The K-shaped Recovery of Shipping
COVID-19 Impacts on Shipping and Logistics: Frenzy and Crisis
The freight market is both frenzied and in crisis. High container import volumes exhibit the strength of consumer demand and the buoyancy of the U.S. economy. Meanwhile, cargo is frustrated and the grounding of the Ever Given has placed a bright spotlight on the fragility of global supply chains. As we conclude the first quarter of 2021, several downstream effects of the Covid-19 pandemic have emerged.
Bankruptcies: As stock indexes hover near all-time highs, bankruptcies have also been peaking. S&P Global, a market intelligence firm, reported that U.S. corporate bankruptcies reached 630 companies in 2020, which is the highest
annual level since 2010. The data set is limited to companies with at least $2 million in assets or liabilities ($10 million for private companies) at the time of filing, meaning the smallest firms are left off the analysis and that total bankruptcies are undoubtedly higher.
Trucking: Looking closely at shipping and logistics, volume records hide aspects of the economic malaise, especially in the trucking business. Metro Group tracks motor carrier changes in participation in the Uniform Intermodal Interchange and Facilities Access Agreement (UIIA) as it serves as an indicator of industry health. The UIIA is a standard industry contract the governs the exchange of equipment between intermodal trucking companies and equipment providers, such as ocean carriers, railroads and equipment leasing companies.
In 2020, the number of deletions from the UIIA became erratic, signaling market volatility unseen in prior years. The rate at which motor carriers left the UIIA in 2018 through 2019 was relatively consistent, but throughout 2020, the numbers spiked at times with August recording about 330 deletions. This may only be a fraction of the true impact. According to transport analysts at Broughton Capital, 3,140 trucking firms closed their operations last year compared to 1,100 losses in 2019. Uncertainty and tough economic conditions have taken a toll on motor carriers.
Trucking is beset with many complexities that the volatility of the UIIA chart begins to call out. Perhaps the most significant issue is capacity. Trucks left the road in 2020, signaled by Schneider National which eliminated over 1,000 trucks from its fleet; but more importantly, driver availability remains an immediate and long-term issue that the recently signed stimulus may exacerbate by adding competition for drivers as other jobs become more attractive. Overall, aggregate revenues of the top 25 motor carriers dropped 2.9% in 2020, but that masks the disparities experienced by individual companies. According to the American Trucking Association, 18 of the top 25 truckload carriers saw revenues decrease compared to 2019, while others like NFI Industries and Penske Logistics made acquisitions to drive inorganic growth.
Container Congestion: Keeping containers and equipment on the move has been the paramount challenge. Congestion has built up at nearly every point in the logistics chain; even waterways with the grounding of the Ever Given have
been affected. Idle containers are a nemesis, threatening increased costs and slower service. Some ocean carriers are responding to idle containers by billing midstream for detention. It serves to notify the party in control of the container and encourages a faster return since the containers are effectively out of service. For shippers and transportation intermediaries, demurrage and detention are the risk.
Abandoned Cargo and Cancelled Bookings: Abandoned cargo is on the rise based on Metro Group Maritime’s initial data, and it appears to be the fusion of two problems addressed above – bankruptcies and D&D. Shippers may be unexpectedly forced to find new buyers for their goods or the cargo is unclaimed and becomes abandoned. In these scenarios, the D&D clock remains active, and the charges are accrued until the situation is finalized and the container is returned to the pool.
Spot Rate Cancellations: Turning to another current problem, spot rates have spiked to the extent that booking cancellations have jumped, too. Some carriers offer guaranteed space on the voyage for which their cargo is booked, but if the container is a no-show, the shipper pays a penalty. Metro Group Maritime is seeing indications that these cancellations have risen in recent months and are becoming a more meaningful component of delinquent receivables on ocean carriers’ books.
Labor and equipment shortages have taken center stage as cargo and ships back up at many of the nation’s ports holding back record volumes from discharging. The difficulties brought about by strong business conditions is the contradiction of a market rebound spurred by the global pandemic. With volumes expected to remain strong into the summer, the K-shaped recovery will require agility and resiliency of all actors in container logistics.