São Paulo — The record-high ocean freight costs seen during the pandemic are unlikely to come back. There’s a downward trend in the rates due to both an excess of ships and the slow recovery of the global economy. Furthermore, environmental legislations and the need for investments in Brazilian ports are some of the challenges for major global shipowners to balance costs and profitability. Shipping prices in Brazil may be higher due to logistics costs but don’t go anywhere near the peaks of up to USD 12,000 seen in 2021 and 2022.
When people stayed at home back in 2020, 2021 and part of 2022, global trade surged. This ushered in a shock between the supply of available ships and containers and the consumer demand for goods transported by those ships and containers. As a result, consulting firm Solve Shipping managing director Leandro Barreto said, ocean freight became the sole tool to separate those who would and those who wouldn’t ship their orders. These prices were also a result from the COVID-19 contamination of the industry professionals.
State University of Campinas (UNICAMP)’s School of Applied Sciences associate professor of Engineering and Production Engineering Research Center (CENPRO) coordinator Paulo Sérgio de Arruda Ignácio adds that by the first half of last year prices were high as China still faced a lockdown. And the Asian country was where 25% of the world’s available containers remained stranded during the worst moment of the health crisis.
Consulting firm Datamar CEO Andrew Lorimer says at the height of the pandemic ships remained docked, which caused a ripple effect. “Sitting ships led to a ripple effect that disturbed the world’s logistics chain, which usually acts like clockwork – having containers depend on ships getting to the port, so that they can be filled up, dispatched, landed, and so forth. The quarantine disturbed this whole chain,” he said. He added that a momentary cost surge was partly caused by the blockage of the Ever Given Suez Canal in Egypt, in March 2021. The vessel obstructed the canal for six days, which interrupted the navigation in one of the world’s busiest routes.
According to data from Datamar, the average freight of a dry 40-feet container from Shanghai, China, bound to Santos, Brazil, usually costed from USD 2,000 to USD 3,000 before the pandemic, reached USD 12,000 in 2021 with some oscillations, and is now back again at USD 2,000. Barreto of Solve Shipping points out that in some cases elsewhere the freight peaked at USD 20,000.
Shipping prices are a rate applied worldwide. According to Ignácio, several factors can contribute to setting this price. “Shipowners calculate the ship costs, the route to be followed, if it includes pirate or conflict danger zones, the longest routes,” he said.
But there are other elements involved in such cost. Pontifical Catholic University of São Paulo (PUC-SP) Economy professor Cristina Helena Mello points out that the exchange rate and the port infrastructure are other components of this cost.
“Shipping freight is made up of: heavy bulk fees, large bulk fees, exchange rate adjustment factor, ad-valorem [a tax whose amount is based on the value of the transaction], fuel surcharge, bottleneck surcharge, and additional port charge, Therefore, the behavior of the exchange rate is another explanatory factor, and with the post-pandemic economic recovery and the poor port infrastructure, it burdens the costs on the bottleneck surcharge and the additional port charge,” said Mello.
Crisis and stability
Since the end of the pandemic, freight prices plunged to levels that now threaten the financial results of shipowners. The reasons, Lorimer said, are various: war in Ukraine and a large number of new ships coming into operation, ordered during the pandemic’s price surge. To balance costs and profits, shipowners have even decommissioned vessels to reduce the supply, thus pushing up freight costs.
Lorimer says a small cost increase is expected to take place as the end of the year approaches, since the Christmas orders, which are concentrated from August to October, raise the demand for container ships and ocean freight costs. As for bulk carriers and oil tankers, costs are calculated on a usage day basis. The freight of these vessels also surged dramatically in the pandemic but not as much as container ships.
Prices are expected to return to lower levels in the following years. “This large number of new ships coming into operation puts pressure on the freight, which is expected to continue. But the global economy has started showing more positive news, and we may see a growth in 2024. Therefore, costs are forecasted to be similar to pre-pandemic levels, with a steady growth and freights from USD 1,500 to USD 3,000. But that’s the expectation for the following two or three years, as we can’t imagine much further,” he said.
Challenges. And opportunities…
The ships that have started arriving to the shipowners’ fleets are larger than those currently in operation. They transport over 20,000 TEUs (1 TEU equals a 20-feet container), while Brazil currently have docked smaller ships, which will be substituted by the larger, more efficient ones. But the largest vessels around the world have nowhere to dock in Brazil as the depth of Brazilian ports doesn’t support the largest ships in operation yet. This overburdens the shipowner but particularly those paying for the freight.
Ignácio points out that goods imported from the East to Brazil leave the Asian ports in large container ships that stop in European ports and then transfer this load to smaller ships. These vessels will then proceed to the South American coast. “An extra fee is charged for the freight according to the difficulty [of transportation and throughput]. The freight costs in Brazil increases,” he said.
Mello of PUC-SP also says that “a smaller infrastructure becomes more costly.” “Whether it’s because of a lack of throughput becomes a bottleneck, thus incurring in an overcharge, or because port costs need to be funded. Therefore, higher workforce costs, a lack of technological intelligence and a storage impossibility are factors that also push up shipping costs,” said the professor.
Looking at the current projects and the future of the Brazilian infrastructure, Barreto believes there’ll be an alternative to what’s available now what would be ideal, when comparing it to the world’s leading ports. “I believe that the establishment of regional mini hubs from North to South Brazil are the most likely thing to happen, with both the Northeast and South ports being able to dock and handle some 1 to 2 million TEUs, and the rest remaining with Santos,” he said. “The environmental legislation won’t allow 8,000-TEU ships any more due to their high emissions, and because larger ships are more efficient. We’d have to receive 12,000-TEU ships but they can’t land in Santos,” said Barreto.
Arab countries
Brazil has a direct shipping late to the Arab countries for bulk carriers, particularly from Brazil, and oil tankers from the Middle East states.
According to data from Datamar, year to date through February Brazil exported to the Middle East and North Africa 37,7000 TEUs, down 8.1% from a year earlier. The leading products exported via ports were meats (accounting for 57%), followed by timber; cotton; coffee, tea, mate and spices; vegetable products; tobacco; and paper. Top importers were the United Arab Emirates, Saudi Arabia, Turkey (which isn’t Arab), Egypt, Iraq, Israel (which isn’t Arab either), and Jordan.
On the other hand, Brazil imported mainly plastics, glasses, textiles, fertilizers, and inorganic chemicals. Year to date through February, imports reached 14,900 TEUs, up 13.2% from a year earlier. Leading exporters to Brazil in the region were Turkey, Saudi Arabia, Egypt, Israel, the UAE, Morocco, and Oman.
Translated by Guilherme Miranda
