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A diamond is just a lump of coal that stuck to its job.– Leonardo da Vinci

Had enough of supply chain snarls? An energy crisis in China is adding a new twist to the tangled mess. Factory slowdowns and shutdowns in the Far East coupled with no slowdown in demand stateside for goods coming from the Far East indicates a new phase of disruption and more reason to pay closer attention to efforts to improve the flow trade. 

It would be reasonable to think that controversy over COVID-19 investigations might not have any effect on trans-Pacific trade or global emissions targets. Well, you would be wrong. 

As China prepares for the 2022 Winter Olympic Games, supply chain strategists should be planning each shipment as if they were standing and surveying from the edge of a ski jump, a ski jump where even if you were to execute a flawless landing, you would still find yourself hurtling down a steep, icy moguls course in a whiteout blizzard. For the present moment, there has been some much needed freight rate relief due to the lower volumes coming out of China, but one cannot count on the ‘jump’ getting any easier.

China’s Got An Aussie Beef

Extreme weather, a high-flying export economy, and a spat with the land Down Under have all conspired to drive China’s coal reserves to a 10-year low. Despite policies aimed at shifting to alternate sources of energy, China’s coal usage still increased to more than half of global coal fired energy in 2020. New regulations cut domestic production amidst pushes for higher mine safety standards and environmental restrictions on the development of new mining projects or mine expansions. In the first half of 2021 China’s demand for coal rose by 11%.

In 2019–20, Australia supplied 55% of China’s coal imports, which made up over one third of Australia’s total coal exports. This mainline connection of minerals would be dynamited by a few undiplomatic words. After ‘ScoMo’ (Australia’s Prime Minister, Scott Morrison) called for an independent investigation into the origins of COVID, China retaliated by boycotting and restricting imports of Australian goods in China, putting the cheeky Aussies on what some would describe as ‘double secret probation’. These unofficial Chinese sanctions put a halt to imports from Australia, suddenly stopping the flow of barley, copper, beef, wine, and, most importantly, coal to the Middle Kingdom.

Ships laden with Australian coal were victimized by the abrupt break in commercial relations and were blocked from discharging their cargos at Chinese ports for months, and forced to sit off the Chinese coast indefinitely (in some cases for more than a year!). China’s imports of Australian coal in 2021 fell to zero before the current energy crisis first took hold in late September.



Power Crisis Of Their Own Making?

Abrupt factory shutdowns and crippling power rationing that can be traced largely to China’s unhappy relations with Australia will claw back China’s YTD export outperformance, and continued erratic production and uncertainty will harm China’s trade partners. 

But… China has allowed over a million tons of Australian coal to clear customs since the beginning of the month despite the unofficial ban. 

With coal prices peaking on the domestic market, Beijing has maintained a tight grip on the price of electricity, in many places squeezing grid providers to ration power to factories on a controlled weekly schedule and driving producer prices to record highs. With winter just around the corner and coal demand expected to rise, is the Chinese energy crisis a colossal own goal or is there more to the story?

President Xi Jinping wants to show the world China is serious about pushing for net zero carbon emissions.  He also wants to clear the smog that regularly blankets Beijing in time for the arrival of the critical foreign press for the Winter Olympic Games in February, and has undertaken efforts similar to those that helped to clear the air for the Beijing 2008 Olympic Games. We could have easily anticipated a slowdown in heavy industry due to Olympic air quality priorities, but soaring prices for coal, natural gas and petroleum have forced the Chinese government’s hand to impose more sweeping emissions restrictions.

Let it Slide?

If Australia and China could get beyond their grudges and China restores its energy security, shuttered and sputtering Chinese factories could resume regular production.  Unfortunately, existing production backlogs are already almost guaranteed to cause further supply chain delays and the energy crunch is driving up prices around the world. China’s national output was already going to be restricted by a scheduled national shutdown for Golden Week festivities at the beginning of October, but more extensive factory closures have helped drive shipping rates down to levels not seen in months

Before you get ahead of yourself thinking that high-flying rates are on the way out, stop and count your blessings. Remember:

  1. Steamship lines have not let go of their chokehold on the market.
  2. America’s public and private sector supply chain leaders can’t effectively address the domestic congestion crisis much beyond pointing fingers, with many players unable to see beyond their own narrow interests or otherwise unwilling to threaten the record profits that they are enjoying that makes the status quo of intermodal paralysis preferable.
  3. China’s factories have been relatively dormant due to Golden Week and the energy crunch. If and when production kicks back into full gear and all things remain equal, the pipeline feeding congestion and supply chain inflation will kick back into high gear too.
  4. High flying consumer demand in the US as well as pandemic-trauma-induced ‘just-in-case’ inventory strategies that were simultaneously adopted by procurement teams across America will continue to perpetuate port and terminal congestion that extends well beyond the Pacific. 



All “Aye-Ayes” On Trans-Pacific Trade

So much money to be made, but nowhere to unload!

In the trans-Pacific container shipping gold rush, shipping lines keep adding new services to eastbound trans-Pacific trade lanes. In a scorching lease market for container vessels, ocean lines and opportunists are drawing ships off of other less lucrative routes and driving up rates (due to under-capacity) in less trafficked lanes found in smaller markets like the Middle East and Africa. 

‘One-off voyages’, aka: “extra loaders” are becoming more frequent as strong demand and record high freight rates attract more carry capacity for Asia-to-North America cargoes and pile on to the epic lines of vessels sitting at anchor waiting to dock off major North American ports. As the charter market continues to melt up, the smaller ships that have been deployed to move containers are partly to blame for the wild number of ships at anchor off the port of LAX/LGB.

With profits reaching unheard of levels, carriers are naturally going to continue shifting all available assets to where they can generate the most returns. With all available container ship capacity deployed, dry bulk vessel owners like Genco are making investments to convert their vessels from already profitable activity in the commodity market to ships better equipped to to load containers. 

It Wasn’t Always This Way

Ocean trade is highly flexible because ships are – by design and function – mobile. Carriers can move ships to wherever the money is. In the past, this flexibility created a race to the bottom. Carriers would cannibalize each others’ markets by sailing to where the demand was, resulting in overcapacity, creating a supply mismatch that sunk rates like a stone as they fought for suddenly scarce freight. 

Carriers fought tooth and nail to cut per-unit costs.  Fleets expanded and vessels grew to titanic proportions under a controversial business model that was often unprofitable. Port authorities were forced to make massive infrastructural investments to accommodate the ballooning scale of vessels. Shallow ports that did not spend heavily on dredging and landside infrastructure became backwaters, effectively erasing them from the map of maritime trade for failing to conform to the new paradigm. 

Wow, It Really Does Go Counter Clockwise

Now the sheer capacity of these megaships is having the opposite effect than it has had in the past. As carriers inject more capacity into the trans-Pacific trade, demand continues to be insatiable. As a result, the enormous volumes are clogging infrastructural nodes and exposing the fragility of our supply chain infrastructure and laying bare the deficiencies of our tools to respond and coordinate land-side assets to relieve intermodal chokepoints. 

So here we are: congestion increases, delays remain unpredictable, shippers will have to pay premiums, and rates are not done touching record highs. 

It pays to be flexible in the global shipping industry, but flexibility does not replace planning ahead and seeking advice from people with experience and people in the know. If you need help navigating through this tumultuous market, CargoTrans has a fantastic team standing by. All you need to do is contact us.

— Shipping Magnate