The fight against the COVID-19 pandemic spurred a wave of lockdowns that upset global supply chains, triggering a transition from Just-in-Time logistics to the Just-in-Case model. Freight prices on the SCFI exchange soared to an unprecedented USD 18,000 per FEU, changing the landscape of international transport. What were the direct effects of the pandemic on the global economy? How did it affect the Polish economy? How it changed the rules of the game in sea and rail transport? For an in-depth analysis, read the report of the Polish Road Transport Institute: “International Transport: The Challenges and Role of Freight Forwarders in a Changing World”.
Economic Impact of COVID-19
In the report’s first chapter, “The COVID-19 pandemic and its impact on international logistics”, Artur Lysionok identifies the main trends in the global economy determined by the pandemic. Among the most notable ones, he points to the long-term erosion of growth in the global economy. In addition, the public and private sectors face the risk of over-indebtedness becoming a pervasive trend. Over the coming period, financial markets will exhibit volatility, and cyber risk is heralded as another major threat.
In the initial period, reduced manufacturing output and consumption destabilized supply chains and curbed trade, ultimately leading to a global recession. Meanwhile, in a multi-year horizon, the crisis may lead to higher indebtedness, reduced disparities between the economic potential of large global economies, increased geographical diversification of investments in manufacturing plants and a partial reversal of globalization,says Artur Lysionok, an independent TFL expert who authored the first chapter.
Global economy in the red
According to the calculations of the International Monetary Fund, the global economy lost USD 6.7tn in 2020. Meanwhile, Polish losses, estimated by the Federation of Polish Entrepreneurs (FPP), stood at over PLN 185bn (estimated value of GDP not generated on account of the pandemic). In turn, the lockdown of March 2021 cost Poland over PLN 25bn,points out Artur Lysionok.
Sea transport experiencing delays
International transport was marred by high unpredictability during the pandemic. To make bad things worse, it was further affected by the Ever Given incident in the Suez Canal, which blocked one of the primary international sea trade routes for several weeks. This directly caused an unprecedented increase in sea freight rates.
Lockdowns led to reduced crews in ports, with ships entering ports subject to additional restrictions. The most important among them included a mandatory two-week quarantine in the sea zone, the inability to rotate crews due to the closure of borders, and obligatory quarantines for visitors. These factors caused delays in sea transport on the export side and congestion in unloading and receiving deliveries of goods on the import side,points out Artur Lysionok.
Increased freight prices marring logistics
The instability of sea freight rates is best illustrated by the World Container Index (WCI) for the cost of transporting a forty-foot container (FEU). “In January 2019, the price stood at USD 1,720 and remained stable throughout the year (even declining to USD 1,300 in the summer). May 2020 (USD 1,576) was the turning point when rates started to soar. In September, prices climbed to nearly USD 2,700 per container and exceeded the USD 4,300 mark in December. 2021 saw a particularly dramatic rise in rates as they reached a record high of almost USD 10,400. Depending on the period, this represents a growth of nearly 500% relative to 2020,” says Artur Lysionok. While rates are currently falling, this may be a harbinger of a recession. On 13 January 2023, the SCFI index stood at 1,031, and on 6 January at 1,061.
Sea transport overshadowed by oligopoly
In total, the ten largest shipowners controlled over 20 million TEUs in 2022. It might seem that this should only concern logistics companies losing customers and market share. However, this trend also spells bad news for customers. Market consolidation in the hands of literally a few giants means less competition, fewer options, and, effectively, dramatically worse conditions for buyers of transport services.
Recent years have been marked by a significant revolution in the operation of shipowners who, thanks to digitization and process automation, make their resources available to a wide range of customers, and thus exclude forwarders from the transport chain. This trend goes beyond sea shipping, where shipowners saw record profits (over USD 190bn in 2021), as it also exists in land transport, where they are taking over one logistics company after another. The desire to dominate the transport sector also reached the skies, as shipowners now operate their own aircraft fleets,concluded Bartosz Wilga.
Shipowners join alliances
Furthermore, shipowners, in an effort to optimize operational and financial activities, enter into so-called shipping alliances. A shipping alliance is a formal strategic association of shipowners seeking to optimize shipping operations costs and cargo space utilization on ships that are de facto handled at the same ports using one ship. In 2022, there were three alliances on the market: 2M, The Alliance and Ocean Alliance
Małaszewicze – HUB of the New Silk Road
The New Silk Road’s value was thoroughly tested shortly following the outbreak of the war in Ukraine. Initially, the market was somewhat skeptical about the future of rail freight between China and Europe, especially about its main line through Russia. However, after the initial drop in demand, rail traffic rebounded, and interest in the Trans-Caspian Corridor increased. According to experts, rail transport may present a viable alternative to sea transport, where shipowners dictate the rules and prices.
Rail transport remains the best solution for transporting goods from China to Europe. Orders were shifted to the rail route due to the risks associated with sea transport, such as lack of space on ships or extended transit times. The transit time by rail to Małaszewicze is about 12-14 days, which, compared to 32-35 days in sea transport, offers substantial time savings. Currently, the EU’s only and largest gateway on the New Silk Road is Małaszewicze. What is important from the Polish perspective is that there are no indications that the situation might change because there are no alternatives. Nevertheless, capacity remains a critical issue,points out Jakub Walczak.
Start of pushback against concentration on shipowners’ market
The FIATA International Federation of Freight Forwarders Associations presented a set of key requirements which could ensure a more level playing field in the market. For starters, box lines should stop spending their record-breaking profits on vertical integration and start contributing to decarbonization. FIATA indicated that to achieve the IMO’s (International Maritime Organization) goal of reducing emissions by 50% in maritime transport by 2050, an investment of some USD 1.5tn is needed, which presents
a significant challenge”. Instead of creating “unprecedented market concentration”, the lines should invest in new propulsion and fuel technologies. “A campaign condemning this state of affairs is underway in the USA, which is served primarily by a foreign fleet of container shipowners. It was argued that ocean carriers posted extraordinary revenues and profits while offering terrible ship arrival schedule reliability. Ports continue to see congestion, and US exporters are having issues with shipping, for example, agricultural products. The President of the United States sided with the shippers,emphasizes Janusz Piechociński, President of the Poland-Asia Chamber of Commerce and Industry.
Poland initially defended itself against the effects of the pandemic
Experts indicated that Poland emerged rather unscathed from the initial wave of major restrictions., citing two main factors. Firstly, “growing sales of telecommunication equipment for audio recording and playback, as well as electrical machines and their electrical parts”. Secondly, sales of cereals and cereal products as well as apparel and related accessories. The report’s first chapter provides detailed calculations of their share in Poland’s exports.
In addition, it also presents a sentiment index for individual sectors of the economy compiled by the Polish Central Statistical Office (GUS). During the peak of the pandemic, Polish exports dropped roughly on par with other EU countries, however, throughout 2020, the annual scale of decline in the volume of exports was three times lower than in the Eurozone (-2.7%) and twice lower than in global trade (-5.6%),adds Artur Lysionok.