Why supply-chain snarls still entangle the world
FATHER CHRISTMAS and the global container-shipping industry have similar objectives, though the timescales differ. Santa’s world-spanning logistics operation aims to deliver presents all in one night. Shipping firms step theirs up around September to ensure that gifts and other seasonal goods join a vast global supply chain. But a system that usually operates unnoticed (and unremarked upon) is still in chaos. For months a covid-induced maelstrom of delays and sky-high shipping rates has left goods lingering at sea and shop shelves bare around the world. Politicians insist that the snarls will disappear. But survey the horizon and there is little sign of smoother sailing.
The pandemic has hit shipping firms’ operations along the supply chain. Labour shortages have been worsened by workers forced to isolate. China’s zero-tolerance measures have closed port terminals after the discovery of one or two covid-19 cases. The spread there of the new Omicron variant makes more closures likely. But the most significant impact of the pandemic has been to ignite demand for goods from self-isolating shoppers, particularly Americans eager to buy Chinese products using stimulus money. The value of merchandise goods exported from China to America was 5% greater in the first six months of 2021 compared with 2019, before the pandemic. In September and October it was 19% higher than two years earlier.
The result is that shipping rates are not coming back to earth. A set of benchmark spot rates from Freightos, a digital freight marketplace, between China and America’s west coast are below a recent peak. But at around $15,000 per FEU (40-foot equivalent unit), they are ten times pre-pandemic levels (see chart 1). The outsize appetite for goods in America has had a knock-on effect elsewhere. A shortage of vessels, drawn by high rates to the trans pacific routes, has pushed the cost of sending boxes between China and Europe to record levels. That raises costs for businesses that rely on shipping firms. Small items such as smartphones or sports shoes can be packed by the tens of thousands into a container. But a rough estimate of the average value of goods in a box travelling between China and America is around $50,000. Another $15,000 makes a significant difference.
To eye-watering costs add lengthy delays. Ports, unused to such volumes of traffic, face long queues of ships waiting weeks to unload. In a system already stretched to the limit by lack of lorry drivers and warehouse space, up to 15% of the global container fleet is currently sitting at anchor outside the world’s ports.
Apparent signs of improvement are illusory. A widely watched indicator, the armada waiting to offload goods at the twin ports of Los Angeles and Long Beach, America’s main entry points for Chinese imports, now numbers some 30-40 vessels, down from 70-80 in October. However, that is mostly because a recent change to the queuing system means that ships are now asked to wait far out at sea (some even linger off the Chinese coast). The real queue is over 100 ships.
Relief from this congestion does not look imminent, and the longer it builds the longer it will take to unwind. Most pundits see little hope of improvement until after Chinese new year in February. Disruptions may last all of 2022. Though rates may have hit a peak, they are unlikely to fall much in the next six months and are set to remain elevated into 2023, thinks Lars Jensen of Vespucci Maritime, a consultancy. Only then will new vessels ordered in response to high rates start to hit the waves.
Even if spot rates have peaked most customers will face higher bills in 2022. The long-term contracts that govern the bulk of container traffic are currently far lower than spot rates—perhaps $2,500-3,000 per FEU between China and America. But as David Kerstens of Jefferies, a bank, points out, spot rates inform contract rates. In 2021 two-thirds of the contracts signed by Maersk, the world’s biggest container-shipping firm, which controls a fifth of the global market, have been long-term ones. As Maersk’s contracts and those of its rivals roll over, the rates could double. And with customers more concerned about securing scarce capacity than haggling over price, some are signing contracts for two years rather than one.
Fears that a trend for “near-shoring” might hit demand seem unwarranted for now. Soren Skou, boss of Maersk, sees little evidence of it so far. Many firms that source supplies from China are having doubts about relying on one country. A “China plus one” policy of adding a supplier in another part of Asia, such as Vietnam or Thailand, needs more ships to transport these goods directly to America or to giant Chinese hub ports for their onward trip.
The industry’s response to the crunch reflects changes to its structure that predate covid-19. In the words of Rahul Kapoor of the Journal of Commerce, a sectoral must-read, “The era of cheap shipping is behind us.” Shifting goods around the world has been inexpensive because the response to high rates has historically been a frenzy of orders. That, in turn, has led to a flood of vessels that arrive just as economic conditions worsen and trade slows.
But bloody price wars over market share may be gone for good. Since 2016, when a previous ship-ordering binge collided with slowing trade, collapsing rates and big losses, the industry has consolidated—20 big firms have become seven bigger ones in three global alliances. This has helped them manage capacity more ruthlessly. As a result, the cyclical industry may suffer shallower and shorter downturns, says Parash Jain of HSBC, another bank.
The strange result of the pandemic is that the industry is awash with cash. Simon Heaney of Drewry, a consultancy, says that profits could reach $200bn in 2021 and $150bn in 2022, an unimaginable bonanza beside the cumulative total of around $110bn for the previous 20 years. As well as returning cash to shareholders, Maersk may acquire more firms in e-commerce fulfilment and air-freight as part of its effort to build an end-to-end logistics business that ferries goods by sea, land and air, taking on DHL and FedEx. Other big container-shipping companies such as China’s COSCO and France’s CMA-CGM are doing the same.
The big question is how much new capacity is in the offing. As world trade boomed in the years before the financial crisis of 2007-09, order books were roughly equivalent to 60% of the existing fleet. They now stand at a little over 20%. Restraint is due in part to uncertainty over the technology needed to make vessels which have a 25-year lifespan compliant with tougher carbon-emissions rules that the industry is expecting. Still, capital discipline may have its limits. Orders have begun to swell again (see chart 2). But it will take two to three years before ships ordered today start rolling down slipways. The era of pricey shipping could well last for another Christmas or two. ■
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An early version of this article was published online on December 15th 2021
This article appeared in the Business section of the print edition under the headline “All at sea”