The Flanders-China Chamber of Commerce organized a webinar focused on “China Logistics – Challenges and Solutions to and from China” on 4 February 2021.

Ms. Gwenn Sonck welcomed the participants to the webinar. Current spot ocean tariffs from China to Europe are reaching record levels. Experts will explain why and how this happens and what we can expect in the coming months. For traders and businesses in Western Europe, needing to export to and import from China, what are the sustainable alternatives? In this webinar we will present a comprehensive picture of the current status of the Arctic maritime route and a detailed update on the Silk Road option. 

Mr Pepijn De Vreese, Chief Officer International Trade of the Port of Zeebrugge, introduced the impact of container shortages on the shipping supply chain. The Port of Zeebrugge is also a long-time structural partner of the Flanders-China Chamber of Commerce for many years. Before Covid-19, the profitability of container shipping had been under pressure since the financial crisis of 2008 due to overcapacity in the market leading to pressure on container shipping rates with an all-time low in 2016, when income didn’t even cover the costs of shipping companies anymore. The first action they took was to try to increase scale through mergers & acquisitions. This involved companies such as CSAV, UASC, APL, Hamburg Süd and OOCL. Some names disappeared, others became part of a larger shipping company. They also formed alliances to share operational costs. There are now three major shipping alliances: 2M, Ocean Alliance and The Alliance. The biggest impact on the sector was the bankruptcy of Hanjin, a Top 10 ocean carrier for containers. There has been huge pressure on prices – which were very low – before Covid-19. 

Covid-19 started in China, which took immediate measures with a lockdown. This led to actions being taken by shipping companies. Because cargo dried up, they reduced the number of vessels calling on Chinese ports. Containers were halted in the ports and because of Covid-19 there was a reduction in the availability of port laborers. All these measures led to an imbalance in container repositioning. Containers weren’t repositioned like they should have been. The rest of the world followed China’s lockdown, which meant people took no holidays, didn’t go to restaurants and took no recreation, and there was no physical shopping as people redirected their budgets towards e-commerce for hobbies, personal fitness, home maintenance, office supplies etc. Schools were closed so people had to buy laptops for their kids. All these products originated in large part from China. Because China was able to relaunch production quite fast, a lot of companies moved part of their production to China. The increase in volumes and e-commerce led to a shortage in airfreight adding to sea freight and a massive volume increase leading to container shortages because the containers weren’t where they were supposed to be and because vessels were taken out of rotation. There wasn’t enough vessel capacity to move the containers around were they needed to be. 

Adding to these problems was that in the U.S. vessels were and still are delayed at ports due to the huge volumes and personnel at the ports taken out by Covid-19 or by preventive measures creating inefficiencies. Containers also remained longer in the hinterland because there weren’t enough drivers and equipment to move the containers. At the Port of Los Angeles, there are currently 68 vessels and only one-third are being handled while the others have to wait outside the port. Over 560,000 TEU remain idle at the port before being handled. Congestion is also part of the problem we see today. In the UK there are also congestion issues due to volume increases and shortages of staff. Due to driver and equipment shortages, containers in the UK also remained longer in the hinterland. On top of that, due to Brexit, there was stockpiling before the end of the year, leading to 98% of warehouse capacity being filled. Companies started using containers as back-up space. 

Shipping companies prioritized vessels and containers on the most profitable long haul routes, first on Asia-Pacific and later on Asia-Europe. Zeebrugge suffered as well as vessels were sometimes turned back at Pireaus to pick up more cargo in China. This led to lack of vessel space for companies outside the big trade routes. These volumes were rerouted to hub ports via feeder vessels. Due to higher volumes, hub ports also got more congested, meaning containers and vessels remained longer at the ports. 

The situation today is that carriers do no longer limit vessel capacity. With Chinese New Year approaching, normally vessels are taken out of the fleet because of the expected drop in volume, but now the idle fleet is shrinking, so there are even more vessels. No blank sailings programs are implemented after Chinese New Year to meet high cargo demand. Today all very large container shipping (VLCS) tonnage is sold out so companies can’t use the charter market to cope with highs and lows. Shipping companies prioritize the money they no earn to reorder their debt and are not looking at orders & acquisitions. The carrier box fleet – containers – grew quite fast during the second half of 2020. The biggest Chinese container producer CIMC is working around the clock and its order book is filled until the end of March. New boxes are coming onto the market but this takes time. 

Turning to the outlook, the current rates are excessive, but the feeder rates before Covid-19 were not sustainable so they should go back to a level a little bit higher to make it sustainable for shipping companies to offer shipping services to customers. We expect rates to stabilize in the near future and there are signs of improvement in equipment availability in Chinese ports. But shipping lines are still cautious in ordering new vessels – which are only build after two years – as the 2021 outlook is still uncertain. They don’t know what is going to happen after most of the world is vaccinated so they are hesitant to buy more capacity. 

Zeebrugge is an emerging Belt and Road Initiative (BRI) hub. COSCO Shipping Ports has managerial control of the Zeebrugge deep sea terminal since 2017 and COSCO plans to make it their hub for North-Western Europe. There is a 20% growth in deep sea container volumes year-over-year for the last three years. Zeebrugge has profited from congestion in the UK. A lot of volume destined for Felixtowe was diverted to Zeebrugge. The work to expand the container terminal is currently under way. COSCO is aiming for this year at a growth of 20% to 30% in line with the previous years. The Lingang Logistics Group also plans to set up a park in Zeebrugge. Shanghai Lingang Group is the biggest industrial and logistics real estate developer in the Shanghai region, owned by the Municipality of Shanghai. They have chosen Zeebrugge as their first overseas investment in line with COSCO’s strategy. In a first phase they will build a warehouse of around 76,000 square meters divided into 10 units. Construction was planned to start in 2020 but due to Covid-19 the Shanghai team could not travel, so it was delayed and construction is expected to start in 2021 becoming operational in 2022. The Zeebrugge Port Authority is also building the biggest turning bridge in Europe connecting the deep sea terminal with the motorway. Zeebrugge is also handling a big volume of Chinese e-cars. Zeebrugge is growing as a BRI hub, but still has a long way to go to reach critical mass, especially concerning containers, but the port will be able to offer more services to companies in the hinterland. 

Mr. Didier Duponselle, Director Supply Chain Solutions at Ahlers, introduced the company, which is a Founding Member of the Flanders-China Chamber of Commerce. Ahlers has 650 employees in over 35 locations worldwide. Ahlers started as a shipping company in the Port of Antwerp in 1909 and their headquarters are still located in Antwerp. Its mission is to deliver high-quality logistics services to enable customers to focus on their core business. It offers sustainable and tailor-made logistics solutions with one common cultural approach. Recently, Chinese-owned containers are not allowed to leave China and should be used first on the domestic market. This has even added to the problem. The supply chain has not come to a standstill, it is disrupted, is less reliable and it is really global. How does this affect shippers, importers and end customers? Spot rates are at a record high. There are higher peak season surcharges and equipment imbalance surcharges to cover for container returns. Several booking stops were announced for certain carriers. Contracts and long-term agreements are not always honored. The better you negotiated and obtained better prices, the easier you are now put aside. Rollovers are causing delays at loading points and as a result at destinations.

There is increased uncertainty. The maximum rate today for a 40 foot container is USD10,000 on the Shanghai-Antwerp route, which is massive. The average is about USD8,000. The Harper Index from Asia to Europe is similar. This reality is unseen. On the Antwerp-Shanghai route we see some peaks in 2017, but we also see quite significant increases in the last months. The maximum price for a 40 foot container today is USD3,000, this is also not going in the right direction. It is a global issue.

What are the alternatives? There is the Arctic Route – a sea freight alternative – and there is the Silk Road, the real alternative. The classic Suez Route is still the major trade lane for containerized goods with many available carriers and takes 37 days from the Far East to Europe. There are three alliances and competition to offer competitive prices as long as there is sufficient capacity. About six months ago we were happy with this situation, but today we are a lot less happy: capacity is restricted and the alliances are playing their capacity game. It is in fact an oligopoly, being allowed to share rates within the alliances. This goes back to 2008 when there was a necessity to consolidate. In adverse times like today we are all affected. 

Arctic routes have been discussed quite a lot in certain forums. Nobody feels comfortable if you only have one choice so everybody is looking for alternatives. Today, traffic on the Arctic Route is mainly project related (65%) – mainly focussed on LNG – and of the 35% cargo vessels, 50% is container traffic. In 2020 only 499 vessels have used the Norther Sea Route (NSR), so it is still very limited. You need special vessels do deal with the ice, but the distance is 40% shorter compared to the Suez route. The Arctic Route is still not open year round, this is expected by 2030, so in the month of February this is not a good option.

The Rail Silk Road takes about 16 to 18 days and is approximately 11,000 km long. Volumes are higher than on the Arctic Route at 1.14 million TEU last year, an increase of 56% year-on-year. It is expected to increase to 3 million TEU by 2030, but for global trade it is still very low. You have to keep in mind that there are different track gauges so at certain terminals containers have to be transferred from one rail operator to another. You have multimodal options: a sea-rail combination via Kazakhstan and Kaliningrad; trucking to the Chinese border and continuing by rail; and sea freight to Vladivostok and continuing by rail to Europe. Finally there is a “Covid track”: containers going by rail to St Petersburg and onwards by ship to Western Europe. 

Which is the better option? Looking at the ocean route, vessels are delayed by 7 to 12 days, ports of discharge are congested and there are delays for pick up of up to two weeks extra. So there is a delay of 7 to 26 days. On the rail route, in late December there were 7,000 containers waiting to cross into China with an average delay of 20 days, but some containers waiting for 42 days. Delays today are 5 to 7 days. 

	Dec.’19	Sep.’20	Jan.’21
Rates ocean	USD2,150	USD2,400	USD9,750
Rates rail	USD16,900	USD6,000	USD14,500
Avg delay rail	3-5 days	15-20 days	3-5 days

Rail rates declined due to subsidies from the Chinese government and more frequent use by shippers. Then there was a spike in prices due to the shortage of containers and the Chinese government reduced subsidies as there was huge demand on this route. Train organizers also raised their prices. Looking at the CO₂ on different routes, CO₂ by ship on the Suez route is 3.27 tons; by ship on the NSR it is 2.33 tons and by rail on the Silk Road 8.66 tons. Also in terms of CO₂/ton km, the Rail Silk Road is a lot less interesting. A main reason is that many of the trains still have diesel engines. A truck is still three times worse than rail. 

Is the Silk Road a viable alternative today? Not yet, due to delays at the China-Kazakhstan border and high prices. Thinking strategically, it might be later as it takes only 16 days to Europe, with a high safety level and lower inventory carrying cost. Since many parties are involved, you need an experienced partner. Ahlers has offices and people along the complete route able to handle the different modes of transport. Short term, the Arctic Route and rail are not a good option. Capacity has not decreased in the ocean trade and demand has not doubled. There is still some long term balance. In the second half of 2021 a normalization of tariffs is expected, but still at a higher level than pre-Covid. Longer tariffs do not show the extreme high peak we see today. It is expected that lead times will improve as carriers plan to continue to sail during the Chinese New Year period. No rate changes are expected till the end of March. 

Ahlers’ recommendations for shippers include: 

• Checking contracts on legal strengths and asses applying penalties, certainly with carriers. 
• Increase your safety stock as the chain can no longer be deemed reliable enough for the coming months. 
• Book two weeks faster than you used to as timing between confirmed booking and actual vessel departure may increase from 10 days to three to four weeks.
• Trust a forwarder that can deliver a solution and back up bookings with a different carrier for critical goods.
• Change incoterms to FOB/FCA/EXW and have more influence on your supply chain.
• Make a risk assessment study on your supply chain and structurally re-assess a rail solution.

Q&A: Can you ask compensation for delays if paying a high price? Mr. Didier Duponselle: It all depends on your contract. If you are entitled to it, go for it, they can pay.