Why crisis for exporters could turn out to be a boon for shipping industry

In August, a group of exporters announced that it would app­roach the Competition Comm­ission of India to investigate possi­ble cartelisation by shipping lines. The basis of its complaints is skyrocketing freight rates — as much as three to four times over the last one year — and a 15 per cent drop in container availability. But shipping companies claim this steep rise in logistics costs has been the result of the disruptions following worldwide national lockdowns as Covid-19 spread. Indian exporters aren’t the only ones suffering. US President Joe Biden dir.....
In August, a group of exporters announced that it would app­roach the Competition Comm­ission of India to investigate possi­ble cartelisation by shipping lines. The basis of its complaints is skyrocketing freight rates — as much as three to four times over the last one year — and a 15 per cent drop in container availability.

But shipping companies claim this steep rise in logistics costs has been the result of the disruptions following worldwide national lockdowns as Covid-19 spread. Indian exporters aren’t the only ones suffering. US President Joe Biden directed the Federal Maritime Commission to crack down on “unjust and unreasonable fees” in the shipping sector.

“This crisis is a global issue. If the cartelisation allegation is to be probed, it will have to be probed globally. Companies with 600-700 ships had to stop their operations following the 2008 crisis,” Amitabh Kumar, director-general of shipp­ing in India, told Business Standard. As Kumar pointed out, “Had it been a cartel, these lines would not have run into losses for 10 years.”

In fact, the current spurt in freight and container rates comes as a life-saver for an industry that has been struggling since the global financial crisis of 2008.

In 2009, for instance, Maersk, the world’s largest shipping line, posted its first full-year loss ($1.31 billion) since the company’s founding in 1904. This turned out to be a trailer for a decade of struggle for the shipping industry, following the global economic downturn that led to overcapacity, lower freight rates, declining profits and rising debt levels.

A major casualty was Hanjin Shipping, the world’s seventh largest container operator, which shut shop in 2016. Several mergers and acquisitions and creation of container shipping alliances were symptomatic of the crisis — the acquisition of the shipping line CMA CGM by American President Lines and the merger of China Shipping Container Lines with China Ocean Shipping Company being examples. In 2000, the 10 largest shipping companies controlled 12 per cent of the market; today, they account for more than 80 per cent of global business.

State-owned Shipping Corpora­tion of India (SCI), whose revenues are partly protected as the monopolist of the crude oil import business of the public sector oil marketing companies, has not escaped either. SCI’s earnings dipped 21 per cent from Rs 4,564.5 crore in 2008-09 to Rs 3,617.5 crore in 2017-18. In 2020-21, it was Rs 3,828.8 crore.

Between 2008 and 2018, according to the World Trade Organ­iza­tion, world exports of sea transport services declined at an average annual rate of 1 per cent. Between 2011 and 2018, the average growth of world merchandise trade stood at 2.4 per cent against 7 per cent in 1987-2007.


The ClarkSea Index (a weighted average of tanker, bulk carrier, container ship and gas carrier earnings) showed that freight earnings per day decreased from $46,800 a day in June 2008 to around $37,400 a day in August 2021, still lower than the 2008 peak, despite the climb this year. It stood between $8,100 and $15,400 a day between 2009 and January 2021.

This is the point shippers want to underline as accusations of cartelisation are being bandied about. They add that they have their own pressures, too. The dislocation in global trade has translated into an acute shortage of containers as shipping companies began reducing the number of cargo ships to be sent out. India’s experience is a case in point. According to the Container Shipping Lines Association (CSLA), demand from the US and Europe started picking up in India after the Covid-19 lull in the first half of 2020. At the same time, Indian imports declined following a demand drop and restrictions on Chinese imports.

This led to a situation where Indian trade, traditionally dominated by imports, saw a surge in exports. During the third quarter of 2020, India’s exports in terms of volumes grew 24 per cent but imports shrank 28 per cent over the same period in 2019, causing a mismatch in container supply. “Shipping lines, which used to ship out empty containers from India earlier, had to start moving empty containers inland to demand locations at a huge cost,” said Sunil Vaswani, executive director of CSLA. Other containers have been piling up at the ports.

Inevitably, exporters started seeing “blank sailing” (scheduled sailing cancelled by a shipping line to a particular port or region), while freight rates to ports such as Cochin to Melbourne and Hamburg-Mundra increased eight- to ten-fold over the past year. In addition, transit time to several ports more than doubled. For example, the transit time to Vancouver, which used to be about 35 days, is now 80 days. This has affected Indian exporters, leading to a large amount of commodities being stuck in Indian ports.

Shipping companies counter that their costs have soared as well. The cost of chartering a 6,500 TEU (20-foot equivalent unit) has increased from $11,000 to $68,000 per day in just six months, while bunker prices saw a spike of 32 per cent (bunker prices refer to the cost of refuelling a ship).


“There is pressure on shipping lines, too. For almost five years continuously they were making losses; then came the change in fuel policy shifting to very low-sulfur fuel oil that led to rise in fuel rates, and even during the first quarter of Covid, shipping companies were bleeding,” said J S Gill, managing director of X-Press Feeders, one of the world’s largest independent common carriers. The International Maritime Organization (IMO) had made it mandatory from January 2020 to have a maximum sulphur content of marine fuels around 0.5 per cent (down from 3.5 per cent) globally.

CSLA states that the availability of ships and congestion at trans-shipment ports like Colombo and Singapore and in some of the major ports in China, Europe, and the US led to delays in the turnaround and added to the costs of the shipping lines, leading to an increase in rates.

Now, most shipping lines have signed long-term contracts of more than three years and have ordered around 600 ships. But these deliveries will take time. So “the current shortage and higher rates are likely to extend for another two or three years. Shipping companies are also cautious ab­out a sudden fall in rates as after the 2008 episode”, said a top exe­c­utive from a Singapore-headquartered container shipping major.

Critics such as Hitesh Gutka, president of the Indian Spices and Foodstuff Exporters’ Association, pointed out that the top 10 shipping majors saw an increase of 19,754 per cent in net profit, 12-fold rise in operating profit, 66 per cent in revenue and 27 per cent in margins in 2020-21 over last year. He is probably right (see chart), but the shipping industry, reeling from multiple crises between 2008 and 2020, is still sailing on choppy waters.


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