Logistical lockdown: will Russia be able to take advantage?

Situation with logistics in the world

Problems with ports in the two largest economies of the world — China and the United States, have strongly knocked the transportation market down. This situation began closer to the autumn of 2020 and so far, apparently, it is not getting better. Every week we see reports from another port, where a large number of ships have accumulated waiting for unloading.

Judge for yourself, there is a logistical collapse in the South Korean port of Busan, instead of the standard three days, containers are waiting for shipment for at least 12. Goods from some countries have been in the harbour for already 2 months. This port is one of the ten largest ports in the world — cargo turnover reaches about 23 million containers a year. Most large international companies operate through Busan. In particular, almost 70% of Japanese cargo to our Far Eastern ports goes through this terminal.

Now there are being 25 thousand containers with goods from Southeast Asian countries in the ports of Korea, sending goods from China is a priority. Even their own South Korean cargo is on the waiting list. As a result, we may soon feel a shortage of goods from this country. Additional problems were brought by two typhoons in August, September and the harvest festival in Korea in early October. Here we see the overlap of some factors on others, which leads to a deterioration of the overall situation in the logistics chains.

The factor of Russian ports has emerged — the transit of containers from Korea to Vladivostok and Nakhodka, and further along the Trans-Siberian Railway, has been added. It costs 40% cheaper than the southern sea route (via the Suez Canal). Prices for transportation from China to Europe via Suez have increased 3-5 times. Korean ports are working at the limit of their capacities.

In China itself, the situation is no better — the transport collapse in ports has been in full swing since the summer of this year. Due to the coronavirus outbreaks, the work of the world's largest transport hub in Guangdong Province is limited (it includes several ports that are consistently among the five largest in terms of cargo turnover in the world). As a result, there is a constant accumulation of hundreds of ships off the coast of China.

In the United States, the ports of the west coast are experiencing great problems with excessive loading of container ships — in the ports of Los Angeles and Long Beach (which account for 40% of traffic in the country), 40 ships are idle daily waiting for unloading. About 500 thousand containers are being stuck in the terminals. The scale of the problem is obvious. Because of this situation, both ports have switched to round-the-clock operation. Large retailers like UPS, FedEx, Target, Samsung, Walmart also started working at night.

The situation in the US ports is caused by several factors — the main one, of course, is the recovery of demand for products — on the eve of the Christmas holidays, retailers and manufacturers are trying to increase inventories in order to compensate for losses in sales for the year. According to experts, in order for the situation in the global logistics industry to stabilise, it is necessary for the United States to buy fewer goods in China. Which sounds unrealistic, of course. Another reason for congestion in the US ports is the strong overregulation of American cargo transportation and the underfunding of ports (which is very similar to the problems of our ports, more on that below). The country is already discussing the need for a comprehensive programme for the development and modernisation of port infrastructure.

Among other things, there is a shortage of containers on the world market, several million free containers are needed for stabilisation. Production takes time, and the number of container ships is also limited. For information — in August 2020, free container fleet was 11%, and in August of this year it was already 0,7%. As we can see, the transport capacity is now operating at the limit of its capacity (without the possibility to stand for repairs at the docks). Very large vessels — supercontainers are expected on the market in 2022-2023. The lack of regular air traffic with Southeast Asia, which usually took a decent amount of cargo with them, puts an additional burden on sea transportation. Most of the e-commerce cargo was previously transported by air. Now there are only containers.

As a result, downtime in ports led to an increase in the cost of transportation, which resulted in an increase in the cost of shipping containers. Carriers need to somehow compensate for losses. For example, the cost of shipping a 40-foot (12-metre) container from Asia to Europe has increased to 10-14 thousand dollars, which is by 350-400% more than a year ago. A huge figure, if you think about it.

Situation in Russia

For a month now, problems with the supply of products have begun in Chukotka and Kamchatka, these regions are tightly tied to the delivery of products by sea. In addition to products, there were interruptions in the supply of equipment, building materials, modular structures for infrastructure facilities and landscaping. Many objects will not be handed over on time now.

Far Eastern ports are overloaded due to changes in global logistics flows. As a result, suppliers cannot deliver goods to many regions on time, especially remote corners of our large country are suffering. The shortage leads to an increase in prices, which will additionally add to our already almost double-digit inflation this year. The capacities of our ports in the Far East are overloaded — hundreds of containers waiting to be shipped have accumulated. The ships have been standing for several weeks. The minimum waiting time is 10 days, a month on average. New cargo is not accepted in the ports of the Far East.

What has happened? Transport companies were forced to look for new ways of delivery, as prices for transportation along the Northern and Southern Sea Routes have increased significantly, and they are already operating at full capacity. An alternative option is transit through Russia using multimodal transportation (sea, railway). The load on our Far Eastern ports has increased tenfold. Previously, they served mainly goods for Russia (in a much smaller volume). Now there has been a collapse — neither state bodies nor foreign trade participants were ready to increase incoming vessels. For 9 months of 2021, the number of foreign trade participants in the Far East has increased by 28,5% — more and more companies from Asia and Europe are choosing our country for cargo transit. We have been dreaming about this for a long time and now, it would seem, it has happened, but we are not able to handle this flow. The seasonal factor is also superimposed on this, when there is an urgent need to ensure delivery to remote regions before the closure of navigation. Therefore, the priority is shipment to Chukotka, Magadan, Sakhalin, Kamchatka. Taking into account the large number of infrastructure and construction projects in these regions, the volume of traffic there has increased significantly in recent years.

The sharply increased load has revealed the problems of our ports in infrastructure, personnel qualifications, IT and energy supply. Ports simply do not have proper corporate accounting systems and, as a result, refuse to unload even if there are free places on the sites. Very similar problems in US ports have already led to a modernisation programme, it seems that we will come to such a need. I must say thank you to coronavirus for the new capacities that will eventually allow us to become another route of conventional supplies from Asia to Europe.

The above-mentioned multimodality of transportation implies the use of rail transport in the logistics chain. There are also problems with this element — a shortage of trains and other problems. For example, the waiting time for trains is 3-5 days, and earlier this period was one day. Containers ready for shipment do not immediately leave the ports, as the stations in Moscow are packed with cars, and trains are queuing there. The classic centralisation of our country in Moscow once again leads to problems out of the blue, because the main flow of Russian goods is delivered there. Metallurgists are already suffering from the collapse, they are complaining about the increase in the cost of renting a rolling stock by 132% for 9 months of 2021, idle locomotives, lack of personnel.

But, at the same time, Russian Railways does not forget about making money for the company — container transportation on the China-Europe-China route increased by 47% in 9 months of 2021 compared to 2020. Since 2019, the growth has been as much as 230%. Not bad, for Russian Railways.

Hope remains that due to the increase in the cost of transit through Russia, its volume will decrease, which will slightly stabilise the situation in this industry. Judge for yourself — at the end of 2020, the cost of container transportation through the Far East was two times lower than through the Suez Canal. Now this difference is only 40%. When the prices are equal, some of the cargo will return to the “old” route. We should invest in increasing our capacity and stake out a strong place among the main logistics routes for the future.

In conclusion, I would like to note that the situation in the logistics industry needs to be urgently corrected. Otherwise, the stretching of counterparty chains threatens us with a new round of inflation, the shutdown of a large number of industries around the world, and a drop in the pace of economic recovery after the pandemic.

Here in Russia, the transport collapse will lead to an increase in prices for everything, primarily for fuel, which is the basis of all supply chains, and the rise in price will fall on the shoulders of end consumers. The congestion of ports will have an impact on any industry — from construction to small retail trade. As a result, a shortage and a rise in prices. So far, the price tags are kept due to internal reserves and inventory. It will be interesting to watch the development of events further.