What Made Shipping Containers So Expensive and Attractive?

Remember the 300-feet-wide and 1,300-feet-long clog in the Suez Canal during March earlier this year?

News is that recently, the ship Ever Given passed through the Canal again and managed not to choke it this time!

But it did manage to bring back old memories of the two weeks which shook global supply chains and shaped important conversations around the shipping industry in general — only to be accentuated by a pandemic in the background.

A very important node of this conversation was the dearth (and resulting price escalation) of shipping containers. A year ago, companies paid close to $1,920 for a 40-foot steel container on a standard route between China and Europe. Now, they are paying $14,000 for the same — a staggering increase of 600%!

We understand that while demand for goods have soared following the glut during lockdowns, it has taken time for elements in the global logistics and supply chain sector (e.g. containers, ships, delivery trucks) to catch up. This has meant that containers have become incredibly scarce and hence wildly expensive.

But is there more to it than just a supply side bottleneck? Let’s find out.

“Container Dislocation”

Containers are the cogs of the global shipping machinery. For months, global supply chains had been damaged under the crippling effects of the shutdowns which triggered shortages of items everywhere from coffee and milk to semiconductor chips.

This is what happened. As soon as the pandemic hit, major shipping lines were cancelled or delayed. So, not only were shipped containers stranded at the shores but the empty ones weren’t picked up either. Ports like Rotterdam (largest port in Europe) had to build extra storage capacity for the “empties”. It took the gradual lifting of lockdowns and resumption of operations at ports and depots to send the empty containers back.

Problem was that this period of transit had given a head start to the export sector of the countries. So, by the time the empties reached, there was already a beeline of goods waiting to be transported. Ergo, backlogs leading to pressing demand leading to skyrocketing prices of transport i.e. Containers.

Scrambled Empties

Let’s look at this closely. Most of the world’s container factories are located in (you guessed it!) China which was expected to produce a record number of boxes this year (approximately 5.4 million). But this pre-pandemic estimation went haywire in light of sudden global economic slowdown.

Chinese exports to the US and Europe far outweigh its imports. Being one of the first countries to recover from the pandemic, the Chinese revved up their goods production and export economy. But most of the shipping containers were stranded in the West. Plus, the orders for new containers were mostly cancelled in the first half of 2020 which exacerbated container shortage further.

Result — A rising Chinese “aggression” to get the empties back. In January 2021, 3 out of 4 containers going back from the US to Asia were empty. China started paying premium rates for importers to return the containers making it far more profitable for shippers to send them back empty than refill them.

This may have helped with expediting their returns to China but it created problems for cargoes in the West as shipping lines started refusing outbound bookings over premium-rated empty containers.

Air freight did manage to de-stress the shortage to some extent by transporting some high-value items like electronics etc. But it was a limited rescue seeing as it is the container vessels which carry around 90% of the world’s non-bulk cargoes.

Companies which manufacture containers are also battling rising raw material costs. The specialised corrosion-resistant steel and flooring materials (plywood, bamboo etc.) that containers are made from have also become expensive owing to supply-demand imbalances and labour costs.

The spiralling cost cycles ultimately reached e-commerce retailers offering consumer goods with production based out of China. The costs were either absorbed or passed on to the customers without facing any implication of price-gouging, unfortunately.

Another visible shortage worsening the situation is that of container ships. Although the number of mega-ship orders has soared since the pandemic, the orderbook-to-fleet percentage remains relatively low (11% of the current fleet as opposed to 50–60% in the past as reported for Hapag-Lloyd, a global leader in container shipping). So, the ongoing growth in demand will continue to outstrip shipping capacity which means overpriced containers are here to stay.

Running Tight Ships

The companies which lease containers have captured a fair end of the bargain, however, by asking for carriers to sign longer-term contracts. For those financiers who have invested in shipping containers, the higher upfront costs are offset by these leasing arrangements creating a favourable market.

But for the rest of the world, higher prices and competition for containers has affected higher demands and rising prices in almost everything from food to consumer electronics. Thanks to the Chinese rush to procure the empty containers, food was stranded at the wrong places aggravating literally a container war amongst the shippers.

Loading times have been significantly reduced as the necessity to fill containers fast and send off remains high. Higher freight rates have also forced some retailers to cancel contracts, purchase supplies in bulk or delay purchases until prices have normalised.

But the question remains as to how soon the prices will normalise? Exporters don’t think it will be anytime soon. Supply chain issues are expected to persist well until 2023. The production of new containers may be on full tilt but the pace of new ship-making isn’t particularly promising since vessel deliveries in 2022 are expected to be at a record low.

For a container that reached Chicago from Beijing in 30 days pre-pandemic, it now takes more than 70 days. Logistic delays may be short-term but price fluctuations resulting from increase in container costs could possibly upend consumer markets globally unless “contained”.

(Originally published September 13th 2021 in transfin.in)