Perfect storm

There is light on the horizon but challenges remain as New Zealand navigates through the global supply chain chaos.

By Iain MacIntyre, freelance writer
6 Jul 2022
read time
8 min to read
Cargo ship underneath and a bridge road

Stakeholders involved in or reliant upon the container shipping sector, New Zealand’s lifeline to international trade, are expressing some optimism that an end to the unprecedented, pandemic-related disruption to global supply chains is on the horizon.

However, even with the positive influences of borders reopening and general pandemic-management restrictions lifting, certain underlying forces will not instantly dissipate and notable new geopolitical factors also need to be factored.

Therefore, shippers should expect to continue strategically navigating supply chain challenges, absorb learnings of operating in the “new normal” and potentially further explore innovative shipping options for at least the remainder of 2022.

Setting the scene

A myriad of compounding factors have converged to generate chaos throughout the global supply chain since the onset of Covid-19.

As has been widely reported, preventative lockdowns combined with labour shortages due to infection have impaired port operations, causing vessel delays – with vessels missing berthing windows then generating further backlogs.

In an attempt to maintain schedule integrity, carriers have regularly omitted port calls, which has created logistical issues elsewhere while also inadvertently removing cargo-carrying capacity from the overall network.

Vessels being delayed has also removed capacity – given those ships are unable to complete existing cargo exchanges, never mind commencing their next – and at a time when global demand for consumer goods has markedly risen as a very consequence of the pandemic.

Idling vessels still incur costs, at a time when bunker fuel prices have been on the rise, and the overall supply/demand equation on vessel tonnage has seen charter rates skyrocket. In September last year, carrier Euroseas reported a new charter of a 4250-TEU containership costing about US$200,000 per day, compared to its existing fleet charters ranging from about US$10,000 to US$30,000 per day.

Additionally, following a several-year period of returning minimal profits or even losses, the current market pressures have enabled carriers to cover such cost increases, as well as securing record profits. In this regard, maritime analyst firm Drewry recently forecast that global container line EBIT was expected to reach US$200 billion this calendar year, compared to US$50 billion in 2020.

The consequence of these factors, and numerous others that have been at play since the onset of the pandemic, is that shippers are not only being faced with extremely lengthened delivery schedules, they are also reporting massive rate increases. Woolworths New Zealand managing director Spencer Sonn recently estimated shipping costs to have risen 640% over the past two years.

All of which, of course, flows onto the end consumer.

Current picture

A spokesperson for the International Container Lines Committee (ICLC) says while there are “some signs” of a closer alignment between adjusted supply and demand at a global level, “we will be facing some challenges for a period of time yet”.

“There are ongoing schedule impacts across most trades which will take some time to settle,” the spokesperson told Boardroom, citing the example of the current lockdowns in Shanghai “disrupting one of the largest ports in the world – an exit and entry point for a significant amount of New Zealand demand and supply of goods”.

“It would be prudent for the New Zealand supply chain to prepare itself for a prolonged period, where our traditional seasonal patterns will be disrupted. This will mean peak volumes, or close to it, moving both inbound and outbound concurrently, putting extreme pressure on our limited resources over a sustained period.”

ExportNZ executive director Catherine Beard agrees.

“Things are still congested as it seems that Covid continues to take people out of the workforce and China’s lockdowns are having a big impact,” says Beard.

“I have heard that a lot of the truck drivers in the European Union are Ukrainian and they have all gone back to fight, so that is causing a problem. In addition, there is a shortage of ships and a shortage of containers, and some containers are stuck in Russia.”

New Zealand Importers Institute secretary Daniel Silva considers developments in those two areas of the world serving to provide pertinent examples of the “perils of trading with dictatorships”.

“(1) Germany becoming dependent of Russian gas while dismantling its nuclear energy sectors and investing in windmills to appease its green voters; and (2) most other democracies’ decision to subcontract their manufacturing sectors to China,” he says.

“The zero-Covid folly is one that we are familiar with, having experienced it here in New Zealand. The attempt to eliminate Omicron was only abandoned here when ordinary people decided that it was futile and stopped complying with the increasingly absurd mandates.

“The option to change course when ‘mugged by reality’ is not in play in China, where rulers believe they are infallible and immune from public opinion. Importers in other countries will suffer the effects of the resulting disruptions.

“As they realise that the lure of cheaper labour is not sufficient to outweigh the uncertainties inherent in dictatorships – like a lockdown here or a small invasion there – they will start to trade more with other democracies.

“Immigration policy changes will also hopefully make it easier to source employees in some areas where limited skills exist in New Zealand and make it easier for foreign advisers to travel to New Zealand to undertake essential repairs and maintenance.”
- Charles Finny, CFInstD

Borders reopening

On a positive note, New Zealand Port Company CEO Group independent chair Charles Finny CFInstD says the country’s port sector “welcomes further liberalisation” of the rules applying to the international border.

“Most obviously, this will allow for the resumption of cruise ship visits,” he says.

“They will also allow New Zealand exporters and importers to reconnect to customers and suppliers.

“Immigration policy changes will also hopefully make it easier to source employees in some areas where limited skills exist in New Zealand and make it easier for foreign advisers to travel to New Zealand to undertake essential repairs and maintenance.”

Finny asserts the country’s ports will remain highly vigilant as pandemic management restrictions continue to ease.

“Aside from some cruise ship passengers very early on in the Covid outbreak, the maritime border has become very secure and has not been the source of Covid importation into New Zealand.

“While infection of port workers from within the community has had an impact on operations at some ports, Covid policy has not been the principal reasons for supply chain disruptions impacting the New Zealand economy – 90% of the reasons lie offshore.”

“It is possible that well-intentioned governments can frustrate these adaptations by attempting to centrally plan supply chains. The impulse is based on the principle that no problem is so complex it can’t be solved by someone with a political science degree.”
- Daniel Silva, New Zealand Importers Institute secretary

Political and regulatory influence

As New Zealand strives to navigate through the evolving global supply chain environment, Beard asserts: “Don’t expect to be rescued by government.”

“Some of it is out of their control and they move slowly – private sector co-operation and collaboration is much quicker.”

That said, Beard notes the Ministry of Transport is leading a review of supply chain issues.

“But they don’t have much influence outside of New Zealand.

“Officials are watching the situation closely and there are working groups, led by the Ministry of Foreign Affairs and Trade and Ministry of Transport, with Singapore and Australia on supply chain challenges.

“There is some talk that the government could better support domestic coastal shipping and some in the industry would like to see more investment in roads and rail.”

Given the New Zealand supply chain remains “facing the most challenging period in recent memory”, the ICLC spokesperson is seeking greater government influence.

“The Ministry of Transport does have a part to play in this with some critical infrastructure direction in our small economy, to improve our landside logistics network. The coastal trade, inland hub development and port capacity/ownership needs to be co-ordinated well.

“Our duplication and lack of collaboration in landside infrastructure is one area which is necessary to consolidate our country’s strengths into a presentable and productive package to the world.”

In contrast, Silva believes that natural market forces are already shaping to return balance to the global supply chain.

“It is possible that well-intentioned governments can frustrate these adaptations by attempting to centrally plan supply chains. The impulse is based on the principle that no problem is so complex it can’t be solved by someone with a political science degree. Any such attempts are, of course, doomed to the same failure visited on centrally planned economies throughout history.”

Contrasting future perspectives

In that vein, Silva is adamant that freight costs “will come back to pre-pandemic prices before long”.

“That is because the extraordinary profits of the major shipping lines have attracted new players keen to get a share of that bonanza. Capacity will increase and so will competition.

“Likewise, freight schedules will return to some level of predictability, as supply chains gradually adapt to the new conditions. The capacity to spontaneously adapt is what makes supply chains so resilient. They are a product of millions of decisions made independently by millions of individuals every day.”

However, while predicting an end to Covid-related supply chain disruptions, Silva is wary of the potential impacts of looming inflation and “inevitable corrective recessions”.

“These are the results of the economic mismanagement perpetrated by those who fervently believed that ‘this time it’s different’. It wasn’t.

“Importers will need to do what an earlier generation did in the 1970s and manage as best they can. This too will pass, but it could take one or two decades.”

The ICLC spokesperson also notes global indices pointing towards “some difficulties in most economies” as inflation continues to rise.

“This may have an effect on demand. There is caution around the industry in committing any timelines on ‘normalisation’. What is apparent is the pre-pandemic status will not return quickly, but carriers are collectively doing as much as they can to address this by their own actions.”

Beard expects current supply chain challenges to remain prominent for at least another year.

“Markets respond to high prices and there is a lot of ship and container building going on, but you still need the workforce in the supply chain to be there as well.

“People in the industry say New Zealand had container prices that were too low as to be sustainable for the shipping lines pre-Covid, so we are unlikely to get back to the same low prices for shipping.”

Similarly, given growing global inflationary pressures, increased fuel costs and new policies around fuel quality and carbon taxes, Finny cannot see shipping rates returning to pre pandemic levels.

“Prices are showing signs of stabilising and services are getting a bit more reliable, and delays into many ports, in New Zealand and around the world, are not as bad as they were.

“But we have growing Covid disruption in China and the Russia-Ukraine war and sanctions disrupting also. Personally, I fear that we are going to see disruption occurring until late 2022/early 2023.

“From 2023 onwards we should see global shipping capacity increasing as new ships come on stream. Hopefully, we will see more reliable services.”

“While costs are a focus for all organisations, the flexibility and behaviour toward the environment is becoming very high in considerations in a global context. Reliability, capability and service are all prominently mentioned items.”
- Catherine Beard, ExportNZ executive director

Advice to directors

Finny says he is “cautiously confident” of prospects improving in 2023 when compared to the past two years.

“But we should be expecting a ‘new normal’ – not the one we enjoyed in the run-up to Covid’s emergence. Directors should be reflecting deeply about what this will mean for their businesses.”

Reflecting on what has unfolded over the past two years and what potentially lies ahead, Beard urges business leaders to stay regularly and well informed, as well as to “think global and think about how to scale up for more prioritisation”.

“I think most businesses have weathered the last two-and-a-half years as best they can and done all of the obvious things – such as holding more inventory, putting their prices up to reflect higher costs where they are able, and even outsourcing production closer to the market you are selling to etc.

“We are hearing about more businesses choosing to offshore manufacturing to get closer to customers and get around supply chain problems and staff shortages. Those businesses that were literally shut down in Level 4 lockdowns are also putting more investment into overseas locations for production than in their New Zealand based businesses.”

Beard notes another successful strategy for exporters has been collaboration to scale, as per the Kotahi supply chain model.

“Those with bigger volume have bigger clout and get looked after by the shipping lines better. The small- and medium-sized enterprises get buffeted around the most.”

Making adroit choices over service partners throughout the entire supply chain is one of the most important considerations in the current environment, says the ICLC spokesperson.

“While costs are a focus for all organisations, the flexibility and behaviour toward the environment is becoming very high in considerations in a global context. Reliability, capability and service are all prominently mentioned items.”

The spokesperson adds that a key challenge to business leaders is to rethink pre-pandemic supply chain models.

“We need to be more organised, coordinated within industries and futureproof our thinking.

“The sustainability of landside options are highly important, as they are for ocean carriers with the International Maritime Organization regulations from 2023. Carbon emissions and a reliance on road transport will be an item to consider heavily and development of rail or better sea options connecting to hub ports.” 

We are holding a panel discussion to discuss the challenges and opportunities facing directors of export businesses now that New Zealand has reopened its borders. Wednesday, August 3

The panel includes global business leader and advocate Phil O’Reilly, Peter Chrisp (NZTE Chief Executive), Gráinne Troute (Chair of Tourism Industry Association), and Steven Maharey (Chair Education New Zealand).

Register now for the in-person event in Wellington or livestreamed events across New Zealand. Find out more

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