The amount of cargo is increasing
The most recent data regarding global freight volumes shipped in September show positive developments. If you only look at the annual growth, the progress appears significant, but that does not provide a fair picture of the situation.
Growth or normalization
These figures do not reflect a sudden increase in the quantity of containers. This is rather because freight volumes in September 2022 were abnormally low. The growth rate is therefore more attributable to a normalization of the market than to a sudden increase. When compared to the reference point, we had in 2019 before the pandemic, the growth is not impressive. Global demand, measured in TEU (Twenty-foot Equivalent Unit), has increased by a total of 9.7%, amounting to an average annual growth of 2.3% since 2019. Taking distance into consideration, TEU*Miles has only increased by an average of 1.8% per year. This is happening at a time when the global fleet has grown by 3-4.5% between 2020 and 2022, and here in 2023, it seems to be on track to grow by 7-8%. Therefore, overcapacity has significantly worsened.
It is this overcapacity that has been crucial in pushing freight rates down to the point where the third-quarter results of shipping companies are almost at zero, and they are likely to show losses in the fourth quarter.
Strongest growth in South Asia and the Middle East
The seemingly strong growth of 30% from Asia to Europe turns out to be significantly less robust when compared to 2019. Over this 4-year period, volumes have only increased by 5.6%, equivalent to an annual growth rate of 1.4%. Meanwhile, on this route, all large new ships with a capacity of up to 24,000 TEU are being deployed.
At the regional level, the Indian subcontinent and the Middle East exhibit the strongest growth. Since 2019, exports have increased by 23%, and imports by 22%. This growth rate is significantly higher than in other regions worldwide and is primarily attributed to a combination of two factors. Firstly, the economic growth in the region is higher than the global average, and the growth expectation, measured by the gross domestic product, suggests that the region will continue to grow faster than the rest of the world over the next 5 years. Secondly, there appears to be a slow shift where a part of production is moving from China to the Indian subcontinent.
Conflicts and cyber threats pose a threat to supply chains
However, this region does face risks to supply chains. In the past month, there have been issues with import and export in Bangladesh. This is due to a law that requires a significant part of these freight volumes to be transported by local shipping companies in Bangladesh. However, the reality is that these companies do not have sufficient capacity. Furthermore, this law has not been enforced for many years, but it is now being enforced. This appears to be due to a combination of domestic political circumstances and protectionism being enforced despite available capacity.
Furthermore, this month there are two risk elements in supply chains that need to be mentioned. The first relates to the conflict in Gaza and Israel. This text was written on November 13, and at that time, the conflict is still primarily confined to Gaza, with sporadic attacks from Lebanon on Israel. Although tragic, it currently has no significant impact on global supply chains. However, there is a risk scenario that needs to be highlighted. If the conflict spreads, there is a small, yet present, risk that it could affect the Suez Canal. If that happens, we find ourselves in a situation where the excess capacity of ship capacity is significant enough to allow for a diversion south of Africa for the route from Asia to Europe. This would, of course, lead to extended lead times and higher freight rates, but there is sufficient capacity to address such an issue.
The second element concerns a risk that has been present for quite some time but is often overlooked: cyber-attacks. Over the weekend of November 10 to 12, the container ports of DP World in Australia were hit by a cyber-attack. This led to the closure of the ports in Sydney, Brisbane, Melbourne, and Fremantle. These ports handle approximately 40% of all import and export goods in Australia. The ports were reopened on November 13, which is, of course, a positive development. However, it once again emphasizes that the threat of cyber-attacks must be taken extremely seriously by all parties involved in supply chains.
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