BLOOMBERG, JANUARY 27, 2021
By Brendan Murray for Bloomberg
Sixty-five years ago, a North Carolina trucker named Malcom McLean pioneered the standardized shipping container, launching a global trading system that lifted millions of people out of poverty and created a generation of discount-minded American shoppers. Those boxes are now at the center of a worldwide transport puzzle as a shortage of containers in the right places has disrupted supply chains, idled car factories and sparked a surge in costs that’s pinching companies and consumers. Here’s a look at how a system so geared to move massive quantities of goods has been so slow to adapt.
1. What caused the problem?
In the simplest terms, the supply of containers fell well short of demand where and when they were needed most. According to Container xChange, an online platform based in Hamburg, Germany, there are 25 million containers in use worldwide making 170 million trips a year and another 55 million made when they’re empty — on return voyages or to be realigned with demand. The system usually works well but can run aground trying to adjust to sudden, unpredictable shocks. Enter the pandemic of 2020, when even the most sophisticated economic risk models were useless.
2. How did the system break down?
When the demand for goods rebounded more strongly than expected in the second half of 2020, the varying speeds of recovery across the world created a container shortage between China and the U.S., clogging one of the main thoroughfares. That led to backlogs at U.S. ports, truck yards and railroad hubs that handle intermodal freight. With dockworkers out sick and shortages of truckers, there’s plenty of blame to share on land, too. By the start of 2021, the system was nearing a breaking point and the disruptions spread to other regions, including Europe. A key point to remember: Most rates that big companies pay for shipping are spelled out in annual contracts with the carriers — not the volatile spot rates grabbing headlines. And those fees don’t include premiums now commonplace to ensure more reliable services like guaranteed loading.
3. Why couldn’t it adapt quickly enough?
The industry’s consolidation left it less nimble to respond to demand swings but swifter and more unified in cutting capacity — and as a result, keeping rates elevated. About half the world’s containers are owned by the 10 major shipping companies and the rest are leased to the carriers by leasing companies, or owned by freight forwarders or other cargo handlers. The carriers — a mix of publicly traded, privately held and government-backed firms mostly based in Asia and Europe — sail along routes on fixed schedules matched to their expectations for market forces, handling about 90% of the worldwide trade in goods. After years of cutting capacity and creating alliances to boost efficiency, companies such as Copenhagen-based A.P. Moller-Maersk A/S are now enjoying some of their best profits in years. But the deals have also raised concerns about concentration that’s hurting competition. The carriers have also stirred controversy by returning containers to Asia empty rather than filled with American exports because the eastbound route has been so profitable. The U.S. Federal Maritime Commission is investigating.
4. Who pays the higher costs?
Ocean freight is like any other cost companies have to bear. Sometimes they absorb it, sometimes they pass it along to customers in the form of delivery surcharges or higher sticker prices. On Jan. 20, Proctor & Gamble Co. cited headwinds to its earnings outlook including $100 million in higher freight costs after taxes. While that’s a fraction of its nearly $20 billion in quarterly net sales, small businesses may have a harder time. To be sure, even with shipping rates as high as they are, it’s still a relatively cheap way to move goods: If a container full of 1,000 televisions cost $1,500 to send across the the Pacific Ocean a few years ago, the unit cost per TV was $1.50. If the container rate tripled — as it had around the start of 2021 — the per-unit cost of $4.50 is probably not enough to deter purchases if passed to consumers. The U.S. Federal Reserve flagged rising shipping costs in the summary of its Beige Book survey of the U.S. economy in January.
5. How long is it expected to stay gummed up?
Most analysts expect the problem to resolve itself in the first or second quarter of 2021. In the weeks heading into the Chinese Lunar New Year holiday Feb. 11-17, industry observers will be keeping close tabs on the number of blank sailings — voyages the liners cancel in anticipation of weaker demand. Last year, dozens of trips were scrapped as the pandemic spread. Lars Jensen, Chief Executive Officer of SeaIntelligence Consulting in Copenhagen, said on a webinar Jan. 26 that some blank sailings are happening out of “operational necessity” because of issues like port congestion — not because of the carriers’ desire to reduce capacity during the crisis. So if ships keep running full steam and routes remain overwhelmed, transport snarls might linger and rates could stay elevated for months longer. Vincent Clerc, head of the ocean transport division at Maersk, the world’s largest container liner, told reporters in January that rates probably will peak at some point during the first half of the year, but he cautioned that the company only has about four to six weeks of visibility.
6. How do I sound like an expert?
Like most industries, shipping has its own jargon. Here’s a list that will help market-watchers talk like a sailor:
- OCEAN CARRIERS: The container shipping companies, also called liners or carriers.
- ALLIANCES: The biggest liners have formed alliances similar to airlines’ code-sharing arrangements to extend their reach, share ships and maximize capacity.
- SHIPPERS: Not to be confused with the container carriers, shippers are the companies that need to have goods imported and exported. It’s their cargo that the liners are hauling. Think Walmart Inc.
- FREIGHT FORWARDERS: Agents that contract with the carriers to move goods on behalf of companies.
- TEU: Short for 20-foot equivalent units, this is the standard unit for measuring containers and ship capacity. Another widely used size of the steel boxes comes twice as long.
- INTERMODAL: The system designed to move containers seamlessly around the world on ships, trucks and trains.
- BLANK SAILINGS: A canceled voyage, or a port that’s skipped, sometimes without much advanced warning.
- ROLLED CARGO: Freight that gets bumped from a scheduled sailing that’s overbooked — not unlike the way airlines oversell seats on planes. It was a big problem in 2020.
- BACKHAUL: Cargo carried on the return trip. Westbound Trans-Pacific backhauls have stirred controversy recently because the liners have returned containers to Asia empty.
- DEMURRAGE/DETENTION CHARGES: Extra fees the carriers charge shippers for returning containers or other equipment late. Truckers and others complain about these penalties when the system is overstretched.
- REJECTION RATE: When freight forwarders decline to take cargo, despite having already agreed on a contract.
The Reference Shelf:
- An Odd Lots Podcast: “Why the Cost of Shipping Goods From China Is Soaring.”
- Smithsonian Magazine article on McLean’s legacy creating the now-ubiquitous shipping container.
- A Jan. 20 report from Lee Klaskow, senior logistics analyst at Bloomberg Intelligence.
- The humanitarian crisis of stranded seafarers is explored in this Bloomberg.com story thread.
- Books on the impact of containerization include “Giants Of The Sea: Ships & Men Who Changed The World” by John McCown, and “The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger” by Marc Levinson.
- Bloomberg articles on shipping bottlenecks and the headwinds the crunch creates for the global economy.
— With assistance by Christian Wienberg
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