At the time of writing the MSC New York is just off the coast of China at Ningbo waiting to offload its’ cargo of containers.
Miquel Serracanta Domenech asked me a question last week about my thoughts on the disruptions in global shipping following disruption at Yantian and other ports in China due to Covid 19. A supplementary question was what will the new normal look like? Many businesses are asking the question: Where is my box? This got me thinking more about the problems currently being experienced by many businesses who want to import or export their goods and the knock on effect it has on global supply chains. In this article I want to examine global sea trade carried by containers in a little more detail.
Is it a case of Plato’s cave when it comes to inflated prices being charged by shipping companies and multi-modal logistics firms? In Plato’s allegory the slaves were kept in check by the appearance of guarding soldiers behind them casting large shadows onto a wall of the cave that the slaves faced. They could not look around to see the world as it really was with normal sized people not giants under penalty of death. The world they could see was one of appearance. So it is with firms acting as a single supply monopoly or colluding as an oligopoly visibility is obscured from view for the customer and this facilitates price fixing for cartels. Increasing concentration with shipping owned and controlled by a relatively few large companies and the biggest multi-modal logistics companies handling a high percentage of cargo is it the case that the rapid rise in prices for containers is somehow being artificially inflated to recoup lost profits during the pandemic? If you work in shipping let me know what you think?
Things are desperate for some UK businesses attempting to book containers to move their imports and exports. Reports of price increases as much as five times higher than a year ago for containers between Chinese ports and the UK with average box prices up by 400 per cent. Similar price increases are being experienced in the EU and in the United States. The main reasons given by shippers and logistic firms is that there is a box shortage and yet there are now more boxes in the world than ever according to the statistics held by UNCTAD, World Shipping Council and the large shippers operating in these markets. So where are they? Where’s my box? Another reason given is that boxes are in the wrong places and the shippers have not been able to move as many empty boxes to the return ports as they would in normal times. Demand for boxes is also said to be higher than normal. While these reasons are plausible it is also clear that the profits earned by the largest players are increasing despite Covid 19. So is it the case that these large businesses dominating the global sea trade have seen an opportunity to clawback some profit by fixing higher prices through a quasi cartel?
In recent episodes of my Chain Reaction Podcast disruption and complexity have featured heavily. Disruption is number one in my list of trends to be managed to achieve supply chain advantage. Layered complexity is also in my top ten too. Today’s supply chain networks are complex and the type of system complexity is what I describe as layered. Since the Suez Canal hold up caused by the Evergiven container vessel stopped the flow of sea freight travelling through it in March the situation has worsened and now we have many ports in China stopping ships from entering or leaving because of an increase in Covid 19 in their sea terminals. According to Maersk this has increased delays by two days from 14 to 16 days. This is adding much time and layers of complexity to moving goods around the globe. Nearly one quarter of China’s exports pass through Guangdong and the port cities of Shenzhen and Guangzhou. Other ports in the province including Yantian, Shekou, Chiwan and Nansha, have stopped vessels from entering. Ninety five per cent of electronic goods out of China travel this route.
When shipping lines carry containers to a port of discharge where cargo is unloaded they request permission to enter and dock at an unloading berth where the containers are lifted off the ship. Usually they are loaded either directly onto waiting transport where they are either moved directly to their onward destination or to a storage facility. If cargo gets stuck at a port for longer than the permitted berth time it incurs charges known as demurrage. These fees are expensive. They are an incentive to get things moving. Excessive delays can incur costs greater than the value of the container. Containers are often provided by shippers and they expect them to be returned to use as soon as possible after discharging cargo. Customers return them to the allocated port where they are picked up and put back in use The shipper may have to move them to a pickup port.
Detention Charge: The customer picks up the container from the shipper and loads the cargo in the box wherever they have the goods stored. The container is then delivered to the embarcation port. There is a time allowance for doing this part of the operation. If the customer keeps the container longer than that time they incur a detention charge. If customers exceed the free day allowances that shippers give they have to pay detention charges until they are returned to use. Ten years ago it was rare to have detention charges. Nowadays such charges can be $100 per day so you can soon run up a large bill.
Demurrage Charge: Once the container is inside the port again there is a time allowance for any loading or unloading. If this is exceeded then demurrage charges apply.
How much global trade travels by sea?
About 80 per cent of Global Trade by volume and 70 per cent by value travels by sea freight and 60 per cent travels from Asia with one-third of maritime trade travelling through the Straits of Malacca and through the South China Sea (Source: United Nations Conference on Trade and Development UNCTAD). Trade passing through the South China Sea is valued at $3.71 trillion. Europe and the US are heavily reliant on these trade routes. Sea freight is one of the biggest disrupters when it goes wrong the impact is high and the interconnected supply networks feel the full effect with many businesses and consumers detrimentally affected. Fifty Two per cent of DWT is under control of just five nations; Greece 18%, China 11%, Japan 11%, Singapore 7% and Hong Kong China 5%. Sixteen per cent of all merchant ships are registered in Panama. The beneficial ownership will of course be located elsewhere.
Even prior to the recent disruption some signals were already emerging from the noise. I recently mentioned the sharp increase in the cost of hiring 20 and 40ft sea containers had risen with 40ft boxes rising from around $4,000 to $10-12,000 moving freight from China to the US. Moving goods in a 40ft container from Shanghai to Rotterdam is costing in the region of $10,000-11,000 up by 350-400 per cent on prices last year. This will feed into business costs and consumer prices in the months ahead. Price inflation is likely to increase as the shortage of boxes intensifies. Most of the world’s sea containers are manufactured in… you’ve guessed it…China. Many boxes are tied up in the supply chain as they remain at ports, on ships and elsewhere because it is taking much longer to complete shipments than it did prior to the pandemic. This extra time is adding to the pressure on the existing container stocks. Three in four containers returning from Los Angeles to China do so empty. Maersk estimate it costs them $1 billion to ship and reposition empty containers annually. Most shippers want their empty containers in Asia for the next pick up. There is also a mismatch of increased demand to shrinking supply for transport.
Facts About the Boxes
It is estimated that there are 93,161 maritime vessels (Various Sources), 5,222 of these are container ships. The capacity of container boxes in use is estimated at 38.5 million dead weight tonnage (DWT), This is the weight of everything on board a vessel including cargo, people, water, ballast, fuel, food and crew. Around 1,400 containers are lost at sea annually on average. Sometimes but not often a whole ship sinks which pushes averages upwards. In a normal year up to 6 million containers are manufactured usually in China where they make 97 per cent of all containers. There are two standard boxes known as the 20ft and 40 ft container with a height of 8’6″ (High Cubes are 9’6″). While the 40ft box is exactly that the 20ft box is 19’10”. In addition there are 6 million High Cubes which are 9’6″. These containers make about 200 million trips p.a. equivalent to 811 million Twenty Foot Equivalent Units (TEU) carrying $4 Trillion in container cargo value. They travel to 150 ports in over 80 countries.
There is no complete register of containers but best estimates suggest that there are:-
- 23 million shipping ‘in service’ containers or 38.5 million TEU ( of these about 67% are 40ft and 33% 20ft)
- 14 million not in-service shipping containers or 23.3 million TEU
- 6 million new shipping containers or 10 Million TEU added annually
Total 43 million Shipping Containers or around 72 Million TEU
So if there are 23 million containers in use, 14 million not in service and 6 million new boxes added each year it appears that there are close to double the number of boxes available than are currently in use. This suggests that the efficiency level in container utilization is exceptionally low compared to other parts of the supply chain. So where is my box? There have obviously been disruptions die to Covid 19 but is this sector doing enough to remedy the situation? In normal times pre-pandemic demand was obviously more predictable and less volatile than it is today. Inefficiency is disguised when you can operate at lower volumes. So it maybe that there has been no urgency to improve customer service until now.
Reverse Logistics
Reverse logistics is the big issue to be tackled in shipping. It doesn’t make sense to move empty containers on large ships half way round the globe in large quantities. Maersk alone moves 4 million boxes empty to get them to where they are needed. Maersk has 16 per cent of the market in shipping containers. Improvements were made in road haulage transport when attention was paid to backhauling rather than returning empty so perhaps this is one area that needs attention if bottlenecks are to be avoided to make the supply chain more resilient. One suggestion has been for shippers to co-operate by sharing containers so that the empty box is reused at the destination port by other shippers to improve efficiencies. It cannot be that difficult in the digital age to set up a digital register of containers so that shippers have visibility to allocate, reuse and return boxes to ports of origin or somewhere else where it is needed.
So what does the new normal look like?
Well it looks disrupted. Supply chains and networks are going to need to employ agile and flexible solutions to the continuous disruptions likely to break-out without much notice. Contingency planning is the name of the new normal. Each and every supply network needs to audit and assess the vulnerabilities and risks in order to plan for those ‘what if’ moments that are likely to be more frequent. Shipping has to be a high priority to address for many. However, if you were to look beyond this immediate shipping crisis to the root-cause analysis it would suggest that Western businesses have become too reliant on China and Asia to satisfy their every need and it is the imbalance of global trade that is a major risk. A new normal might begin to examine what it takes to rebalance trade.
Layered complexity means that this has to be tackled by governments creating incentives to encourage investment in production hubs, service centres and transport infrastructure. In the United Kingdom these are areas that have for too long been put on the back burner. In the US the Biden Administration is committed to making supply chains more resilient and this requires significant investment. It would be good for UK policy makers to do something similar. If government needs some encouragement to think this through then it might be worth pointing out that Factory costs in China have risen by more than 9 per cent in the past year which is higher than in the previous decade. They are likely to continue on this trajectory in the short to medium term as they struggle to contain cost. Consumer price inflation in the US,UK and Europe is also on the rise. While international trade brings many benefits it has to be balanced. Balance is needed for stability, risk reduction, reduced environmental impact and to secure employment. It is also necessary to build strategic capabilities. While China has been building its strategic capabilities much of the developed world has been sleep walking into a turbulent future. Downsizing, offshoring and outsourcing may all sound attractive when faced with immediate threats or in search of immediate returns on profit and performance measures. They were relatively easy ways for global companies and their accountants to push cost overseas while at the same time lowering them. It is not the way we should build the future. We need to build back better. It is time to reskill, relearn and reinvest for a better future. This is not a simple argument to re-shore or near-shore although there may be benefits in doing so in some cases. This is an argument about rebalancing the economy. A manifesto for making it resilient and fit for purpose.
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