Understanding the Economics of Containerised Freight During Covid-19
Approximately 90% of international trade is conveyed by containerised sea freight, and we have indeed seen a paradigm shift in container freight rates from pre-pandemic to current.
The Covid-19 pandemic is an unprecedented event that has brought and continues to bring with it, an array of challenges, inter alia, a supply chain quagmire with several ensuing conundrums. After critical analysis and careful evaluation of fundamental economics concepts, together with an overview of the pandemic and the market structure of the shipping industry, we are able to carefully project the trend of freight rates as we conclude the last quarter of 2021 and head into 2022.
One would recall, when the pandemic was in its infancy, there was indeed a high level of uncertainty surrounding the mechanics and possible progression of the virus. Very little was known and very little research was available to guide informed decisions, resulting in several initial “hard lockdowns” that virtually brought supply chains to a standstill. Containers were stranded at ports, incurring demurrage charges, equipment shortage would soon ensue, port schedules were disrupted as vessels were detained and others prohibited from calling at certain geographical locations, resulting in altered trade lane routes. Factories that manufactured goods for export were also adversely affected insofar as production lines were concerned, resulting in a shortage of supply to export markets.
Having said that, containers are often regarded as the building blocks of the supply chain and, as indicated in the opening statement, form an integral component of international trade. Having said that, one would soon be able to deduce that it was only a matter of time that supply would become scarce and, based on the fundamental principles of the law of supply and demand, demand would begin to rise, and so too would the prices.
We further take cognisance of the fact that oil prices plummeted at the initial stages of the pandemic, and similarly once lockdowns eased and supply chains mobilised again, the demand for oil increased, resulting in an increase in the selling price. The shipping industry indeed can invariably be categorised as an oligopoly market structure whereby a few major players dominate the market.
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By: Devlyn Naidoo