Shipping companies are having a bumper year, racking up profits when they can

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Manufacturers, business owners and ordinary Americans have been mired in the supply chain quagmire for months now – a slump that only intensifies as the holidays approach. For heavyweights in the ocean freight industry, however, the current environment is akin to an all-you-can-eat buffet – with the prospect of heartburn in the form of further regulatory scrutiny and lawsuits over allegations of price manipulation.

“I would say it’s purely a question of supply and demand. Supply is currently at maximum, as anything that can move containers is either chartered or occupied, ”said Willy Shih, professor at Harvard Business School. “You see some companies like Home Depot or Walmart even chartering what are called project cargo ships that normally don’t even carry containers,” he said.

“The incentives for businesses to find creative workarounds are immense. Recent anecdotes of large retailers chartering their own freight vessels as well as cargo being diverted to smaller, less congested ports in the United States provide an example, ”wrote Matt Colyar, associate economist at Moody’s Analytics, in a recent report. of research. “The good news is that household balance sheets are in very good shape and consumers are sitting on a significant amount of excess savings, which will help limit the impact of rising costs on the purchasing power of consumers. households, ”he said – but the deadlock persists. , the less resilient businesses and consumers become.

The current environment is like an all-you-can-eat buffet.

Historically, said Patrick Donnelly, senior analyst at Third Bridge, surcharges tended to be one-off events triggered by short-term delays or confusion. “Initially there were seasonal surcharges but standard shipping rates,” he said. “We’ve never seen any surcharges going on at this point. “

It used to cost between $ 1,500 and $ 3,000 to ship a 40-foot sea container from China to California, Donnelly said. “Today we are looking at prices about 10 times higher… We are now in a range of $ 15,000 to $ 17,000,” he said, after the surcharges were added.

Donnelly predicted that shipping costs will stay at this high level not only during the holidays, but likely into the first half of next year.

Danish container shipping giant AP Moller-Maersk A / S told investors in August that its revenue rose more than 60% in the second quarter and improved its projections for the high end of a key annual profit from $ 6.3 billion to $ 15.5 billion. Analysts say these staggering numbers live up to the evolution of the industry this year. Watch groups have called on regulators in the United States and abroad to do something.

The Biden administration said earlier this month it would initiate 24/7 operations at the ports of Long Beach and Los Angeles, through which about 40% of cargo ships carrying cargo to United States. Earlier this week, the agency that manages these ports announced that from November 1, it will levy a fee on ships that occupy terminal space without being unloaded after a certain number of days (the number of days varies depending on whether the goods are transported by land by rail or by truck). Fees will start at $ 100 per container and increase in increments of $ 100 per day – a potentially hefty fine, as freight ships can carry thousands of containers each.

But analysts say there is no one-size-fits-all solution to unraveling this maritime bottleneck.

The roots of the current standoff go back to early 2020, Donnelly said. “It started in March and April last year at the start of the pandemic with many crossings canceled from China. When they experienced the initial surge, the ports were at a standstill, ”he said. “We are still feeling the impacts of those initial canceled departures to this day.”

When the first wave of the pandemic hit the United States, authorities took swift and sweeping action to prevent economic collapse, adopting an unprecedented series of monetary and fiscal policies that bolstered the purchasing power of people. Ordinary Americans despite widespread reduction in business and social activity.

“What was not expected was that consumer demand remained relatively strong and e-commerce volumes exploded,” Donnelly said. “We have seen e-commerce continue to grow at an unprecedented rate. This is in addition to the extreme amount of demand on freight shipping, ”he said.

In addition to a lack of space on the ships, there is also a lack of space for these ships to dock, especially when they arrive on the California coast. “The real bottleneck is in the ports and the amount of congestion that exists in the ports,” said Donnelly.

“Last week there were 78 or 79 ships waiting to enter Los Angeles and Long Beach,” Shih said. “When ships wait, they contain either cargo or empty containers. It effectively removes capacity from the system, ”he said, citing an estimate that around 13% of global capacity has been taken offline by these bottlenecks.

On the ground, trucking capacity remains a problem. With a growing number of older workers choosing to leave the workforce rather than risk contracting Covid-19, an existing shortage of truck drivers has been exacerbated by the relatively advanced age of fleet operators, as the shift from people buying goods in make-to-order stores to have them delivered online and have them delivered has confused typical ground transportation logistics and created new pressure points.

“It’s not only that demand has increased, but demand has picked up in a very different way,” said Suresh Acharya, professor at the Robert H. Smith School of Business at the University of Maryland. “More and more, stores are glorified showrooms,” he said. “It’s entirely possible that this will continue to be our buying behavior in the future.”

Historically, shipping has been characterized by boom and bust cycles. Now, companies “accumulate profits while they can.”

The sudden shift to e-commerce impacted the availability of containers in addition to the amount of space available on ships, Acharya added. “What goes into a container, rather than being uniform things, is a hodgepodge of things, which means you need more containers,” he said.

And while shipping containers themselves have been scarce because the factories where they are made – also largely in China – have also been affected by Covid-related closures, shipping conglomerates as well as the companies that make the containers. have been hesitant to launch more to meet demand, in case the change in the way people buy is only a temporary change.

Historically, the shipping industry has been characterized by boom and bust cycles driven by peaks in demand leading to overcompensation of supply. With the wind turned in their favor, shipping companies are racking up profits while they can, Shih said.

“Now they are using this high demand to recoup their cost of capital and try to make money,” he said. “There has also been a consolidation among the shipping lines,” he added, comparing the contraction of the container shipping market to the merger activity that has reduced the number of US-based airlines – each triggering an increase in prices as competition diminished.

“We’re still in a period where we don’t fully understand whether this is a ‘way out of a pandemic’ or a long-term norm. I think everyone can guess, ”Acharya said. “What the container companies are evaluating, is it a pain in the short term or is it here to stay? ”


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