Navigating the current disruption in containerized logistics

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Global supply chains have seen unprecedented disruption, and container freight rates are at record highs. COVID-19 led to a boom in US containerized consumer goods demand, causing congestion, and reducing effective container logistics capacity. Global container shipping rates have, on average, increased to four to five times their 2019 levels while some spot markets have seen even higher rates.1 Shippers have struggled to locate capacity, with acute shortages of vessel space, container boxes, chassis, warehouse space, intermodal capacity, and labor. Shippers that managed to find access to the constrained capacity have experienced record low reliability both at sea and on land. Average container schedule delays have doubled globally, and increased by six times on the Far East and North America trade from two days in the first quarter 2020 to 12 days in the last quarter of 2021 (Exhibit 1).

Average container schedule delays have doubled globally, and increased 6x on the Far East and North America trade.

Global demand growth is moderate; the challenges are caused by a North American import demand boom

COVID-19 caused substantial fluctuations in containerized goods demand that upset the global containerized logistics supply. Restrictions and shutdowns imposed by most countries early in the pandemic decreased container trade and demand. Demand recovered in Q3 2020 across the globe, particularly in North America that saw import volumes jump an average of approximately 20 percent throughout 2021 when compared to 2019. By comparison, global import volumes have grown around 3 percent when compared to 2019 (Exhibit 2).

Demand recovered in Q3 2020, particularly strongly in North America.

The spike in rates is driven by a sharp reduction in effective supply, caused by congestion

When China went into lockdown at the beginning of 2020, export volume slumped. Retailers feared a global recession and cut back orders. Ocean carriers responded by cancelling sailings and idling vessels to match the logistics supply with demand. This measure allowed ocean carriers to protect rates from crashing, but it failed to reposition empty containers back to Asia effectively.

Once China’s factories restarted, demand for containerized goods recovered by Q3 2020. Container box shortages at export locations increased rates as shippers scrambled to secure access to the limited boxes. Lockdowns in North America saw a strong rebound in consumer demand and ocean carriers captured this surge in demand by shifting vessels and container equipment to the Transpacific and Transatlantic trade lanes. Allocated container vessel capacity on the Transpacific trade lane—Far East and North America—increased by 31 percent between January 2020 and December 2021, which is more than three times the growth of the next largest East-West trade lane by capacity, Far East and Europe (Exhibit 3). Idle capacity, and smaller North-South trade lanes, contributed to vessel and equipment capacity being diverted to North American import-related trade.

Ocean carriers increased transpacific capacity to cater for increased demand.

As imports from Asia poured into North American ports, cargo operations started to slow down at container terminals. By September 2020, the hinterland intermodal subsystems, particularly in the US West Coast, became overwhelmed and failed to keep cargo moving out of the congested terminals. Slowdowns in Los Angeles and Long Beach began to radiate across the industry and other short-term shocks such as the Suez Canal blockage in March 2021, and closure of Yantian in May 2021 and Ningbo in August 2021 due to COVID-19 outbreaks, exacerbated the situation.

By December 2021, congestion had removed around 16 percent of global container ship sailing capacity when compared to September 2020 (Exhibit 4). Ocean freight rates climbed higher in all major trade lanes as shippers continued to show willingness to pay premium rates to secure capacity, especially for containers carrying high-value goods.

Active container shipping supply has reduced due to congestion.

Framing the outlook

It is almost impossible to predict exactly when supply chains will normalize. Efforts are being put in place to remedy the situation, however, massive uncertainty remains.

To help shippers navigate the path towards normalization, we have developed four possible scenarios of rate outcomes. The scenarios were developed by considering drivers of container demand and containerized logistics capacity that form the basis of the current industry and market dynamics.

Container demand drivers

Container demand is driven by end consumer spending on goods, shippers’ desire to continue stocking inventory, and an economic re-opening that may shift spend back to services.

The container demand surge seen in North America is tied to consumers’ spend on goods. COVID19 lockdowns shifted the share of US personal expenditure on goods from 31 percent to 35 percent. Between September 2019 and September 2021, goods spending increased and remains 14 percent higher than the prepandemic trend.2

In the wake of the pandemic, governments provided stimulus payments to mitigate the impact of the economic shutdown, allowing consumers’ spending power to remain in place while almost all service-industry associated activities were heavily restricted.3What’s going on with shipping rates?” McKinsey & Company, August 20, 2021. Overall spending has increased, with US consumer spend on services only 2 percent below the prepandemic trend (Exhibit 5). Full economic reopening may spur spend towards services leading to prepandemic levels of spend and demand for goods.

Spend on goods remains 14% higher than the pre-pandemic trendline while services spend is yet to recover to the pre-pandemic trend.

Containerized logistics capacity drivers

Containerized logistics capacity can be defined as the volume capable of being processed and transported by the system at any time. This capacity is dependent on hinterland logistics and equipment availability, ocean capacity and equipment availability, and labor availability. The lack of effective capacity—caused by congestion across the supply chain—is the biggest driver of the current spike in rates.

The recovery of port and hinterland logistics capacity from current congestion will depend on landside operators working together. The unexpected surge of US container imports after Q3 2020 overwhelmed the system. While part of the congestion came from lower labor availability, our analysis suggests that slower trucking equipment turnover—including tractors and chassis—is the main factor driving the current congestion. Trucking plays an important role in container hand-offs. Fixing trucking and improving equipment turnover requires a respite from the continuing volume surge and a relaxation of the pinch-points that delay trucking. This cannot be achieved if warehouses continue to be at full capacity, empty storage at terminals is congested, and shippers are not receiving and releasing equipment as quickly as possible.

Several interventions could mitigate current congestion and improve containerized logistics capacity. Regulators are extending ports’ working hours and number of shifts, adjusting stacking height regulations, and prompting shippers to commit to moving containers out of terminals at a faster pace. Railroads are improving dwell times at ports, and incentivizing shippers to use weekend in-gates.4 These interventions will help stakeholders re-establish the coordination needed to get the value chain moving again.

Supply will also increase as ocean carriers invest their record profits to order new vessels, with around 5.5 million TEUs of new capacity expected by the end of 2024. Availability of container boxes has already increased, and an additional 4 to 5 million new containers are expected in the coming year.5

The pandemic has amplified labor shortage across all economic sectors, leading to lower capacity across containerized logistics. Logistics employers are responding with increased wages which could attract workers back to the sector. This, combined with the acceleration of automation projects at warehouses and ports, should help the industry become more resilient in times of labor shortage.

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Four possible scenarios for containerized logistics recovery

Trends in container demand and logistics capacity inform four scenarios—each with different implications as to how long the supply/demand imbalance will last (Table 1).

Four possible scenarios for containerized logistics recovery
Four possible scenarios for containerized logistics recovery

A brief look into two selected scenarios, is as follows.

Rapid market recovery to 2019 levels

In this scenario, logistics capacity recovery begins in Q1 2022 with full quick recovery possible by Q3 2022. Three things must occur for this early recovery: 1) demand slows down and pent-up or unexpected demand shocks must not materialize to overwhelm supply chains; 2) logistics operators utilize the drop in demand to execute coordinated efforts to clear container inventories; 3) no further external disruptions interrupt operations (such as COVID-19-related terminal shutdowns, weather impacts, or labor challenges).

Rates are expected to remain elevated throughout the 2022 contracting season and decline rapidly after Q3 2022 when competition between the ocean liners picks back up. Ocean tender and spot rates could come down close to prepandemic levels by Q3 2022 (Exhibit 6).

Rates are expected to remain elevated throughout the 2022 contracting period and for most of the year.

Slower capacity recovery

In this scenario, containerized logistics capacity recovery is expected by Q1 2024. Three things would occur for this scenario to materialize: 1) interventions from regulators and operators have only marginal success; 2) container trade volumes continue to demonstrate modest growth and some pent-up demand from underperforming commodity sectors materializes (notably auto parts); 3) containerized logistics operations are interrupted by minor, short-term disruptions from weather and/or labor challenges.

Freight rates on both the ocean and hinterland side are expected to remain elevated until normalization is robust. Ocean shipping rates will remain elevated through the contracting season of 2022 and 2023. Similarly, railroads will maintain current rate levels to keep operating ratios low while trucking and drayage rates may witness a slight decline. While ocean rates will come down, ocean carriers will better match capacity with demand, and shipping spot rates could stabilize at around 50 percent higher than prepandemic levels after Q1 2024.

Building shipper resilience and responsiveness

All four scenarios assume disruption to last at least another five to six months. Regardless of which scenario occurs, shippers can take steps to improve supply-chain resilience right now.

Shippers are operating in a world where disruptions have become regular occurrences. Averaging across industries, businesses can expect supply-chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events can take a major financial toll.6Risk, resilience, and rebalancing in global value chains,” McKinsey Global Institute, August 6, 2020.

In the short term, shippers can look for creative alternatives and adjust contracting to continue moving goods

There is space available on container ships, but at high spot prices asked for by forwarders and ocean carriers. Some shippers could decide that it is better to defer or cancel shipments, especially when moving lower-value goods. This may lead to lost business in some sectors. But there are opportunities to be creative with supply routes. For instance, some shippers have found Canadian ports (e.g., Prince Rupert) to be less congested than those in Southern California and still provide rail services into the US Mid-West. Other shippers are using all-water services to East Coast ports, where congestion is less severe. As another alternative, some shippers have shifted away from inland point intermodal container movements, towards transloads in the immediate port vicinity.

Some larger shippers have made the move to chartering their own vessels. These efforts have primarily focused on general cargo ships as there are no cellular container ships available for charter beyond those already in use by the ocean carriers. Shippers looking to charter their own vessels need to find other ship types which, while not designed specifically for container carriage, can carry between 500 and 1,000 containers. Multi-purpose ships or open-hatch bulk carriers, previously used for breakbulk, can be used. But this does not remove the fundamental challenge of finding available ports. Even with a chartered vessel, shippers need to find a US port that can unload it. A ship chartered by a large US retailer recently waited for 25 days outside Los Angeles, before giving up and unloading in Portland. Some shippers have managed to use smaller second-tier ports that are not on the major container trade routes. For example, the port of Everett outside Seattle is usually used for moving parts for Boeing. It has now received several special container charters. Dedicated charters can offer emergency help, but this is unlikely to be a long-term solution.

Contracting for 2022 is complex

The other challenge facing shippers now is how to contract for volumes in 2022 and 2023. Ocean carriers are offering contracts, but at considerably higher rates than in previous years, and often proposing these higher rates for several years on a take-or-pay basis. The future rate environment is uncertain. In some scenarios, rates could normalize by end of Q3 2022. In other scenarios, rates could remain high until 2023 or even beyond that.

One potential solution is a mixed approach, hedging the risk. Shippers could contract some volumes now and potentially for the next two years, while leaving some to contract in the usual April-May 2022 rate season. They could also leave some volumes to secure on the spot market. The right mix of contracted and spot will be different for each shipper. To find the right balance, shippers should consider the value of goods in the container, substitute products, and the business trade-offs between high rates and supply-chain interruptions.

Shippers may also want to sign firmer contracts with forwarders or ocean carriers. Historically, agreements in container shipping have been called “contracts”, but they were not enforceable. They are rate agreements, not firm contracts. These rate agreements indicated minimum quantities shippers commit to move, but typically were not enforced by the ocean carriers with no punishment for not meeting commitments. In many cases, over 10 percent of cargo booked on a ship was not honored, with no penalties for the shippers who had booked space and failed to use it. This flexibility suited shippers well in the last ten years, but it came at a cost, and that cost is that ocean carriers typically do not guarantee space. Consequently, bookings with ocean carriers are subject to space being available, or container equipment being available, and the rates exclude surcharges. Ocean carriers have been honoring only the minimum level of these rate agreement volumes.

There has been a shift toward enforceable contracts, in which shippers make firm take-or-pay commitments of volumes, and in return ocean carriers and forwarders give commitments that capacity will be available. These contracts could help stabilize the industry over the longer term and reduce the uncertainty in the industry which has not been positive for either ocean carriers or shippers.

In the medium term, shippers could shift their supply chains or rethink product design

In the short term, manufacturers may have little option when it comes to changing their current suppliers and existing manufacturing footprint, but in the medium term they could cultivate alternative suppliers. Some successful strategies could evaluate near-shoring options, or use suppliers in India and South America that reduce exposure to the main Transpacific trade lane.

Manufacturers can also rethink product design, particularly to limit highly customizable components that are complex to source. Assessing products and redesigning packaging is often a quick win and can help to improve efficiency in container space utilization.

Shippers can also re-evaluate their overall supply-chain design and strategy. The last 12 months have reminded shippers that relying on just-in-time supply from container shipping can be risky. Companies may need to increase inventories and safety buffers, both at departure and at arrival ports. This adds costs to the supply chain, which may lead to broader redesigns in product sourcing and manufacturing.

While the outlook for containerized logistics and global supply chains remains uncertain, there are actions that shippers could consider to bolster supply-chain resilience and aid recovery. The future may be uncertain, but shippers’ ability to react is controllable and known.

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