• Unexpected increase in demand: 1) the sudden spike in container volumes to meet the higher demand following the reopening of economies after lockdowns, 2) the usual pick-up in demand before the holiday season, and 3) front loading of orders by importers to safeguard themselves from any supply chain disruption that could be triggered by a second wave of infections (which has already become a reality in some parts of the world), have led to congestion at ports (mainly in the US – Los Angeles and Long Beach). Ports are generally characterised by fixed capacity which cannot be changed/modified to meet the short-term requirements.
• Cost management tactics adopted by ports to combat the impact of COVID -19: Container ports deployed cost management strategies to save the bottom line from the COVID-19-led decline in revenue. However, these strategies have resulted in unwarranted consequences once the operating environment improved. In Felixstowe (UK), the decision to let go the contract workers to lower the cost has left the port underprepared for a steep recovery in volumes that started in 3Q20 and has resulted in the current congestion at the port.
• Ripple effect of congestions at nearby ports: The heavy congestion at Felixstowe (UK) has not only overburdened other ports in the UK (Southampton) but also ports of northern Europe (Rotterdam and Zeebrugge) as carriers have stopped calling Flexistowe and are instead unloading containers at nearby ports.
• Increased health measures adopted to safeguard against COVID-19 infections: Several ports in China are facing congestion as the country mandated COVID-19 checks primarily to stop the spread of the infection.

Who is to blame?

Each industry segment has its own justification. Shipping companies claim that rerouting/ cancelling port calling has primarily led by increased time to complete the round trip (due to quarantine measures opted by various ports worldwide). While the technique of positioning containers based on historical trends and future projections across ports works in the normal course, it has failed in the current stressed situation.

Ports, on the other hand, claim that with easing lockdown measures, volumes have picked up suddenly and they are doing their best to deal with the situation. While they believe it is a short-term phenomenon and expect normalcy to return soon, some ports have opted to increase their workforce, while others have introduced overtime to deal with the situation. Additionally, the capacity of inland transport and warehousing providers in each market is broadly fixed, and therefore, cannot be easily ramped-up to meet short-term fluctuations in demand.

Shippers (who are at actual risk of losing the business due to delayed delivery) contest that the recent consolidation in the shipping industry has given unwarranted power to the big three shipping alliances, which virtually dominate 85% of the market share. Their respective capacity management efforts have led to the recent spike in container freight rates, which has stirred the regulators in many countries to closely watch the situation. Recently, the US Federal Maritime Commission (FMC) has intensified monitoring of shipping alliances, requiring them to provide carrier-specific trade data monthly rather than quarterly. This comes in conjunction with the regulators in South Korea and China, which are already keeping an eagle eye on the situation.

Who is bearing the brunt?

Shippers (the weakest link) are bearing most of the cost burden as the maritime industry plays a central role in global trade, container shipping alliances dominate in terms of market share and ports play a vital role in the marine supply chain. Container shipping lines pass on the cost of delay to shippers by adding a congestion surcharge to freight rates, while ports and hauliers pass on the cost in the form of higher demurrage charges and storage cost.

Shippers, who generally rely on sea for international trade (because of the cheapest cost when compared with other modes of transport), generally bear the burden of inefficiencies within the supply chain — when they are aware of the inefficiency, they are better prepared, but for inefficiencies caused by disruption (such as COVID-19), shippers have to bear the indirect cost as well, such as loss of business due to late delivery and increased stock holding led by longer/less reliable service leads.

Impact on the port companies’ valuation

As stated at the start of this analysis, port congestions are not new and have already been tackled in the past. They impact trade in the short term even though their wider impact can be felt by various industries. Therefore, we believe the current crises is also short term and should be resolved soon with limited impact on valuations. The recent uptrend in Drewry’s port index substantiates our claim.

Note: The index represents average stock price of ten port companies covered by Drewry.

Source: DMFR

Also, financial markets are already enjoying the flood of liquidity injected by the central bankers/governments, which instead of supporting the real economy, is actually making its way into various financial assets. We believe liquidity will continue to support the Port company valuations at least until the vaccines are fully available and governments continue to pump money into their respective economies.

Source: Drewry