2. How did the system break down?
As the world emerged from the pandemic, China recovered faster than other countries, so more containers were raced there as manufacturers tried to catch up. But when they arrived in US ports such as Los Angeles, delays related to Covid-19 clogged one of trade’s main thoroughfares, just as stores tried to meet suddenly soaring demand. Backlogs at truck yards and railroad hubs were compounded by dockworkers calling in sick and shortages of truck drivers. By early 2021, the disruptions had spread to other regions, including Europe. The crisis was worsened by the freak grounding of a giant vessel in the Suez Canal in March, blocking the route in both directions for about a week. Delays are more than just a headache for importers waiting for their goods — they sap capacity from the system, which keeps rates elevated.
3. Why couldn’t the shipping industry adapt?
Concentration in the shipping industry is being blamed for dulling some of the competitive spirit that could have provided adjustments to swiftly changing demand. In 2017, about a dozen container lines that control 80% of the global market formed three main alliances to share ships, cooperate on routes and limit excess capacity, an arrangement that has been likened to an oligopoly. Big companies typically lock in their shipping costs with long-term contracts. But in the pandemic, manufacturers reeling from shortages of key components and higher raw material costs have been forced into bidding wars to get space on vessels. That’s prompted exporters to raise prices or cancel shipments altogether. Some of the carriers — a mix of publicly traded, privately held and government-backed firms mostly based in Asia and Europe — have enjoyed some of their highest-ever profits, including the world’s largest container line, Copenhagen-based A.P. Moller-Maersk A/S. Analysts estimate that the industry may see a windfall of more than $100 billion in 2021.
4. What can be done?
US and European regulators have raised questions about constrained competition. President Joe Biden, in a July 2021 executive order aimed at a number of industries, asked the US Federal Maritime Commission to “ensure vigorous enforcement against shippers charging American exporters exorbitant charges.” The agency was already probing the practice of carriers returning containers to Asia empty rather than waiting for them to be filled with American exports because the eastbound route was so profitable. National authorities can influence a narrow range of industry practices. The Port of Los Angeles — which together with the nearby Long Beach port make up the busiest U.S. container hub — announced that it is moving to begin 24-hour, seven-day-a-week operation after discussions with the Biden administration and labor unions. However, the global nature of the container trade means it’s beyond the reach of national regulators, who are unlikely to be able to do much to control prices.
5. When will it get sorted out?
That’s not clear. Most analysts assumed rates would start to plateau by mid-2021, but they kept climbing before starting to dip in October. The cost of sending a container on the busy route from China to the US West Coast was US$11,000 as of Oct. 7, compared with an average of less than US$2,000 in the decade before the pandemic. A survey of purchasing managers in the U.S. by the Institute for Supply Management showed that shipping challenges had contributed to an increase in the average lead time for production materials in September to 92 days, the highest in data going back to 1987. - Bloomberg Quicktake
Photo by Noel Broda on Unsplash
