. 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.