in the same way."
Sanctions on Russian energy have begun to bite into shipping company profits, as fuel comprises 20% to 30% of costs.
"We have seen like a 25% increase in bunker costs in the last six to eight weeks, so that does have a big material impact across the industry," said Nixon, who serves as co-chair of the World Shipping Council.
While profits are surging, both ONE and DHL are investing to boost capacity. In response to consumer trends, especially the growth of U.S. demand for Italian prosecco and French vodka, DHL in March acquired beverage logistics expert JF Hillebrand. The company is also investing in local talent across more than 150 markets to stay on top of customs regulations and customer preferences.
ONE in May signed contracts with Hyundai Heavy Industries and Nihon Shipyard. Each shipbuilder by 2025 will deliver five modern Very Large Container Ships, which can carry more than 13,700 TEUs.
The vessels are designed to reduce their impact on the environment. Plans are for them to be ready to run on ammonia and methanol. In addition, ONE is exploring long-term alternative energy sources and decarbonization technologies for its future fleet.