By Megan Quinn
Scrap exporters were already facing a difficult ocean shipping outlook before the coronavirus pandemic hit. What happens now?
When scrap exporters, brokers, and freight forwarders wrapped up 2019, most thought 2020 would present more of the same challenges: more canceled shipments, more costly regulations, and higher shipping costs. Scrap exports from the United States started strong, with total U.S. ferrous scrap exports in the January-February 2020 period up 45% over that period last year, says Adina Renee Adler, ISRI’s vice president of advocacy.
Destination Logistics (Montreal) was enjoying robust business at the beginning of 2020, says Matthew Samsonovitch, director of sales and operations. Sealink International (Plano, Texas), another freight forwarder with a scrap focus, was experiencing especially strong movement of ferrous scrap, which had been gaining value after about a year of depressed prices, says Anupa Pradhan, the company’s U.S. regional manager. “The ferrous market hadn’t taken off in a while, so we saw a little bit of hope” in the market, she says. Her customers were also shipping higher volumes of nonferrous than usual for January. “It started off as a very busy year, with a lot of trading, especially to the Indian subcontinent,” she says.
Scrap exporters and logistics providers anticipated the annual shipping slowdown due to Lunar New Year, which typically slows markets for a few weeks while businesses in Asia are closed for the holiday. Some customers started to worry about further shipping delays when the Chinese government extended the holiday in an effort to reduce the spread of the novel coronavirus, Samsonovitch says. These exporters still called him with business at a steady rate throughout March. “For a while, despite everything, it was as if [it] was business as usual,” he recalls. As the month progressed, more and more cities around the world were issuing stay-at-home orders or closing businesses. By April, “it was getting harder to do business,” he says.
Ocean shipping has always been a turbulent business, and even small changes in ocean carrier supply and demand can deeply affect recyclers’ bottom lines. When COVID-19 became a pandemic, it magnified existing problems and further disrupted the carefully coordinated chain that gets scrap from point A to point B, Samsonovitch says. “Whether there’s a global pandemic or not, things are shifting all the time in our industry, and every day is a challenge,” he says. “When there’s something wrong with one player, there’s a chain reaction: The carriers, the trucking companies, the drayage carriers, the shipper, consignee, a trader or broker, a logistics provider. If you remove just one link, it comes crashing down.”
Before it became clear just how deeply the coronavirus would affect the ocean shipping industry, many scrap exporters were focusing their attention on one growing logistics problem: competition for space on fewer and fewer shipping vessels. Exporters were becoming used to paying high prices to secure a spot, only to find they’ve been bumped from the vessel at the last minute or the sailing has been canceled completely, Pradhan says. This problem has gotten worse in the last few years because many shipping lines have merged or reduced their capacity, and COVID-19 added even more strain in the last few months, she says.
Back in 2015, ocean shipping prices took a nosedive due to sluggish demand and excess hauling capacity. Carriers began to offer very low rates, which was a boon for scrap exporters, who enjoyed the discounts throughout most of 2016. At its lowest price point during summer 2016, it cost about $10 a ton to ship metal scrap to Taiwan from the Port of Los Angeles—about half of what it normally costs, one West Coast recycler said.
But these extreme price discounts signaled a major change was coming: The 20 largest container lines lost a combined $5 billion in 2016, the Wall Street Journal reports, leading to high-profile bankruptcies of companies such as South Korea’s Hanjin Shipping Co., at one time the world’s seventh-largest container-shipping line. When it went bankrupt in August 2016, it caused major global trade disruptions, and scrap exporters with containers aboard Hanjin ships were left wondering where their containers would go and what would happen to their cargo.
In the years since the economic downturn, many of the remaining shipping lines consolidated to avoid bankruptcy, optimize capacity, and even-out prices by gaining bigger market share, says Ved Prakash, board member and director at Gemini Corp. (Antwerp, Belgium). “The consolidations have made things even worse for the shippers,” he says. “The fight after the consolidation has become even more intense, and at the end of the day, that doesn’t change or make anything better for their customers.”
At the same time they’re fighting for scarce space on ships, scrap exporters must contend with blank sailings, which are cancellations in the shipping schedule. Blanks are especially common around Lunar New Year because fewer goods are shipped out of Asia during that time, Prakash says. As the COVID-19 pandemic worsened throughout February and March, ocean freight carriers blanked additional trans-Pacific and Asia-Europe sailings into April because of coronavirus concerns.
Blank sailings have always been annoying, but the higher incidence of coronavirus-related blanks right now has made it difficult for scrap exporters to do business because they cannot rely on ocean shippers’ schedules, Prakash says. SeaIntelligence Consulting, a maritime analytics company that calculates a schedule reliability score for carriers, reported that the global reliability score in February was about 65%, the lowest score it has recorded since it introduced the score in 2011.
Though 2M Alliance members and some other carriers announced their COVID-19-related blank sailings about a month in advance, scrap exporters are also experiencing an increase in last-minute cancellations, Pradhan says. “It’s haphazard. They take bookings today, but tomorrow they will cancel, saying they are full. If they were full, why did they give us the booking?” That hurts Sealink’s business because the company must scramble to get its customer’s scrap onto another ship or call customers to tell them their shipment won’t leave the port when they expect, she says. “Our clients are unhappy, and we’re unhappy,” she says. “It hurts our profit margin and theirs.”
Rerouting scrap shipments can also be costly, especially now, Samsonovitch says. “We’re all hurting right now, but instead of carriers saying, ‘Your volume is down, our volume is down, and we’re losing freight on the trans-Pacific trade lane, let’s help each other,’ we just hear, ‘Your shipment costs $100 or $250 extra right now.’” Scrap exporters are the ones who have to eat part of that cost, he says.
These exporters face an added challenge because scrap metal is exempt from Federal Maritime Commission rules that require a carrier to file rates on certain commodities and lock in rates with customers after negotiations. This exemption allows carriers to change shipping rates day to day instead of sticking to a publicly negotiated price, meaning freight forwarders and exporters often end up paying a higher price than they budgeted. “This is more common when there are big changes in the market, and we’re definitely going through a big change,” Samsonovitch says.
Scrap as “low-value” cargo
Scrap shipments often get “rolled”: The shipping line takes the scrap shipment off the vessel at the last minute to give the spot to someone with higher-value cargo. This was already a regular occurrence that has become even more frequent over the last few years, Pradhan says.
The coronavirus outbreak is shedding light on just how potent the combination of tight capacity, blanked sailings, and rolled cargo can be for recyclers, Samsonovitch says. With the Lunar New Year holiday extended in China this year because of the virus, several ocean carriers announced they would blank one or two additional vessels in January and February because not enough freight was coming into the West Coast of the United States from Asian ports, he says. “When everyone heard there were two additional blanked vessels, everyone panicked and booked as much freight as they could on those one or two remaining ships,” he explains. “That put allocation at a limit.” On these particular trans-Pacific routes, he says, the carriers don’t make much money on a $200 container of scrap bound for Asia. Each shipping line can make up to 20 times that amount by shipping higher-value cargo back to the United States from Asia. When the coronavirus disrupted freight volumes coming into U.S. ports, the carriers had to be more choosy about how to make up the revenue difference. “The first to go is scrap because it is the heaviest and it’s not high-paying freight,” he says.
Even without a pandemic, there’s a higher chance of scrap cargo getting rolled during the busiest shipping seasons, such as the weeks just before and after Lunar New Year and the weeks leading up to and just after Ramadan, Prakash says. Paper and plastic recyclers are especially vulnerable to this issue because of the commodities’ relative low value by volume. “You are low-paying cargo. You’re seen as nonimportant, so you have to be last in the queue. That is not fair,” he says.
During the height of the busy seasons, Sealink sometimes tells its customers to make multiple bookings with different freight forwarders and shipping lines to have a better chance of getting their scrap across the ocean, Pradhan says. “When we know there’s a major space issue, and someone comes to us with a big order, say 150 boxes to India,” one forwarder might not be able to secure space for that large an order with one shipping line. “In that case, we’d send them to five different forwarders. It’s like putting eggs in five different baskets.” That puts money in other freight forwarders’ pockets, but Pradhan says other companies in the industry are in the same boat. “They’re doing the same thing,” she says.
Once the peak shipping season slows down, Prakash says it’s much easier for scrap exporters to claim vessel space. “When [ocean shipping lines] need the metals and paper and plastic to fill their vessels, they always come into the recycling community to fill the gaps,” he says.
Sealink’s best time of year for scrap shipments is in June or July, when shipping prices are lower and schedules are more reliable, Pradhan says. “We have no problems during the low season,” she says. “That’s when the shipping lines are the smoothest.” Sealink has maintained good relationships with the carriers, she says, even since 2016, when “the industry changed a lot after bankruptcies and consolidation.” Maintaining good relationships with ocean carriers “has proved to be invaluable, and carriers have reciprocated by working as partners rather than just having a vendor-customer relationship,” she says. Other freight forwarders and scrap exporters say they aren’t on such good terms with shipping lines, but they don’t have much choice but to do business with the lines that are still operating.
Revising fuel cost calculations
Just before COVID-19 hit, the ocean shipping industry was bracing for a major oil price hike due to changes in the International Maritime Organization’s regulations on low-sulfur fuel. Starting in January 2020, the new regulation bans ships from using fuels that have a sulfur content greater than 0.5%. Previously, the limit was 3.5%.
Jim Blaeser, a director of consulting firm AlixParners (London), along with several other company directors, said in their 2020 global container shipping outlook report that the new fuel regulations are “a major concern” for shipping lines, some of which are still in debt from 2016. Many carriers use fuel surcharges as a way to sustain their profit margin, “and the survival of these carriers depends on their ability to pass their higher fuel costs along to their customers,” they wrote in the report.
Between December 2019 and January 2020, shippers paid 35% to 45% more in bunker fuel prices for very-low-sulfur fuel oil and related surcharges, according to Drewry Supply Chain Advisors. Those months, exporters were hit hard with that price hike in the form of higher bunker fuel charges, Prakash adds.
Analysts forecasted that the low-sulfur fuel oil prices would keep climbing throughout 2020 as demand increased, but in January, LSFO prices crashed quickly—plummeting about 35% between January, when prices were at their highest, and March, according to the Drewry report. “Nobody expected this to happen,” managing director Philip Damas wrote in the fuel report. “The good news is that the fuel part of ocean freight rates paid by shippers will fall and that the underlying bunker costs of shipping lines will also be much lower than previously expected. The extra cost of the IMO 2020 rule will be deferred until the global economy normalizes.”
The price reversal should have been good news for scrap exporters and freight forwarders, many of whom were bracing to absorb the costs in the form of higher shipping prices on a month-to-month basis. Pradhan says some shipping lines still increased their freight costs in March and April, however, explaining that they had to offset their lack of shipping capacity due to coronavirus-related schedule disruptions. “On our [shipping bill] the oil surcharge has gone down, but not crazy down. Shipping costs are still up,” she says.
Port congestion problems
Though low oil prices might eventually offset the steeper costs of switching to low-sulfur fuel, scrap exporters, freight forwarders, shipping lines, and others in the supply chain are facing unexpected costs from port congestion and market uncertainty caused by COVID-19 closures.
Prakash, who is based in Belgium, says that even though the Belgian government deemed recyclers and ports essential during the pandemic, COVID-19 still slowed Belgian port operations. His customers moved lower volumes of material and took longer to complete business transactions, which affected buyer and seller liquidity significantly. “People in the ports are working, people in our warehouses are working, but there are less staff overall, less transport on the road. Some European borders are closed, and only certain movement is allowed. That means recyclers are working with lower capacity,” he says.
Gemini and other traders continue to negotiate deals during the pandemic, but business is moving much more slowly because scrap shipments are taking longer to get to their destinations, and importers are buying less from overseas because of the risk that the shipments will get tied up at a port or rolled in favor of higher-value cargo, he says.
Many scrap exporters are taking a wait-and-see approach to shipping overseas, which means they aren’t profiting from shipments but are potentially insulating themselves from losing more money down the road, Samsonovitch says. It could be months before the recycling industry gets a full picture of how those wait-and-see decisions affect the market and individual companies’ bottom lines, he says. “If you’re putting a $100,000 container of copper on the water right now, you’re taking a risk,” he said in March. “Maybe you have an excellent relationship with a buyer … but how are you getting paid if no one is processing it when it gets there? Your container is just on a long list [of containers] this processor is waiting to pick up, and there can be hundreds ahead of yours.” Some companies are in a better position to wait out the congestion and uncertainty than others, Prakash adds. “If your cash flow is positive, and you have good liquidity in your company, that will be your only respite,” he says.
Customers also are experiencing unexpected demurrage and storage costs due to port congestion and other coronavirus-related business disruptions. Some of Samsonovitch’s customers report that their containers are getting caught up in ports around the world because some segments of the workforce—truck drivers, dock workers, recycling yards—are running with skeleton crews or are closed indefinitely, meaning customers couldn’t pick up containers of scrap when they originally planned. End consumers are having trouble scheduling a truck to pick up their container from the port, and many are asking for free time extensions, which is the time a port or ocean shipper allows the customer to store the cargo before picking it up. Some businesses have been able to renegotiate their allotted free days or avoid storage fees for a certain period of time, but other companies have been forced to pay storage fees when they were unable to meet the terms of their original contract, he says. “The client was saying, ‘I need 15 days, not the five we originally agreed on, to come pick it up. Can you help me out?’ It’s a very tricky situation,” he says.
This issue is especially pronounced in India, which declared a national lockdown March 25 to stop the spread of the coronavirus. The lockdown, initially set to end by mid-April but extended until May 31, took scrap exporters by surprise, Adler says. It “was instituted with little notice, so there was material on the water” that can’t reach the ports or the importing facilities, she says. The ports are open for essential goods such as food and medicine, but recycling businesses were ordered to close. “It was such a problem that ships were not even offloading,” Adler says. “When you have that situation in a normal world, they charge demurrage, which is paid by the company that did the exporting. So our companies had all this material on the water, already going to India, [and they were bracing] to pay these demurrage charges.”
India’s Ministry of Shipping ordered ports not to charge ground rent or demurrage during the lockdown, and the ministry’s director general of shipping also ordered shipping lines not to charge demurrage. In a relief to exporters, all the major shipping lines are conforming to the orders, Adler says.
Courier services, which companies in India hire to move original shipping documents, have also been suspended, Adler says, meaning the shipments’ paperwork was not immediately available to Indian customers when they were finally able to retrieve their containers. This could cause more delays and lead to more storage and demurrage fees, she says.
The post-COVID-19 future
The coronavirus pandemic has made ocean shipping even more challenging, but Prakash says recyclers have weathered plenty of economic storms in the past. “Every disruption brings new opportunities. We are always looking for disruptions in the market,” he says. Though it’s too soon to tell the full impact the pandemic will have on the ocean shipping industry, Prakash says he anticipates “massive changes” such as shifts in trade routes. Scrap exporters were starting to send more steel shipments from India to China because there were fewer freight issues and more container availability, “and the demand in China is better than in Europe,” he says. Those trade routes are likely to get stronger, he predicts. The pandemic has also shown recyclers ways to diversify their customer base, he adds. “Some people were too dependent on their business between Asia and the U.S. for certain grades, for example. But with the shutdown, we saw how customers were forced to find alternative routes in the Middle East, Mediterranean countries, and even Africa.”
Pradhan agrees that such severe trade disruptions have forced scrap exporters, freight forwarders, and consumers to get even more creative about how they build trade relationships and buy and sell their scrap. “People are not going to stop shipping scrap,” she says. “We’re all in the business of problem-solving, as well as providing [scrap exporters] the technology and access to rates … and documents. That’s all we can do when we show up to work every day.”
Megan Quinn is senior reporter/writer for Scrap.