My Predictions for Ocean Freight in 2022
If you were optimistic that shipping was going to return to normal in 2022, you weren’t the only one. Unfortunately, the saga of supply chain chaos looks like it will continue well into the current year.
We are only a few months into the new year, and already we have seen port closures in China, cargo train lootings in Los Angeles port, Canada banning unvaccinated US truckers from entering the country, and, of course, the rapidly deteriorating situation in Ukraine.
Two years into the pandemic, the shipping industry is still lethargic and volatile. The situation is now improving and prices are dropping, but in terms of a return to normal, I am fairly positive that the shipping industry has changed irreversibly. These changes are not all bad – In fact, some may make the industry better. Let me explain why.
In terms of broad trends, I believe we will see the following occur in 2022:
- Shipping costs will not return to previous levels but will lower gradually throughout the year.
- Companies in other industries will start their own shipping operations, and shipping companies will diversify into other industries
- Governments stepping in to regulate unpredictable shipping and lower prices
Let’s get into the specifics.
Trend #1: Prices will lower, but…
Now, shipping prices are gradually coming down from their peak in 2021, but that doesn’t indicate they will return to pre-covid levels. It is predicted that on average, we will see higher shipping prices in 2022 than ever before.
This has baffled some of our clients, and understandably so. the Baltic Dry Index (BDI), among other leading indicators in the industry, has dropped significantly. This usually means rates for shipping are about to drop as well.
Briefly, the BDI is widely accepted as one of the leading indicators for economic activity all over the world. But it doesn’t represent the actual cost level of transporting raw materials, just the change in cost. The index will go up or down depending on the supply and demand for key materials commonly used in manufacturing.
Although the index does not consider every product type, it is still usually an excellent indicator as to when prices overall will drop or rise. However, BDI levels recently are simply not correlating with a drop in price like they historically have.
However, BDI ratings now are at a similar level to those of 2018. So, why wouldn’t prices drop to 2018 levels?
Here’s why: demand is much higher than supply. Businesses are booking significantly more space with shipping companies than they have available. It’s Econ 101 – when demand for shipping space outweighs supply, it gets tougher and tougher to find, and a lot pricier.
Thanks to the sky-high demand and unpredictability, shipping providers have been reluctant to commit to pricing and contracts for this year. It makes sense – if you were a shipping company, why would you lower prices? Your customers will continue to pay nearly 400 percent markups no matter what. There is simply no reason for them to change their ways.
Throughout the supply chain, logistics businesses are feeling price uncertainty’s sting. In a normal year, large freight forwarders, i.e. those moving upwards of 100,000 containers per annum, establish their prices for the current year at the beginning of that year. But how can they set their prices for the year when the shipping companies won’t even give them a set price quote?
The problem flows down to the small forwarders that buy up small portions of the big forwarders’ booked space. It’s impossible to plan for the year when no one even knows what the costs are.
Trend #2: Shipping Businesses Will Diversify
Shipping companies diversifying into other logistics businesses, like ground transport and warehousing, is among the most interesting trends in shipping at the moment. I think that this trend is even likely to go the other way around as well, with ground transport logistics businesses diversifying their infrastructure into shipping.
A prime example is Zim Shipping’s purchase of 18 ocean freight vessels this past February, adding the five they purchased back in October 2021. And the move has had a positive effect on their company value, with share prices climbing from $20 per share in mid-February, to around $70 today.
Of course, more ships don’t solve the current container problem. Businesses like Maersk are looking to spread out into other areas still –they just acquired the Chinese warehousing, fulfillment, and delivery company LF Logistics. Given the environment, I believe many more strategic moves like this are imminent.
Lastly, it is not a far leap to suppose that if shipping prices can stay high, we will see many more logistics businesses try to diversify into shipping. This isn’t an easy feat – it requires huge capital and resource investments – but some companies will surely think it a worthy investment given the climate.
The key is to look out for companies that raise a large amount of money quickly. A prime example is freight forwarder Flexport, which just raised $950 million. Flexport is likely planning on using the funds to get their own shipping fleet or charter. The funds are there – We will have to wait and see what their next move will be.
Trend #3 Governments Will Step in to Regulate Unpredictable Shipping Costs
When the price of shipping rises, usually the customer is the one footing the bill for the cost increase. Everything needs to be transported, so everything will cost more for customers – Making the customers unhappy. And unhappy people mean unhappy government.
I talked about this a bit in my January post on what we would need to regulate the shipping industry –Below are the main points from that article:
- It is difficult to regulate the shipping industry due to its lack of competition and global nature – it is not tied to one country in particular
- The shipping providers are the only logistics-related business that did not lose out during the pandemic
- It is becoming increasingly apparent how unregulated ocean freight has been, and governments are likely to take action.
However, it could be several months until we see any attempt at reform. One of the main issues: governments still have their hands full with the pile-up of containers in ports. Ports simply cannot handle the drastic increases in volume and the containers are just sitting there waiting to be shipped.
It’s likely we will not see firm government action towards lowering shipping costs until the container crisis is fixed.
We are only a few months into 2022, but already it feels clear that we are standing on the edge of a precipice when it comes to shipping. The industry is going through a historical change, from one that has felt semi-stagnant over the past few centuries, to one that truly belongs to the 21st century.
COVID-19 was the push that forced growth to speed up, and the past two years made it clear to investors that logistics is an industry rife with growth opportunities. With investors pouring more money into shipping than ever in history, it looks like the industry is headed towards a brighter, better future.