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 early 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. The crisis has been worsened by the March 23 grounding of the 200,000 ton Ever Given container vessel in the Suez Canal, blocking the route in both directions and forcing other ships to either wait for it to be cleared or take a detour around South Africa.
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 has been 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. 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?
The cost of shipping goods across the world’s oceans may stay high for a year or more as consumer demand stays strong and the already tight supply of capacity to move cargo commands a premium, according to McKinsey & Co. It’s easy to understand why, looking off the coast of Southern California. The number of anchored container ships waiting to enter the ports of Long Beach and Los Angeles stood at 29 in late March, with an average wait of more than a week. 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 were 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.
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.
• 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 nimble fleets, shipping bottlenecks and the headwinds the crunch creates for the global economy.
(An earlier version of this story was corrected because the company corrected container figures in section one.)
World News || Latest News || U.S. News
Help us to become independent in PANDEMIC COVID-19. Contribute to diligent Authors.