The shipping crisis has revealed just how fragile the international logistics system is. In this Market Bulletin we will summarise the sequence of events that led to this situation, where Australia fits in, and how Australian wine exports have been affected.
How did we end up here?
The COVID-19 pandemic has arguably had the largest and most wide-spread influence on global human behaviour in modern times. In a relatively short period of time, it has altered the way most people think, feel and process their world. It has affected businesses in many ways; from closure to booming sales, depending on which market they operate in. The way in which goods were transported to different markets was largely taken for granted up until 2021, when delays and increased costs reached tipping point.
The global shipping container throughput in 2019–20 was roughly 817 million TEUs (twenty-foot equivalent units) representing 90 per cent of the world’s trade in goods. Although supply and demand fluctuations, weather events, and industrial action are not uncommon in this industry, schedule reliability generally tended to sit between 70–85 per cent between 2018 and the first half of 2020 and the average number of days from loading to pick up of goods at the destination was 55 for the transpacific eastbound lane (the shipping route delivering goods from Asia to the West Coast of North America) in January 20201.
Compare that to the end of 2021, where schedule reliability shrank to around 30 per cent and the average number of days from loading to pick up was more than 100. So how did this happen?
Here is the sequence of events:
1. Lockdown
In early 2020, as COVID-19 started to spread across the world, factories around the world halted production and ports were hit by staff shortages due to workers being in isolation. At this stage global shipment companies started to reduce their sailings as demand collapsed.
2. Sudden surge in demand
Then, in late 2020, as restrictions eased and vaccine rates rose, consumers began to spend again. Government stimulus packages helped feed consumer demand in many markets around the world and the funds were largely spent on goods, rather than services. Production in factories picked up once again, but now they were rushing to make up for a lack of inventory in the face of surging demand for goods.
3. Market imbalance
The result of this sudden outpouring in demand – especially in places such as the United States of America (US) ¬– combined with backlogs in production, shipping lines that had reduced their capacity, and ports facing staff shortages and industrial action, has created a situation where infrastructure cannot cope with demand.
Currently, even though global container capacity is at its highest level ever (25 million TEUs) this increased capacity has mostly been deployed to the strongest demand routes (see image below), leaving other routes with little additional capacity in the face of increase demand.
The delays are severe at many ports, but the most obvious example is Long Beach/Los Angeles on North America’s West Coast. At the end of 2021, 101 ships were waiting to unload, with the queue stretching into Mexico’s waters, and anchored time reaching around 30 days for some vessels in November and December.
However, Mads Aaboe, Regional Director – BWS Oceania, Hillebrand, said the delays are not just isolated to Southern California.
“The ports of Oakland, Long Beach, Seattle and Vancouver all have their individual challenges with congestions and backlogs. In addition to this, there will be numerous blank sailings for vessels into the port of Oakland from February to May, which is traditionally the main port for imports of Australian wine,” Mr Aaboe said.
This disorder in the marketplace has also led to increased costs (see chart below). Freight rates have more than doubled over the course of 2021. This is partially due to operational costs such as fuel, new build containers, and congestion costs at port all rising. Additional costs can also be incurred due to delays.
“Depending on the specific situation there might be additional trucking costs, wharf/depot storage, and container detention. It all depends on if containers are gated into the port or sitting in storage in a holding yard. In some cases, finished/bottled goods are offloaded from the container and stored, only to then be reloaded into another container once the new vessel cut off is announced,” said Mr. Aaboe.
How does this affect shipping to and from Australia?
Australia is further disadvantaged in this situation as its comparatively remote location puts it outside of the main shipping lanes. Shipping to and from Australia represents 1 per cent of global container throughput, so it is very much at the mercy of bigger players in the marketplace who operate on the dominant shipping lanes.
Flinders Port Holdings reports that 80 per cent of shipments to Australia are arriving outside the scheduled window, mostly thanks to bottlenecks in nearby ports in New Zealand, Southeast Asia, and China.
Global and Australian container volumes 2019–20
Source: Flinders Ports Holdings
Another issue affecting Australian ports is industrial action. According to the Australian Competition and Consumer Commission’s (ACCC) Container Stevedoring Monitoring Report 2020–21, released in late 2021, industrial action is putting a system that is already under enormous strain in jeopardy, making stopping at some ports in Australia ‘commercially unviable’. Some of the issues stem from the Maritime Union of Australia pushing for more restrictive recruitment processes, and Patrick’s Terminals (who has terminals in Brisbane, Sydney, Melbourne and Fremantle) subsequently applying to terminate its pay deal with more than 1000 workers.
The ACCC report also showed that, pre-pandemic, Australia’s port system was below international best practice. Australia’s largest ports, Melbourne and Sydney, were in the bottom 15 and 10 per cent respectively for efficiency.
Wine Australia and the South Australian Wine Industry Association (SAWIA) have both made submissions to the Productivity Commission’s inquiry into Australia’s Maritime Logistics System, stating that the current issues at Australian ports have led to delays, significantly increased costs, and cancelled customer orders due to not being able to secure shipping. Additionally, these issues have begun affecting not only exports but also imports of goods required for vintage such as barrels and chemicals.
What has been the impact on exports of Australian wine?
In 2021, 99.9 per cent of all Australian wine exported left Australia on a ship; only a very small amount of wine is exported by air. As 59 per cent of Australian wine is exported, that leaves the sector very exposed to the current issues.
Port Adelaide processes 61 per cent of wine exports, followed by 38 per cent from Melbourne, with the other ports making up the remaining 1 per cent.
The exact size of the impact of the shipping crisis on Australian wine exports is hard to determine, due to a number of factors currently driving down exports compared to 2020 – the significant decline in exports to the mainland China market, three small vintages impacting on available stock, and a counter-swing in off-trade purchasing with many on-trade channels opening up in key markets such as the US, the United Kingdom (UK), and Canada. However, the impact of shipping delays and costs should not be underestimated. Reports are that the shipping issues are a large bottleneck to getting wine into international markets, with a common amendment to shipment permits being a change of departure date to a later date. Shipments are often being delayed to the next month. Mr. Aaboe said, “This is unfortunately a common occurrence due to the ongoing vessel schedule disruptions. A live example is that we have two vessel sailings ex Adelaide (to Europe) in February that have now been cancelled due to the vessel omitting Adelaide.”
The total number of shipments of wine departed from Australia in 2021 was 39,510, the lowest level since 2001. This is especially troubling given that the 2021 vintage was a record size. When comparing the shipment patterns in the months following the 2021 vintage to those following the 2017 vintage (the previous large Australian crop), a trend of reduced shipment volume can be observed (see chart below). Bulk shipments are largely consistent in 2021, but of a smaller quantity, while packaged shipments in 2021 started off promising but then did not escalate like they did in 2017. It is not surprising as most of the wine being exported in the first months after vintage is white and Australia’s largest markets for white wine are the UK, USA, and Canada – the markets with the most reports of shipping issues creating a barrier.
Further impacts are being felt by local trade. For example, in Canada, reports have been received that the shipping delays have caused delayed releases, stock outs and below average performance of merchandising programs due to low or no stock.
The impact of not being able to ship the 2021 vintage on time is not just isolated to letting down overseas customers – it also impacts the 2022 vintage as there is little storage space for it domestically. Companies such as Hillebrand are trying to work with customers to get creative with storage solutions, such as storing bulk wine in flexitanks for the short term.
The shipping delays are also impacting bulk and packaged shipments slightly differently. Logistics companies are experiencing logistical problems with unloading bulk (there being weight restrictions at some ports) and with getting trucks once the stock arrives.
“Delays at overseas bottling plants are also occurring, due to the erratic vessel schedules which delay or accumulate vessel arrivals. This puts pressure on the bottling plants to accommodate sometimes large waves of containers, which in turn causes containers to attract wharf/yard storage and container detention costs as they await a slot for unloading,” Mr. Aaboe said. Packaged goods appear to be slightly less impacted because all ports can take containers of packaged, whereas only some can take containers of bulk (9000L as opposed to 24,000L).
The raised freight costs of nearly $10,000 per container on average are also hitting Australian wine producers. For 24,000 litres of bulk wine in a container, this translates to approximately $0.42 per litre shipping cost. Based on an average winegrape purchase value of $500 per tonne, the cost of producing and shipping commercial bulk wine in 2021 was approximately $1.50 per litre2. The Ciatti price for Australian wine on the global bulk wine market currently is between $0.80 and $1.313.
In addition to this, the latest Hillebrand Customer Advisory (31 January 2022) reports that a further ‘Covid recovery tariff’ is now being leveraged by some service providers in the supply chain to recover additional costs associated with reduced staffing and testing requirements. For example: the Victorian International Container Terminal has introduced a ‘Covid recovery tariff’ of $3.97 per container effective 1 February 2022, with no advance warning.
Shipping industry experts to do not expect these issues to resolve until the second half of 2022 at the earliest.
1.Hillebrand
2. Based on 700 litres/tonne extraction rate and 30c per litre processing costs.
3. Ciatti Global Market Report December 2021. All prices in AUD.