The Container Crunch

When a pandemic is raging, what do you do with your money?

This is a question which has never much preoccupied economists, but we now know the answer: when you can’t fly off on holiday, take in a concert, go out to dinner, or send your toddler to child care, you spend your money on stuff. Especially in Europe and North America, we’ve seen a surge in spending on consumer goods, many of which are imported from Asia.

That’s one reason ocean shipping costs are soaring. A year ago, sending a truck-size 40-foot container from Qingdao to Long Beach cost $1,500 or so; these days, unless there’s a long-term contract that locks in a lower rate, the price is three times that. Some shipments from Asia to Europe are said to have cost more than $10,000 per box, four times as much as last summer. On average, ships are much larger than they were just a few years ago, complicating loading and unloading and often leading to delays even on short-haul routes. Many sailings are being cancelled due to ships being out of position, which makes capacity even more scarce and allows carriers to hike prices.

But that’s not the whole story. The stunning increases in freight rates are the consequence of a prolonged shake-out in container shipping that has left about 85% of global capacity in the hands of three alliances of ship lines. The carriers have scrapped older ships while curbing orders for new ones, so the overcapacity that plagued the industry as recently as last summer, when more than 6% of the global fleet was idle, has pretty much vanished. Although the companies in each alliance remain independent, the alliance structure allows the industry to maintain a certain discipline when it comes to building new ships. There are still 20 or more companies outside the alliance system, but they collectively control so little capacity that they don’t much interfere with the dominant players.

For the moment, everybody in the industry is making real money for the first time in a dozen years. Once the pandemic-driven boom is over, though, the growth of international trade will likely turn sluggish as consumers in upper-income and middle-income countries up their outlays on services, including education and healthcare. If the world economy grows 4% to 5% per year, as the International Monetary Fund expects, the number of containers moved by sea might rise 2% to 3% annually, on average. That is well below what shipowners were expecting when, a decade ago, they started ordering vessels each able to carry more cargo than 10,000 trucks.

Equally problematic, most of the growth in container shipments will come on routes from East Asia’s factory hubs to South Asia and Africa. These routes are relatively short, which means that over the course of a year, a vessel can carry twice as many containers between Shanghai and Mumbai as between Shanghai and Rotterdam. The industry will probably require less tonnage as trade patterns shift. My guess is that profits will be harder for ship lines to come by, and old timers will fondly recall the days when it unexpectedly cost more to ship a metal box from East Asia to Europe than to fly there first class.

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