Addressing New Zealand’s sea freight challenges
COVID-19 has generated significant challenges for New Zealand’s international supply chains, causing considerable disruption and cost increases for local businesses and consumers.
Anyone reliant on sea freight is currently grappling with the consequences of an unexpected surge in global consumer spending that has led to record-breaking demand for shipping services and equipment, beyond available capacity. This in turn has created various logistical challenges – including port congestion globally, shipping delays and service cancellations, container shortages and dislocation, and extreme sea freight rates and surcharges – which are expected to continue for at least the next 12 – 18 months. New Zealand has felt these challenges acutely due to the country’s position on the fringes of global shipping routes.
New Zealand cannot afford to ignore this steadily worsening situation because sea freight carries 99% of the country’s trade by volume and around 80% by value. The business community is calling for government intervention and, in many ways, the Government is responding effectively, but more action is needed. In the absence of intervention, these logistical challenges are forecast to cost New Zealand traders more than NZD10 billion in the coming year.
This is the third article in a series exploring the issues the COVID-19 pandemic era raises for reconnecting New Zealand to the world. The series explores what is being considered, or what should be considered, as we look towards the future. In this article, we explore New Zealand’s current sea freight challenges and identify some government interventions that could help alleviate the harm they are causing in the short-to medium-term.
The market dynamics in the global and domestic container shipping industries are complex. Nevertheless, the key challenges facing the sector at present can be summarised as follows:
1. Global demand for sea freight services has never been stronger
Changes in global consumption and shopping patterns triggered by the pandemic have led to a substantial increase in the demand for manufactured consumer goods – a large proportion of which are transported around the world in shipping containers.
In New Zealand, while demand for manufactured consumer goods has been strong throughout the pandemic, these products are increasingly purchased online and imported by air freight.  As such, New Zealand’s problem is not handling record sea freight volumes (i.e. a demand driven problem), but handling the downstream effects of the significant increase in the international demand for container shipping services (i.e. a supply driven problem).
2. Key ports have never been busier and are chronically congested
As a result of the record-breaking usage of international shipping services in 2021, the world’s ports have never been busier.  This extra throughput has exacerbated pre-existing congestion problems at many of the world’s largest ports. Last month, Kuehne+Nagel reported that there were 353 container ships stuck outside ports around the world (more than double the number stranded at the same time last year) and some ships were having to wait up to three weeks to drop anchor and unload their containers. 
In New Zealand, congestion at Ports of Auckland was an issue at the beginning of the year. However, for the past seven months, import dwell times (i.e. the number of days a container remains at the Port) have ranged between 1.94 to 3.4 days. In addition, there have been 0 – 1 container ships waiting at anchor to enter the Port during this time. While the Port is experiencing some challenges at the moment as a result of Auckland’s eight week lockdown – such as importers having full warehouses or distribution centres, and retailers being slowed through click and collect – these challenges are not of the Port’s making.
3. Shipping schedule reliability has hit historic lows
Largely as a consequence of port delays in Asia, Sydney and Auckland, New Zealand’s shipping schedule reliability has plunged to a historic low of 6% from above 80% before the pandemic.  This means that only 6% of ships are arriving at New Zealand ports on time. Some services are skipping scheduled stops along New Zealand’s coast to make up for lost time or chase higher paying business elsewhere. There is also mounting concern that some shipping lines may soon choose not to visit New Zealand at all, given the country’s position on the fringes of global shipping routes.
4. Container shipping prices are extreme, and surcharges are proliferating
Due to the factors discussed above, container shipping prices have been on the rise since mid-2020 and are now extreme. Globally, the average cost of shipping a standard large container has surpassed NZD14,000, which is approximately four times higher than a year ago.  At the extreme, securing a late booking on the world’s busiest route last month, from China to the West Coast of America, could cost up to NZD29,000. Consequently, major shipping lines like Maersk, which carries 20% of the world’s sea freight, is now forecasting its highest operating profits in the company’s history. 
These market dynamics have created a triple whammy for New Zealand traders who now need to grapple with: extreme freight rates; a raft of new shipping surcharges (like MSC’s NZD1,000 “container drop-off fee” for Auckland-based customers); and a reduction in service supply, as some shipping lines focus their attention on servicing more lucrative international routes (most notably, the China to the West Coast of America route).
Figure 1: China Containerised Freight Index
Source: Shanghai Shipping Exchange
5. Shipping containers are stuck in the wrong places
The delays and the growing divergence in international sea freight rates is making it increasingly difficult to locate and track shipping containers. While the global supply of containers is arguably sufficient, 4 million standard large containers are stranded at sea or waiting to be unloaded at congested ports.  Even more are accumulating at inland freight hubs in the US, Europe and Asia where companies have struggled to cope with overwhelming cargo flows.
In New Zealand, there is an additional problem in that many of the containers the country does have are stuck in the wrong places. At present, there is a mounting surplus of lower grade containers (particularly at Auckland), which are used to transport non-perishable goods. There is also a severe shortage of refrigerated containers (particularly at smaller and southern ports), which take the country’s primary produce overseas. Once upon a time, the international shipping lines would have been keen to redistribute empty shipping containers around the country and take the surplus containers offshore. However, this business stream is not attractive at present given the record sea freight rates on offer elsewhere. With only one New Zealand flagged and crewed coastal container ship, Moana Chief, able to perform the domestic redistribution task, the country’s current container surpluses and deficits are likely to continue to grow in the months ahead.
Potential government interventions
Most stakeholders agree that NZ Inc cannot afford to ignore the logistical challenges outlined above because, in the absence of a sea change, they are forecast to cost New Zealand traders more than NZD10 billion in the coming year. Nevertheless, opinions within the business community vary on whether government intervention is warranted, and if so, what form it should take.
In our view, it will always be difficult for the New Zealand Government to address these logistical challenges because their root causes are based largely offshore. There is clearly nothing the Government can do to curb the incessant global demand for sea freight services. Similarly, there is little (if any) scope for it to address: offshore port congestion; delays in getting international shipping services and containers to New Zealand; and global sea freight rates.
The Government has had some recent success at influencing shipping prices and surcharges, by writing directly to the shipping lines and appealing for their restraint. Some New Zealand stakeholders have called for the Commerce Commission to assume a bigger role in policing competition between the shipping lines. In our view, there may be merit in exploring the timing, size and context underpinning recent sea freight rate rises. However, care is needed to ensure that any regulatory intervention or private court action taken (e.g. asserting a breach of incoming amendments to the Fair Trading Act 1986) does not prompt the shipping lines to further scale back or abandon their New Zealand routes.
In our view, it makes sense for the Government to focus primarily on interventions that:
- expedite the processing of ships and cargo at New Zealand’s ports, including via tracking, tracing, digitisation and trade facilitation measures;
- increase the number of international services calling here, whether by chartering ships in its own name or bringing businesses together to charter ships collectively; and
- facilitate the movement of empty containers to where they are needed most and full containers to where they are best placed to be exported.
Particular focus should be on interventions that will alleviate the challenges outlined above in the short- and medium-term, not least as we expect international market forces will address many (or indeed most) of them in the medium-to long-term.
While it is beyond the scope of this article to consider all potential interventions, we explore the merits of intervening in the domestic market for coastal shipping services below.
New Zealand partially deregulated its market for coastal shipping services through the introduction of the Maritime Transport Act in 1994, specifically via section 198. Under section 198, a foreign flagged ship can carry coastal cargo around New Zealand (including empty shipping containers) if:
- it is passing through New Zealand waters while on a continuous journey from a foreign port to another foreign port and is stopping in New Zealand to load or unload international cargo; and
- its carriage of coastal cargo is incidental to its carriage of international cargo.
The threshold for exemptions is high. To authorise coastal cargo to be carried by any other foreign flagged ship (i.e. one that does not meet the requirements above), the Minister has to be satisfied that there is no availability of New Zealand ships or foreign flagged ships on demise charter to a New Zealand-based operator to carry that coastal cargo.
In simple terms, this partial deregulation made it possible for foreign vessels that meet the aforementioned requirements to port-hop along the country’s coastline and reposition coastal cargo. The impact of this law change was swift and significant. In 1994, New Zealand had 34 flagged ships performing coastal shipping services. Today, the country has just one and foreign flagged vessels are responsible for carrying approximately three-quarters of all containerised cargo around New Zealand’s coast.
Critics of partial deregulation argue that foreign flagged vessels have an unfair operating advantage as they do not have to comply with some of the legislative requirements domestic flagged vessels do (e.g. New Zealand’s labour and tax laws). Those who support the continued partial deregulation argue that the large international shipping operators bring many benefits such as increased domestic capacity and connectiveness to international ports, which New Zealand could not replicate domestically, and worry that any move to re-regulate this area could prompt the shipping operators to further scale back or abandon their New Zealand routes.
Last month, the Government announced its intention to spend NZD30 million over three years to support coastal shipping, but exactly what that money will be spent on remains to be confirmed. In our view, there is merit in using some of this money to encourage the reestablishment of New Zealand’s coastal shipping fleet, which is a low-carbon transport mode that would contribute to reducing emissions. However, any first order investment should be conditional on the generation of a rapid increase in the number of vessels servicing New Zealand shores. The best way to achieve that would be by chartering container ships that could be delivered within weeks, as opposed to commissioning or purchasing ships that may take years to arrive.
If the Government and/or industry decide against investing in New Zealand’s coastal shipping fleet, or if any investment looks unable to generate a rapid increase in the number of vessels servicing New Zealand shores, then we would advocate the (perhaps temporary) relaxation of the section 198 requirements. This would enable a wider group of foreign flagged vessels to carry coastal cargo around New Zealand ports without the need for their visits to be part of a continuous international journey or for the carriage of coastal cargo to be ‘incidental’ to their carriage of international cargo. This relaxation (which could be implemented expeditiously) would allow new services (like Maersk’s Sirius Star) that could rotate around New Zealand’s ports and reposition empty shipping containers and move full containers to where they are best placed to be exported from. To allay the unfair operating advantage concerns of New Zealand seafarers and the unions, this relaxation could be temporary or subject to an amended licensing regime.
New Zealand cannot afford to ignore the significant challenges currently posed to the country’s sea freight market. Carefully targeted interventions are urgently needed, and they should be focused on measures that will deliver material results in the short- to medium-term. The Government has shown it is prepared to act on these issues and to date has made efforts to bring supply chain partners together to facilitate the business-led response.
Going forward, we look forward to contributing to the strategic discussion about the merits of potential market interventions to enable New Zealand exporters, importers and trade facilitators to get back to doing what they do best – taking the best of New Zealand to the world, and bringing the best of the world to New Zealand.
 Total New Zealand container import and export movements in the year to August 2021 were 1.3% down across the same period in 2019, and 2020 movements were consistently below 2019 and 2018 values.
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