Due to ongoing supply problems, more and more companies intend to turn their backs on China in the second year of the pandemic. “Astronomical Freight Rates” make them The production facilities there were too expensive, says logistics expert Alexander Nowroth from the Lebenswerk Consulting Group ntv.de. For some companies it pays off again that Bringing production back to Europe – too another reason. “Produce as cheaply as possible, no matter where and then import it, that will soon be obsolete,” says Nowroth.
ntv.de: Shortly before Christmas, there are again reports from the retail sector that some shelves will remain empty due to delivery problems. D.he replenishment of goods from the Far East is still stagnating in the second year of the pandemic. The “perfect mute” in world trade, as some call it, simply does not want to fade. Why is that?
Alexander Nowroth: In a perfect storm there are always several forces that work together. Not one thing goes wrong, but several. I help customers with various strategic issues and see what’s going on. Freight rates have reached astronomical levels. Prices are currently at $ 16,000 per 40-foot container. The same container cost around $ 2,000 a little less than 18 months ago. These are prices that shipping companies have never dared to dream of. That’s good for this industry. But as an entrepreneur and importer, you first have to be able to afford that.
Is there an end in sight? Once the pandemic is under control, will prices fall again?
In any case, container rates will remain at a very high level in the coming year. There are three reasons for this: Firstly, because of the Suez Canal blockade of Ever Given and corona-related port closings in China, there are still huge bottlenecks. Second, as a result of global restrictions on consumers, the demand for transport is still high. The third reason that speaks for sustained high freight rates is that the shipping companies have turned their price model from the pre-Corona period on its head. For fear of collapsing prices, which they have to assume in the foreseeable future – namely when the corona crisis is over – they lure customers into comparatively cheap, long-term contracts. They bind customers to you for the years to come and thus determine, to a certain extent, the prices in the future.
Can you explain this with an example?
Imagine you want to send 3,000 standard 20-foot containers from China to Germany per year. If you sign a one-year contract, a container will cost you $ 14,000 or $ 15,000. The two- or three-year rate is significantly cheaper at $ 6,000 or $ 7,000. Because the prices are then still three to four times higher than before Corona, it is still very good business for shipping companies. The shipping companies are thus preventing a rapid drop in prices. It is interesting that the tariff model was reversed until 18 months ago. That shows what they are trying to achieve.
So the shipping companies are taking precautions for the time after Corona, are they preventing prices from falling again too quickly?
The container prices can be calculated using the Shanghai Container Freight Index track well. Since 2005, the SCFI has been mapping the freight rates of container transports starting from Shanghai, the largest container port in the world, on a weekly basis. A freight container from China to Europe currently costs between $ 15,000 and $ 16,000.
Right. Sooner or later prices have to collapse at this high level. The background is two factors: On the one hand, stricter environmental standards of the International Maritime Organization IMO will apply from 2023. On the other hand, around four million TEU, 20-foot standard containers, are being launched onto the market as a result of the launching of many new ships. That corresponds to around 20 percent of the global fleet that is currently on the move. Even if a few ships are taken out of service, the supply of free space on container ships is likely to outpace demand worldwide. At the same time, however, demand will also shrink. This is because the majority of the population will be vaccinated at some point. When people move more and travel more again, they will also ask for less material things. And thus buy fewer things from China. This is the moment when freight rates are likely to fall very quickly.
What conclusions do importers draw from this?
There are more and more companies that say that producing goods in China and shipping them to Europe is simply too expensive because the container price exceeds the value of the goods. And we’re talking about 70 to 80 cubic meters that fit into a container. In macroeconomic terms, a point has been reached where entire industries are considering whether shipping across the globe still makes sense – also from an ecological point of view, by the way. A business model that is based on the fact that I can produce cheaply somewhere also means that I can map the transport costs. An importer like MediaMarkt, who has 500,000 euros or more in value in a container, is not interested. For him, that’s a few euro cents on an expensive product level. But for someone who imports safety equipment or gloves, the purchase price per glove is suddenly no longer 20, for example, but 35 cents, which quickly equates to double-digit percentage points of the value of the goods. This is noticeable in the balance sheet.
That sounds as if this could have consequences for the production location in China.
There are two trends: either companies say they are going to India or Bangladesh. It is already more expensive today, but not as extremely expensive as importing freight from China. Or they say they are bringing production to Europe straight away and they see whether they cannot reduce inventory through the much shorter lead times. Then you don’t have to wait months for products and in the end you might save money too. Companies now have to offset that, which is exactly what they are doing.
Do you already have customers looking for new production facilities outside of China?
A customer with a turnover of 300 to 400 million euros is currently considering whether to reduce part of his 3,000 containers by having them manufactured in Spain or Portugal. He could then have the goods transported to England or Ireland by truck or small ship. Especially in industries with a low value of goods – let’s say importers of tiles or fabrics – it can very quickly happen that the business is no longer worthwhile because of the high transport costs. By bringing production closer to the company headquarters, companies can also improve their CO2 balance, because the sea route is also included. That’s another benefit for them.
Will our supply chains ever be the same again, or will Corona become a game changer for the industry?
The supply chains will change permanently. However, this is more true of some industries than others. For companies with low product value, some of which have been manufacturing in China for decades, this will be especially true. This is also due to the fact that they not only suffer from the high container prices, but also from the three to four times higher raw material prices. A lot is being turned upside down right now. That can also lead to us pulling up domestic production again.
Does this mean that shipping companies may abolish themselves with their pricing policy?
I wouldn’t go that far, but the consistently high prices can boomerang for you. It doesn’t have to be that way, but it can happen. But to break a lance for you: Keeping a shipping company running is even more expensive than operating an airline. Shipping companies have bled enormously for years. They made billions in losses because they drove at prices that were far below what they should have asked. From their point of view, it is therefore the moment. However, Rolf Habben Jansen, the head of Hapag Lloyd, is one of those who clearly warn that the price level is not good because it makes itself unattractive for customers. In the end, you have to wait and see what effects this will have.
Do you dare to estimate how much the level of sea freight rates will collapse?
It’s hard to say because multiple factors determine them. However, if you look at the historical fluctuations and the special effects caused by Corona, I think that the container freight market will collapse by at least half, if not by 70 percent in some shipping areas, for example China, in the medium term. I assume that the rate level will no longer fall below the pre-Corona level in the long term, but will be above it.
Wouldn’t the production sites in the Far East with significantly lower freight rates become interesting again for companies and importers, and everything would then be back to normal?
That may sound logical at first. However, another point also plays a very important role here: the growing awareness of the economy for the CO2 problem. When a producer brings part of the production back to Europe, he not only has significantly more control over delivery times and costs, but can also save significantly more CO2 thanks to modern production facilities. In Asia, not only does the transport to Europe cause higher CO2 emissions, but often also the lower environmental and production standards. A “greener” awareness does not reach consumers, but also companies. Produce as cheaply as possible, no matter where, and then import it, that will soon be obsolete. We call this approach “Consciousness Economy”.
Diana Dittmer spoke to Alexander Nowroth