Now that it seems that Covid situation is improving and we can finally relax a little bit and get back to business as usual, shipaggedon is here (cool name but sadly not mine, New York times gets the credit). To make it short, good luck these days if you want to get a container to ship your goods from China.
We have calculated the averange prices that we have paid from Ningbo to Barcelona the last years (thanks Eli!). These prices might differ (or not) from charts that you will find around, because we use different forwarders, different shipping companies, sometimes we are in a hurry and pay more expensive, other times we can negociate better… :
As you can see, these last weeks, container prices have been increasing wildly and they have reached all time highs in some routes. What is happening? Aren’t we in the middle of a pandemic? Hasn’t consumption declined because people is locked at home?
Because of the undertainty and financial problems caused by Covid, most companies have been short on cash or have chosen to keep it in the bank, lowering inventory levels. Suddenly, demand for consumer goods is really picking up: governments have thrown stimulus measures on the table and people is traveling much less and are choosing to spend their money on consumer goods instead. On top of that, holiday season (when we are forced to spend to show people we love that we love them economically too) is coming. And Chinese new year is coming, Chinese factories will be closed during February. So suddently, warehouses look soooo empty, and everybody wants to restock at the same time.
Under normal circumstances it would he hard enough for shipping companies to cope with the sudden increase in demand. But 2020 is anything but normal, and Covid has caught them off guard.
At the peak of the Covid crises, international trade really decreased, so shipping companies were suffering huge losses. So they “blanked” (canceled) an unprecedented number of sailings to try to cut costs and maintain rates (canceling a ship helps to cut losses by 60% according to Maersk). They also tried to move the containers (which they own, or sometimes rent from container leasing companies like Triton) to the most profitable routes at that time (Africa and Latin America), moving them out of their usual routes.
And now, out of the blue, we have a big surge in demand, a lot of containers out of place in Southern routes and continental US (container boxes, not container ships!) and the whole industry struggling to get the containers back to their usual routes, which as you can imagine is not fast or easy. Meanwhile, we all need to fight for the “few” containers available and, as always happens, when demand is much higher than supply, prices shoot up.
We need to note that container prices have been abnormally low since at least 2008. Big shipping liners like Maersk or MSC were OK with low prices, even if they were not making any profit. They bet that smaller carriers, with higher operating costs (among other reasons, because they have smaller ships) would not be able to survive at this price level (yes, same as Saudi Arabia tried to make with American oil frackers). They waited and waited and finally, in 2015-2016, smaller carriers caved.
This is what the market looked like in 2015 (a TEU is a 20 feet container, measure unit for a lot of shipping data. So a 40 feet container = 2 TEUs):
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 at the beginning of 2006, the four top container shipping companies had 45% of the market, today they have around 60%
And this is talking only about shipping liners, that own around 45% of the ships. The other 55% are owned by fleet owners, big companies unknown to us all, like Atlas, Costamare, Global Ship Lease, Navios or Danaes to name some, that charter their ships to liners and others.
Also important, container shipping is a highly cyclical business. Because building a ship takes around 3 years, supply and demand are always playing cat and mouse. Demand increases, there are not enough ships, prices increase, shipping companies have big profits, which they use to buy new ships. After 3 years a lot of new bigger ships suddenly appear, supply increases a lot, prices go down… and so on. Right now we are on the lower part of the cycle, the profits of big shipping companies have been increasing the last 3 years (and will increase even more this quarter and next year), and shipping yards shipbuilding is at its minimum in the last years.
What now? Can prices keep increasing? Yes, they can, and they probably will until February. But the Chinese government is already pressuring shipping companies to put a cap on price. After all, the price increase does not reflect a cost increase, but a demand increase. So shipping companies would simply have less profit.
An easy way to increase capacity would be for the carriers to increase the speed of their vessels. When we started importing from China in year 2000, a container from Ningbo to Barcelona took 24 days. Today, it’s more like 30-35, due to the “slow steaming” strategy to lower costs and increase profits (as airlines do). In container shipping, fuel consumption is related to the cube of speed. If a vessel travels twice as fast it will consume eight times as much fuel, so small changes in speed bring huge fuel savings. But at current prices, they could afford to cut some travel time, at least until situation gets back to normal, because in a few weeks we will need to kidnap or kill someone to get a container.
So probably prices will keep going up until Chinese new year (beginning of February), although not as wildly as they are growing now, because containers will be slowly being relocated to their usual routes, and because there are a lot of external pressures. After Chinese new year, a lot of containers should be back at their usual routes and companies inventory levels will be higher, so prices will slowly begin to go down. Although it’s likely that they will not go back to the 700-800USD levels, as we have seen we are at the bottom of the cycle. And all the mergers and adquisitions mean there are less companies, with less competition which usually translates into higher prices.