Discord in the shipping industry has the chemicals sector dancing to its tune

Author James Elliott, Business Development Manager

The global shipping industry has been disrupted throughout the past two years. Container shortages, a lack of vessel availability, delays at ports, insufficient port capacity and infrastructure, and strong demand for goods have all resulted in challenges in securing shipments and brought significant rises in global container freight rates. All industries have been impacted, including the chemical industry.

One recent example of the difficulties the shipping industry has faced was discussed by Argus VP global business development, chemicals, Muhamad Fadhil, in a CNBC interview — China’s Ningbo port was shut for part of August owing to a positive Covid-19 case at the Zhoushan terminal.

Such news related to the shipping industry invariably brings memories of March and the blockage of the Suez Canal by the 20,000 TEU container ship Ever Given, which resulted in a queue of nearly 400 vessels and billions of dollars of goods awaiting delivery.

Generally, there have been backlogs and congestion at ports around the world. Filled containers typically move east to west. Empty containers have been stranded in the US and Europe, with delays in their return voyage to China, where they can once again be filled with goods for transportation.

The impact on container prices has been well publicised. In June 2020, the container rate from northeast Asia to northwest Europe was around $2,000/TEU. Over a year later, in August 2021, prices have rocketed to more than $14,000/TEU, a more than sevenfold increase in 14 months.

In an attempt to resist absorbing the full impact of the freight cost rises, northeast Asian exporters have changed their quotations to customers in India, Turkey and Europe. In order to de-risk, offers are now typically made on a fob basis, with importers bearing the responsibility for arranging the transportation and swallowing the freight cost.

With the high costs and unreliable lead times, importers have resorted to alternative solutions to source goods. For example, air freight has been utilised, at great expense, to ensure delivery of products essential when using just-in-time inventory management, where the cost of not producing outweighs the cost of delivery using this method.

The disarray in the shipping industry has severely impacted global supply chains and nearly every industry has been affected. This includes the chemical industry — chemicals are moved around the globe to help meet supply shortfalls and demand surges, and when a price arbitrage emerges.

Delayed shipments have resulted in shortages of chemicals, and when shipments have arrived the higher freight costs have boosted the overall price of the chemical on a delivered basis. Thus the challenges in the shipping industry have either caused, or exacerbated, the tightness in chemical markets, and contributed to rises in chemical prices.

The impact of this has been particularly acute in chemical markets that are structurally dependent on imports from other regions. In the absence of containers or vessels, imports have been unable to arrive on schedule and left those markets short of supply.

One such example is in the European PET industry. As discussed in the Argus Toluene, Xylenes and Isomers/PET service, European imports of PTA from Asia-Pacific have fallen this year compared with 2020 because of the high shipping costs and reduced container availability. The impact has been a drop in the European PET resin operating rate, resulting in decreased production of other key feedstocks required along the PET value chain, including MEG.

The container shortage is projected to persist through the remainder of this year and into 2022. With the chemical industry dependent on the container shipping industry to bring equilibrium to global markets, it will continue to dance to the shipping industry’s tune. Importers of chemical products will contend with inflated chemical prices for a longer period, and this will cascade through the disrupted supply chains and result in higher prices for consumer goods.

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