What's Going On in the Container Supply Chain?
Over the past months, we have witnessed unprecedented disruption across the supply chain. While the most apparent reason for this would be the pandemic that brought world economies to a hiatus, the explanation is more complex. Lockdowns worldwide have contributed to the growth of E-Commerce, increasing consumption rates exponentially. However, as major production facilities are concentrated in South East Asia, and this region has been experiencing continuous closures in an attempt to contain new Covid-19 outbreaks, shippers have not been able to replenish inventories, leading to stakeholders across the supply chain being unable to meet demand. According to the Wall Street Journal, inventories are at their lowest levels in 10 years, despite retailers making a big effort to build up stocks. Moreover, with ports and terminals working with reduced staff in order to control new variants, the loading and unloading of cargo has been further slowed down, leading to congestion and additional disruption in the supply chain.
Shipping lines have been adjusting and changing their routes to reduce port calls while using larger vessels, with more cargo capacity. Although this strategy seems beneficial for shippers, ports are faced with the need to race through their operations in order to stay competitive and thus, attractive enough to be included in these somewhat ‘express trade routes’. The result is having terminal operators unable to load and unload cargo within the allocated deadlines, and containers being stationed at the yard; port congestion becomes constant and freight rates go high, risking inflation across the supply chain. Even despite the extra efforts to increment the capacity in the Asia-North Europe route, seasonal bottlenecks, climate change factors and blockade episodes have worsened this situation: According to RBC Capital Markets, 77% of ports are experiencing congestion heading into the holiday season in Q4 of 2021, and with the Chinese New Year shortly after, the disruption in the supply chain is far from over.
Eva Yan Liu, North China Team Leader at Maersk-owned company, Twill, said that we are also seeing a change in the approach to supply chain management, from a just-in-time model to just-in-case. In her views, customers should now plan and book early, bearing in mind a 10-to-20-day delay in their order, as well as diversifying their sources. In October 2021, Peter Levesque, President at Ports America stressed the need for the supply chain to become resilient and highlighted the diversification of sources as one of the key actions to follow. This should present an opportunity to other countries in the region, particularly Vietnam, which has recently approved an investment of VND3.4 trillion (US$147 million) for building infrastructure at the Lien Chieu port in Da Nang. This will increase Vietnam’s exports and make the country a viable alternative to established manufacturers like India or China.
As it is with Vietnam, for other Asian countries with the potential to become manufacture leaders, the modernization and sustainable development of their port and logistics infrastructure is vital. In recent years, we have seen important infrastructure investment across the region -and the world-, particularly coming from China. Known to the world as the Belt and Road Initiative (BRI), this strategy pursued by the Asian giant consists of significant investment in logistics infrastructure, strengthening its presence, both regionally and globally. Amongst its most remarkable projects is the development of the China Rail Express intercontinental rail corridors connecting China and Europe via either Central Asia, Russia and the Black Sea, as well as an East Coast Rail project in Malaysia. The BRI is forecasted to place China as the world’s top economy in the coming years. Yet, the G7 announced during its last meeting the launch of their Bring Back a Better World (B3W) initiative, which is set to catalyse hundreds of billions of dollars of sustainable infrastructure investment for low- and middle-income countries in the coming years. Although modernization of trade infrastructure will be the primary result, there is no doubt that we are witnessing a commercial race between two major powers.
Further to its intensive infrastructure investment, China is also setting its trade strategy, both in the continent and into the Indo-Pacific: Not only has trade between China and ASEAN countries grown 48% in the first six months of 2021, but the Asian giant is also seeking to expand its trade arrangements in the Indo-Pacific by seeking to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Another giant country with growing trade potential is Russia. As global warming continues to melt the ice cap in the Arctic Ocean, the Eurasian power will be gaining access to a potential new trade route in the Arctic Ocean: The Northern Sea Route (NSR). This could open the gate for cargo transport in Central Asia by developing international transhipment ports and multimodal port operations that connect this region to the Arctic Ocean. While the potential for this trade route remains to be explored, its environmental impact must be evaluated, especially when the industry faces severe pressure to reduce its carbon emissions.
According to the Asia-Pacific session of the Global Energy Summit (September 2021), the pace of Asia’s energy transition remains too slow even despite its efforts to accelerate it. This is mainly due to a lack of public policy on it, which leaves many details unaddressed and discourages companies from investing in energy transition. Although there are several important initiatives attempting to decarbonize the industry, these need to be articulated across the sector: Port authorities, terminal operators, shipping lines, cargo owners, energy and technology providers, regulators, and every other industry stakeholder need to integrate their efforts into a unified roadmap. One of the most relevant initiatives right now is the Getting to Zero Coalition, promoted by the Global Maritime Forum, which aims at bringing together key industry players to tackle the decarbonisation problem, and among its main directives is the development of ‘Green Corridors’. These would be trade routes where all parties involved would be carbon neutral. For these to succeed, however, it will be necessary: (1) corridor-level consensus on fuel pathways, (2) policy support to help close the cost-gap for higher-cost zero-emission fuels, and (3) value-chain initiatives to pool demand. Amongst the most significant barriers to this, and all other energy transition programmes, is choosing what type of energy to transition to. Ammonia and hydrogen seem to be the long-term solution for the industry as they are both carbon neutral; by 2050 they are predicted to supply 60% of the market’s energy needs. While hydrogen and ammonia are deemed as the fuels of the future, methanol and LNG are the alternative in the short-term: Maersk will launch the world’s first carbon neutral fleet in 2023, running on methane. According to Simon Neo, Executive Director at S&P Global Platts, methanol is "an alternative fuel that is in use today but will be a short to mid-term solution. Despite all present barriers, recent events like the COP26 and the IPCC’s latest report on climate change have accentuated the importance of reducing GHG. We are now seeing a growing push towards investors prioritizing sustainable assets, which is translated to investment flows in energy transition remaining stable over the next 15 years. Infrastructure investment in hydrogen has in fact started to grow significantly in the region, from 0% (2019) to 16% (2021).
In addition to the ‘greenification’ of the industry is its digital transformation – the element that links both topics together is novel technology allowing industry players to monitor –and therefore reduce– their CO2 emissions. This is only one of the benefits of this so-called ‘4th Industrial Revolution’. Artificial Intelligence (AI), Internet of Things (IoT), Big Data, 5G, cloud-based systems, blockchain, digital twins, and autonomous shipping are only some of the most popular digital tools that are revolutionizing the industry. On a regional level, given the increasing importance of transpacific trade routes, we see a growing number of smart ports in South East Asia, as well as start-ups and start-up incubators. As a result, we should expect a hyperconnected port ecosystem in the region where digital tools meet infrastructure to deliver integrated trade and mobility solutions.
Yet as technology continues to evolve, we are seeing a growing ‘digital gap’ between industry leaders, and small and medium-sized ports. Hence a question that is gaining importance is not so much what new technologies are being created but how these can be integrated into ports’ infrastructure and operations.
Initiatives like the Single Maritime Window, the Just-In-Time (JIT) arrivals, the DCSA and the TIC 4.0 standards, or the novel cybersecurity guidelines published by the IAPH are trying to level up the game to ensure that all industry players follow the same standards, regardless of how far in advance they are in their own digital transformation process. Yet we see that more initiatives, more associations, more digital acceleration programmes, more start-ups, continue to appear – are these working in a coordinated effort, in collaboration with established regulators and stakeholders? While new technologies can certainly optimize trade, connectivity and make port operations more efficient, collaboration across the industry is the key word that must go along innovation in order to make the maritime & logistics sector more resilient. Technology itself is not the end, it’s a means towards sustainable trade.
