Demurrage and Detention Charges have ‘Become a Significant Cost Centre for Shippers’
Increased by 12% Worldwide
Surplus containers are piling up at warehouses as demand wears out, resulting in rising demurrage and detention charges, contributing substantially to the operational costs for shippers. These were a few inferences that were discussed during a recent webinar hosted by Container xChange, world’s leading technology platform and infrastructure provider for container movement.
A powerful panel of speakers from Drewry, S&P Global, and Container xChange discussed the impact of charges on shippers worldwide amidst the changing dynamics of demand and supply for containers on a global scale.
Forecasts shared by the experts on the panel indicated a potential further flattening of demand into the peak season. However, it also was emphasised that the impact of the disruptions will take time to wither irrespective of containers moving at a greater or slower pace into the coming holiday season.
George Griffiths – Editor, Global Container Freight, S&P Global Commodity Insights said during the discussion, “The shipping industry is going to see the freight rates stay flat for the rest of the year; however, it could see a little variance but might not fall off the cliff to the extent that we saw it rise when it did in 2020 and 2021.”
Falling Demand behind 2022’s unconventional peak season
Explaining on why the peak season is going to be unconventional, Chantal McRoberts, Head of Advisory, Drewry Supply Chain Advisors said, “There is massive inventory levels that have been building up, if you speak to shippers, they’ve got a lot in their warehouse that they need to move, and demand is falling”.
“I firmly believe if nobody wants to ship anything on a container in the next six months, we still wouldn’t fix the issues that we’ve got in the market at this point. The market is really snarled up, and it’s going to take a lot of effort to fix it,” said Griffiths.
Even if the demand eases towards normal standards and the vessels on blank sailings are used to clear up the disruption, ironing out the market issues at hand are going to be towering.
Emphasising on the uphill task of easing the supply chain disruption, Christian Roeloffs, Co-founder and CEO, Container xChange, added, “We’ve always compared the flow of containers situation to a traffic jam. If there’s an accident and a traffic jam, even if the accident is cleared up it still takes a very, very long time for traffic to flow again… it’s not the case that you just resolve the blockage and then everything flows.”
Pandemic-induced container imbalance adds to soaring D&D charges & freight rates; D&D charges remain at a 12% high despite a fall in 2022
Insights from the annual Demurrage and Detention benchmark report showed that there was a major spike in D&D charges in 2021, the global average increase was 39% for standard containers whereas the charges for 20 distribution centres doubled in 2021.
Looking at the 2022 scenario, the trend in 2022 has been decreasing slightly. For some outlier ports, like Long Beach, Los Angeles, and Shanghai, the charges increased so much that it ended up with the value in 2022 still being higher than pre-pandemic value by 12%.
“The pandemic has thrown a variety of challenges towards the world, when it comes to demand and supply, it has shown some unlikely trends in the market. Ahead of the peak season, and the lifting of Shanghai lockdown, it should have given a bullish impetus to the shipping industry, however, the demand did not materialise.
Congested supply chains added to the mounting charges which in return made it harder to both extract containers from terminals and return empty equipment.
Griffiths said, “In the U.S., for instance, carriers have been really incentivized to keep a tight leash on their equipment due to high freight costs, meet demand, and log jammed into modal networks; within their purview, they’ve taken the cost of the containers on board.
They need to have their equipment back to keep the flow going and be able to reposition the containers. And I think that’s an important nuance in the container market. So that’s why we’re starting to see these costs increase on detention and demurrage, it is because these charges are designed in such a way that it compensates carriers for the use of their containers.”
Further explaining the root of rising D&D charges, McRoberts said, “It’s clear that supply chain disruptions are driving an increase in detention and demurrage charges. If there’s a shortage of drivers, a shortage of physical people and vehicles to get the containers into the ports and out of the ports, it consequently increases the D&D charges.
“These physical blockages had pushed up charges for shippers, and while the situation was easing, a full clearance of backlogs on the discharge front would not come until next year.”
Shippers may get respite from the soaring charges only if congestion is alleviated
Discussing the scenario behind the hefty D&D charges, Griffiths said, “Many, many carriers and operators have introduced strict free time parameters, and as a result these charges for delays have been levied against the shippers. They’ve become a significant cost centre for shippers. Previously, this was a transient cost, people didn’t really look at it. People didn’t pay that much attention to demurrage and detention. But now it has become a cause of concern”
Talking about respite McRoberts said, “There is some latent capacity coming in next year which should help equalise the supply/demand balance, and if we can get the pedal easing off the accelerator of port congestion, then hopefully that will positive ramifications on the cost side.
In the meantime, shippers should be asking questions about what they can and cannot get in the contract bids. You need to make sure you are nailing down free days in your tenders. It is about maximising any opportunity on a hopefully softening cost element. Regulation, however, was likely to have less of an effect than some shippers hope for.”
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