In a conversation with ET Digital, Aditi Rasquinha, Executive Vice-President, Head of Ocean Freight for Asia-Pacific, DB Schenker, and Kinjal Pande, CEO, Cluster India & Indian Sub-Continent, DB Schenker, give their insights into these issues and talk about the big events that are likely to shape the industry. Edited excerpts:
Economic Times (ET): What is the situation of ocean freight across the world? This is the peak season for global shipping. What are you seeing?
Aditi Rasquinha (AR): The last two years have probably been the most interesting times. Everything that one did not expect to happen came true. From Covid, to the Suez Canal (getting blocked), to the Ukraine crisis, a series of events has created port congestions across the world. Such congestion leads to a longer turnaround for containers. This, in turn, creates equipment shortage, which leads to space shortage, which then leads to an increase in prices and creates a new pattern of demand and supply. At times when demand is very high, the supply is very low. In the last few months, we have seen a trend of demand slowing down. With this, the peak prices that we saw at the beginning of the year have slowly started to come down. However, we are nowhere close to the rates seen prior to Covid.
ET: What is leading to the decrease in rate?
AR: It is a combination of factors, but it is definitely because of a slowdown in demand across sectors in Europe and the US. Earlier, people were buying extra in order to stock up. But in a lot of areas, inventory continues to be very high. With markets opening up and inflation rising, people’s purchasing power is also now different. When you have lower purchasing power and markets open up, you have to choose between buying goods — which one has done plenty in the last few years — or go on that holiday that you could not for a couple of years. Consumption patterns have now changed. With the Ukraine crisis, people have also become more risk-averse.
ET: Would the patterns that you see now for prices continue or do you think the rates will continue to slide?
AR: I think prices will continue to come down for a little longer. This is the peak season for the ocean freight industry and that may take the prices up slightly. But we have to keep in mind that carriers want to create long-term deals, which will happen at the end of the year. They would want these prices to stay higher so that they can secure better long-term deals next year.
In April next year, the International Maritime Organization (IMO) 2023 regulations targeting vessel efficiency and carbon intensity will kick in. A lot of the vessels in service today would need to be taken off the market because they do not meet the carbon emission norms. This will cause a different type of demand-supply imbalance. Yes, there is a new order book of ships coming into play, but the production process will take time. So, we need to see what happens. Ocean freight rates have cooled down from their historic highs, but continue to remain very high. ET: There has been a lingering question: when will supply chains return to normalcy? Do you think we can reach the 2019 levels or we will be in a continuous state of flux?
AR: I do not think we are going back to pre-Covid levels, at least not in the next year or two. We could never predict Covid, Suez Canal or the Ukraine crisis.
Kinjal Pande (KP): The definition of normal has also changed. When we speak to our customers about supply chains, we realise there are various kinds of crises they must tackle. If the pandemic was the big one, we are seeing different kinds of problems coming up in different places around the globe. Supply chains will have to get used to these disruptions — and be more flexible, agile, have back up plans and be open to near-sourcing. At the moment, it is very difficult to predict and forecast what is around the corner, and that is why it will not be normal for a very long time. The benchmark of the pre-pandemic normal is not going to be the one from now on.
ET: Does this have a lot to do with the mindset that a recession is coming? AR: In Europe, an entire generation has lived through war and they passed that feeling or mindset to their kin. Whenever there is a sense of war, there is risk-aversion. It is more about being cautious about how you spend your money, what necessities you buy, etc. You do not see the same type of mindset in the US or Asia, and the profile of a consumer in these markets is very different.
KP: Economies are also cyclical and this is not the first time we will see a recession. If demand is down due to lower consumer sentiment, supply will course correct itself. Businesses have managed through recessions, and if a recession happens now, I do not think it would be any different from what businesses have seen earlier.
ET: With inflationary pressures being felt across the world, the logistics sector, especially shipping and ocean cargo, has come under increased scrutiny because of the profits it is making. In fact, the governments have stepped in and President Joe Biden has signed the Ocean Shipping Reform Act to look into this. What are your views on this? Are markets functioning free of distortions?
KP: The business that we operate in, which is shipping and logistics, is a free market. We have very stringent competition laws. So, the rates that we see and you are referring to are an outcome of the prevailing demand and supply situation, and of course driven by the pandemic. One must also remember that the logistics fraternity has lost a lot of money. Rates had gone really low in 2014-15; and again in 2007-08, the rates had crashed and the logistics and shipping industry struggled. But since these are longer business cycles with investment over the long term, everybody sticks around. And that is how the businesses operate. The Suez Canal is one of the most vital shipping routes between Asia and Europe, but also a potential choke point. The responsibility that such disruptions do not happen rests on all countries. Ships are waiting longer at ports of the US because there were not enough people to handle the cargo. When it comes to the Suez, we all know that it’s still the same narrow canal through which the largest vessels ply. There is a lot that governments across the world are doing, but a lot more needs to be done. Logistics and supply chains are integrated, which means what happens in one part of the world will affect others.
ET: What is the nature of the ocean freight industry in India and how can this be strengthened? What are some of the ease of doing business areas that can be improved when it comes to ocean freight from India?
KP: Like any other country, it is the largest mode of transport and almost 90% of international trade in India happens through the ocean. From a geographical position and due to increasing consumerism, India is also placed better, regardless of what is happening globally. But, as mentioned earlier, supply chains are interconnected, and if there is something that happens in China, factories in India may get impacted, temporary shutdowns may take place, which would mean your export order for Europe may not get fulfilled. At the end of the day, it is all integrated. However, India is doing well in terms of growth, a burgeoning middle-class that is high on aspiration plus schemes like Make in India means there are lots that are going in our favour. The government is doing a lot to ensure the logistics cost comes down. We are still 4-5% higher than many developed economies when it comes to logistics costs as a percentage of GDP. Typically, it is around 9-10% of a country’s GDP. But in India, the cost is 14-15%. However, as an organisation, we are very bullish on India and we will continue to invest Port congestions around the world continue to disrupt supply chains. AR: While we have seen some slowdown in a few countries, when it comes to India and its growth story, we also look at multiple solutions. Also, because of the size and scale of India, there is a totally different logistics setup. If you look at Singapore and compare one city, one country, one port and its distribution network, you will find it is very different. In India, the logistics are very different. If, for example, you are trying to move things from the hinterland to a place like Delhi, the size and scope is very different. This is, however, great for us as we are able to bring different modes together and provide integrated solutions. India is a focal point for us. India has the potential for a great logistics hub for us, if we look at the APAC region.
ET: What are the innovations and tech deployments the company has done in India and how has these panned out for the company?
KP: What we provide to our customers is end-to-end solutions and oceans are an integral piece of the entire international trade. When we look at the entire gamut of services that we provide, which is very customer specific, we definitely look at digitalisation. There is a lot being done globally, within the region and the country in the technology space. For example, SMEs and small players in the hinterlands and tier-II cities that do not have the reach of larger companies find support from us through self-servicing platforms that they find easy to use.
AR: We have booking platforms — regardless of whether you are our customer or not — for shipments, whether air freight or ocean freight. We have e-platforms where we can store your documents and track your shipments online. We are investing in creating visibility, both from a vendor and order management perspective. For example, you can track down and figure out what your order is doing when you have multiple orders within one container. These are the types of digital tools that we are now working on.
KP: Sending goods is now as easy as shopping on Amazon. SMEs are a very important segment for us and we have made a lot of effort to understand their problems and come up with solutions for this segment. Everything that you see in the system or the platform is to support them.
Another example of this is that we all know how difficult it has become to forecast. With our platforms and if the customer uses our services, we can use the historical data to support them in forecasting. This is something that our customers say we are good at and we want to get better at it.
ET: How has the summer of 2022 been and how do you see the rest of 2022 panning out?
AR: From the start of May, we saw volumes go down as China went into a lockdown. We did see some production and volume getting impacted, which meant space was opening up, which led to freight rates going down a bit. Now that China has reopened, volumes have picked up again. I would want to observe for the next few months and figure out if this is a false sense of demand picking up or it is just the recovery from the period of lockdowns. The forecast for the next six weeks looks good and volumes are going up, but this can also be because Christmas is around the corner. We need to see what happens in 2023 given the condition in Ukraine, oil prices and IMO 2023.
KP: From India’s perspective, we are excited. Our customers are still very optimistic and volumes have been very robust. Yes, there is uncertainty around what 2023 will bring, especially when there are so many drivers. But whichever way it goes, we will work with our customers to smoothen supply chains.