A HUGE SHIP wedged across the Suez Canal, record-breaking shipping rates, armadas of ships waiting outside of ports, Covid-related downtime: the container shipping business has rarely been as dramatic as it was in 2021. The average cost of shipping one Standards large container (a 40-foot equivalent unit, or FEU) has exceeded $ 10,000, about four times more than a year ago (see graph). The spot price for shipping such a box from Shanghai to New York, which would have been around $ 2,500 in 2019, is now just under $ 15,000. A late booking on the busiest route from China to the American west coast could cost $ 20,000.
In response, some companies are taking desperate measures. Peloton, a manufacturer of expensive exercise bikes, is switching to air freight. But the costs are also sky high – twice as high as in January 2020 – as the capacity, half of which is normally provided in the holds of passenger jets, is limited by curbs on international flights. Home Depot and Walmart, two American retailers, have chartered ships directly. Pressing in unsuitable vessels has proven to be almost catastrophic. An attempt in July to move containers on a bulk carrier, which usually carried coal or iron ore, was hastily abandoned when the cargo shifted and forced a return to port. More and more containers are traveling through Asia by train. Some are even reportedly being transported from China to Europe and then shipped across the Atlantic to avoid congested Chinese ports.
Trains, planes and trucks can only do so much, especially when it comes to transporting goods halfway around the world. Container ships haul around a quarter of the goods traded worldwide by volume and three fifths by value. Often you have the choice between payments and delays in busy ports or no import at all. Worldwide, 8 million TEU (20-foot equivalent) are in port or waiting to be unloaded, an increase of 10% compared to the previous year. At the end of August, over 40 container ships anchored off Los Angeles and Long Beach. These serve as parking lots for containers, says Eleanor Hadland of Drewry, a shipping consultancy, to avoid clogging ports that lack trains or trucks to load goods into already full warehouses. The “pinch point”, she adds, “is the entire chain”.
For years, container shipping kept supply chains running and globalization was booming. With store shelves well stocked and products from the other end of the world showing up on customers’ doorsteps on time, the industry hardly attracted any outside attention. Shipping is “so cheap that it was almost insignificant,” says David Kerstens from Bank Jefferies. But now, as the glitches pile up, the metal boxes are losing their reputation for low prices and reliability. Few experts believe that things will get better before the beginning of next year. The ongoing distortion could even accelerate a reorganization of world trade.
Shipping is so tense, among other things, because the industry, which normally steams from a short-lived boom to an ongoing bankruptcy, enjoyed a rare period of sanity in the run-up to the pandemic. Stephen Gordon of Clarksons, a shipbroker, notes that the industry demonstrated self-discipline through 2019, with capacity levels and the order book for new ships under unfamiliar control. Then came Covid-19. In anticipation of a slump in trade, shipping companies shut down 11% of the world’s fleet. In fact, however, trading stopped and interest rates began to rise. And in the face of the stimulus cash, Americans started spending money.
In the first seven months of 2021, freight volumes between Asia and North America rose 27% from pre-pandemic levels, according to BIMCO, an association of shipowners. Port throughput in America was 20% higher in the second quarter of 2021 than in 2019. The rest of the world, on the other hand, saw only slight growth – Northern Europe is only 1% higher. Still, rates have skyrocketed on all routes as ships have set sail to service the lucrative transpacific trade and others are losing capacity.
A system that has been pushed to its limits is subject to a “cascade effect,” says Eytan Buchman from Freightos, a digital freight marketplace. A diversion and rescheduling would once have mitigated the closure of part of Yantian, one of China’s largest ports, in May and then of Ningbo, another port, in August following Covid-19 outbreaks. But that doesn’t work without free capacity. “All floating ships are used,” says Soren Skou, head of Maersk, the world’s largest container shipping company.
Empty bins are in the wrong places. Port congestion puts ships out of service. In July, the industry moved 15 million containers, more than before the pandemic. Still, the average door-to-door shipping time for ocean freight has increased from 41 days a year to 70 days, Freightos says.
Some observers believe that after the Chinese New Year next February, usually a low season, things could return to normal. BIMCO’s Peter Sand says it could take up to a year to breakdown. Lars Jensen of Vespucci Maritime, a consulting firm, notes that a dock workers strike on the American west coast in 2015 caused similar disruption, if only in the region. It took another six months to clear the backlog. On the demand side, a lot depends on whether American consumers’ willingness to buy continues. Although retail sales fell in July, they are still 18% above pre-pandemic levels, the consultancy firm Oxford Economics points out. But even if American consumer demand subsides, companies will save huge sums of money by replenishing supplies from the buying frenzy and preparing for the Christmas season at the end of the year. And there are signs that demand in Europe is picking up.
A bedrock remains in a sea of uncertainty. The profitable industry is reacting as usual and is setting an annual record for new orders for container ship capacities in less than eight months of this year, says Sand. But with a waiting period of two to three years, this drain valve will not go into operation until 2023. Today there are significantly fewer shipyards: 120 compared to around 300 in 2008, when the previous record was set. And shipping, which is responsible for 2.7% of global carbon emissions, is under pressure to clean up its policies. Tighter regulations will come into force from 2023.
The result is that the industry “will remain cyclical,” but with interest rates normalizing at a higher level, says Maersk’s Skou. Discipline can be more permanent in both ordering and managing existing capacity. Greater consolidation helped – the top ten companies have 80% of capacity, compared to 50-60% a decade ago.
The effects of higher shipping costs depend on the type of goods being transported. If you want to buy cheap and bulky imported goods such as garden furniture, you may have to wait a long time. Mr. Buchman notes that current spot rates could add $ 1,000 to the price of a sofa traveling from China to America. In addition, the effects on product prices have been dampened so far, as around 60% of the goods are subject to contractual agreements with previously agreed shipping rates and only 40% are subject to sharply rising spot prices.
Still, for most products, shipping costs are usually a small percentage of the total cost. The head of a large global manufacturer based in Europe says the extreme costs are now “bearable”. Even with persistent disruptions, the shipping rates could not increase any further. CMA CGM, the world’s third largest container shipping company, stunned industry observers on September 10 when it said it would cap off spot rates on ocean freight. Others could follow suit.
The cost of decarbonization will eventually level off at a higher level than before the pandemic. However, research from Maersk suggests that this may not affect customers very much. Even if sustainable fuel cost three times the dirty stuff and the cost of fuel per container in the Pacific rose to $ 1,200, the impact on each item for a container of 8,000 pairs of sneakers would be minimal.
Instead, it is the problem of reliability that can change the way companies think. “Just in time” could give way “just in case,” says Sand, as companies protect themselves from supply bottlenecks by building up stocks well above pre-pandemic levels. Reliability and efficiency could also be accelerated by using technology in an industry that has long resisted its adoption. As Fraser Robinson of Beacon, another digital freight forwarder, points out, supply chains can be made more stable by using data to create better “visibility,” e.g. earlier.
So far, there is hardly any evidence of “nearshoring”, except in the automotive industry, says Skou. But the combination of trade war, geopolitics, and Covid-related disruption can all together cause trade patterns to move away from China. Some Chinese companies and the companies they supply are moving their production to low-wage countries in order to diversify supply chains and bypass trade barriers. Jefferies’ Kerstens notes that trade from China to America fell 7% in 2019 after America imposed tariffs on China under President Donald Trump, but American imports overall remained stable as countries like Vietnam and Malaysia built the slack. Protection against Covid-19 shutdowns, especially given China’s zero tolerance for infections, could be another reason to move away.
The shipping companies for their part may be preparing for a more regionalized trade. For ships of 13,000-15,000 TEU, the order book is full, smaller than the mega-ships that can only be handled in the largest ports. Vietnam opened a new deep-sea terminal in January that can handle all but these largest ships.
However, especially with complex products, it is difficult to find new manufacturers. And building buffers in supply chains is costly. But it is said that some manufacturers of cheap clothing and consumer goods are starting talks about deglobalization. If the higher costs persist and reliability remains an issue, some will argue that the benefits of being close to suppliers will outweigh the costs of shipping goods far away. Even shipping companies admit that customers are currently feeling discouraged with high rates and a lack of reliability. With few alternatives to ships for moving goods, the only option is to relocate the factories that make them.