Why are container costs not going down?

As everybody knows by now, container costs raised tenfold during Covid (yes, multiply by 10). For example, Ningbo-Barcelona 20ft container, from USD700 to USD7500 (but if you really wanted your container to ship on time, you had to pay premium, up to USD9500-10000). The causes that caused container prices to skyrocket are diverse and have changed as the situation has evolved with the pandemic (you can read more in this post).

Now, after 2 years, situation is far from normal, but container prices are still crazy expensive. Why is that?

As we explained here, the last years big shipping companies played a strategy to be able to buy smaller competitors. Due to economies of scale and huge ships, their operating costs are lower than those of smaller companies. So for several years, they lowered their prices to the minimum, lowering their profits or, sometimes, loosing money (you can see  the results of the strategy in the chart lower in this page, showing Maersk profit for the last 10 years)

The strategy worked and, in 4 years, Maersk bought Hamburd SUD, Hyundai bought Hanjin, COSCO bought China Shipping, CMA bought APL, Hapag Lloyd and UASC merged and ONE was born as a merger of NYK, KLINE and MOL

So right now we have an oligopoly, there are 4 shipping companies have 60% of the market and that mainly decide the price of the flow of containers around the world. Most consumer products that you buy are moved around, at some stage or another, by one of these four companies.

Source: Freightwawes. One TEU=one 20ft container. After receiving all ships in construction, MSC will overtake Maersk.

So, why are container costs still so expensive? If you dive into transportation related websites, you will read a lot of excuses from shipping companies: not enough trucks, port congestion, port closures in China due to Covid, blah blah blah…. But there is one undeniable fact: they are getting crazy profits, and we consumers are paying them:

– As you can see on this chart, Maersk (second biggest shipping company) averange profits are around USD3 billion. Year 2021, USD18 billion. Multiply by 6, not bad.

Making history… SMILE, you are on the picture because you are paying for it

– France’s CMA CGM, the third largest shipping company, reported one-quarter net income of USD5.6 billion in November 2021, compared to $570 million the previous year. Multiply by 10.

I am not an economist. But it seems quite obvious that, even if their costs have risen, a big chunk of the x10 price increase is going directly from consumer’s pockets to their pockets. The robber barons of the 21st century?

And yes, this money comes from our pocket, consumers’ pockets, because high transportation costs increase the cost of the products. Shipping companies of course say that the effect on inflation is very low. Maybe. I don’t know their data sources. But I know that we, GISP, import a lot of different products for many different sectors. Some big, some small, some light, some heavy… In year 2019 we paid an averange 20ft container cost of USD691. In 2021 we paid an averange 20ft container cost of USD8264. If we make an averange of all the products that we sell, this increase represents a 17% increase in the final product cost. Increase that eventually will be passed on to the final consumer.

That causes inflation, which is already at levels not seen for a generation. And inflation makes everyone poorer. Especially the middle and lower classes, that can not make investments that raise with inflation. With inflation, you have money in the bank, you are loosing money every day that passes. So it increases inequality, which is already at dangerously high levels (you can check history books to see what happens when inequality is too big………..)

So, again, the big question: When will prices go down? Well, MSC, Maersk, CMA and COSCO control the market and their incentive to lower the prices is ZERO. But inflation is becoming a big problem, and politicians are getting nervous. So prices will go down when they see that syphoning consumer’s money to their pockets will have consequences.

Last month Biden used the State of the Union address to announce a crackdown on shipping companies. A step in the good direction, let’s see if they can really do something… or if consumers will keep getting poorer at the expense of four shipping companies.

Marc Torras