Until very recently, the wine industry, like other sectors, became very used to cheap transport. A 40ft container (FEU) full of wine could travel between continents for $1,500 or less, and the metal boxes themselves and the pallets on which the wines were stacked were of such little value that they were then often sold off cheaply by the recipients. Converting disused containers into offices and garden sheds became a thriving business.
The pandemic and the shortage of haulage drivers and port workers changed all that. The cost of those same voyages rose to $15,000 and there was talk of a worldwide pallet shortage. In December 2021, over 100 container ships were waiting offshore for berths in Los Angeles/Long Beach, one of the biggest ports in the US. At the beginning of 2022.the authoritative Freightwaves website reports that annual Asia-U.S. contract rates are up 122% from pre-Covid 2020
Is this temporary or will the industry have to become used to higher transport costs over the long term?
The answer, according to professionals quoted by Freightwaves is unclear. Ben Nolan, shipping analyst at the brokerage and investment banking firm, Stifel, sees spot rates dropping from $9,300 per FEU (as measured by the Drewry World Container Index) to $2,000 over the course of 2022. In Nolan’s view, “As is the nature with traffic jams, when the accident is removed, normal velocity patterns materialize relatively quickly. It does not currently look like that accident is likely to be moved soon, but when it finally does, we do not expect ‘this time to be different.’”
On the other hand, Andy Chu of Deutsche Bank is predicting that Maersk and Hapag-Lloyd freight rates will be 30% higher this year and the two shipping giants’ respective EBITDAs will rise by 43% and 56% from last year.
Judah Levine, head of research at Freightos, is inclined to agree with Chu “There is no strong expectation of significant improvements [for cargo shippers] until underlying demand wanes. That doesn’t look like it will be happening anytime soon.”
These varying views over short term prospects are reflected in shipping industry thoughts about the availability of ships on which to transport the containers.
Too few ships?
In August 2021, Xavier Destriau, chief financial officer of the giant shipping group Zim told the Financial Times that he feared that the number of old vessels that are due for scrapping and the lack of recent orders for new vessels posed “a potential major threat… a… risk of pressure on supply in terms of vessels… three, four or five years along the line.”
Shipyards have certainly been getting orders for ships this year, but the reduction in the number of these operations – two thirds less than in 2007 – raises the question over whether they will be able to satisfy demand. According to Clarkson’s research, in the first seven months of 2021, orders had been placed for sufficient ships to carry over three million 20-foot containers – an unprecedented number over that period.
Other industry players are more hesitant to buy new vessels. On the one hand, there are debates over how they should be fueled in an era when environmental concerns are increasingly important. Should they be driven by Liquid Natural Gas – LNG – hydrogen or green ammonia? Or possibly an alternative that is not yet on offer.
On the other, there is the fear of repeating the oversupply of vessels that hit the sector five years ago. In 2016, Maersk, the world’s largest shipper, suffered its second annual loss since 1945. The Danish company was able to weather that $1.9bn loss, unlike its South Korean competitor Hanjin which collapsed the following year in what was described as the shipping sector’s biggest bankruptcy in three decades.
That event helped to create three major alliances between some of the most powerful container ship lines that are thought by some to reduce price competition in the sector.
Quite apart from shipping, and rising inflation, there are of course other additional costs that will have to be covered, such as the higher wages that are being demanded by truck drivers and port workers whose bargaining power has grown so much stronger over the last couple of years.
When all of these factors are taken into account by the wine industry, the strongest likelihood is that the trend to bulk-shipping and bottling at destination will continue to grow.