UNDERSTANDING THE CONNECTIVITY CHALLENGE

COVID-19 created one of the biggest connectivity crisis in living memory, with congestion, closed ports and rapid changes in demand for routes and services. Even coming out of the depth of the crisis, the past two years have seen historic volatility in global container freight rates, which reached a record high of nearly USD 10,400 in September 2021 and entered a significant correction phase at the end of 2022. The global freight rate index stood at USD 2,400 in November 2022.

Historically high freight rates distorted global connectivity, as shipping companies looked for the highest returns from the most connected markets. Figures from UNCTAD’s Review of Maritime Transport 2022 suggest that certain key markets – such as China and India – have consolidated their leadership positions as the most connected nations due to high demand and upgraded port capacity. However other markets, such as most of Africa and Latin America and the Caribbean, have seen significant reductions in direct connections in the current period.

These challenges are exacerbated by low fleet growth. In the Review of Maritime Transport 2022, UNCTAD’s research suggests that the global commercial fleet grew by less than three percent in 2021 – the second lowest rate since 2005 – resulting in an aging fleet, with the current average age by number of ships 21.9 years. Low fleet growth reduces the industry’s capacity to respond to new demand and limits e orts to connect markets.

Some of these issues are a result of structural imbalances in the container shipping sector, which has seen significant consolidation over the past decade, through mergers, acquisitions, and vertical integration. The top 20 carriers currently supply around 91 percent of total container capacity, while the four largest control more than half of global capacity, according to figures from UNCTAD.

What does this mean for the global shipping industry?

A MENA-based maritime executive interviewed for the research explained: “High freight rates and disruption had a concentrative impact in the post-COVID period. Routes in the MENA region were comparatively under-served because the largest shipping companies prioritised their most profitable markets. Shipping from frontier markets became prohibitively expensive, because companies e ectively needed to outbid the most-connected ports to draw interest.”

Does this mean that the correction in the market will result in restored balance and connectivity? The executive expressed scepticism. “The maritime industry is cyclical. The falls in freight rates we’re seeing now typically cause smaller players to leave the market and push the global players to focus on their core. It creates an opportunity for a provider to emerge that supports these markets now and benefits when freight rates rise again, but that provider must have the resources to plug the connectivity gaps.”