The cost of shipping has become a global issue. In normal circumstances, conversations about the global supply chain – complex and critical though it is – are the preserve of those who make it their business: shippers, importers and operations consultants like myself, among others. Right now though it is one of – if not the – greatest concerns facing anyone remotely affected by global trade. From CEOs to the consumer the post-pandemic supply chain challenge is a worry.
For importers recently it seems bad news has followed bad news. Last week, Drewery’s World Container Index reached another all-time high at $10,834 per forty-foot equivalent unit. As ever, there are winners and losers (as my colleague Erik Mattson explored in a recent article): while importers are struggling, container companies are thriving. CMA, for example, recently recorded a record EBIT of $3.81bn for the second quarter, putting it on track to post its greatest annual result ever.
However, recent news from CMA, Hapag and inevitably other shippers may bring some relief to importers. Both have committed to halting all spot rate increases between now and February 2022. As well as bringing some respite to importers, it’s a sensible way to preserve their market in the future as for many importers, particularly smaller operators, current prices are unsustainable and an existential threat.
Playing the long game
With shipping currently costing as much as a Honda Civic on the spot market (we have heard upwards of $20k – 30k per container from our clients) – up from $2,500 pre-pandemic, many small-margin importers simply cannot afford to pay 6 – 7X prices for containers. Small-margin importers rely on importing significant volumes in an economical way. With smaller importers lacking the volume to leverage carriers into lower prices, they are stuck paying the high spot rates, which are in an unavoidable crisis. In both cases, bearing these costs alone is nigh-on impossible. They have little alternative but to pass costs along to their customers. For many this presents a significant business risk, as consumers are characteristically unwilling to bear costs like this for anything other than the most critical of products.
The fact that carriers have realized this is a welcome development. Carriers are beginning to acknowledge that if current pricing continues much longer, two things could happen: 1) small importers will be highly motivated to near-shore production as economics shift closer to home, or 2) they may be driven out of business completely. If either of these trends materialize, the potential market for carriers in the future will inevitably shrink when the market eventually normalizes and prices settle down.
Additionally, the loss of small importers would result in a greatly improved bargaining position for large importers (the Walmarts, Home Depots, and Targets of the world) who are able to leverage the carriers for better pricing. This is obviously undesirable for the carriers who, longer term, risk being squeezed on costs.
No pain, much gain
At this point it’s worth mentioning that most carriers are nearly fully booked for the next five months. Even if they wanted to increase spot rates, they’ve no capacity to sell. Peak shipping season, combined with record-level demand and TEU imports, has driven a scramble for container capacity between now and the end of the year. As the current supply and demand dynamics driving record prices suggest, there aren’t enough containers to meet demand. It’s realistic to think that, regardless of pricing, most shipping capacity is sold out for at least the next three months.
Additionally, this is a price freeze, not a price cut. Even if carriers have minimal spot-market capacity remaining, they’ll make record-level margins on that capacity at existing spot pricing. Given that the market has been inflationary for over a year, they may be banking on importers having a short memory and considering this the ‘new normal’.
The shipping forecast
CMA and Hapag will not be the last carriers to freeze spot pricing. It’s in all of their interest to cap the astronomical spot prices we have seen in the last few months. And there’s very little commercial downside.
However, this does not mean relief is coming for importers... pricing will hold at record levels for a few reasons:
Demand remains high
- Consumer demand continues to reach record levels with no end in sight (upcoming peak season), suggesting continued pricing for at least the next six months. Shifts in consumer habits from goods to services spending may eventually provide relief.
Capacity remains low
- Landside disruptions and delays, both intermodal and COVID-related (e.g. lockdowns in Yantian, Ningbo) will continue to cause disruptions for many months ahead.
- New vessel capacity is years away. A market over-response is likely in late 2023/early 2024 when forecasted shipping capacity increase (300+ ships) comes online. Until then, capacity will remain limited.
Inventories are low and replenishment will delay normalization
- Retail inventory-to-sales ratio is still near record lows, hovering below 1.0.
- Once consumer demand slows, importers will still spend a few months replenishing inventories, which will continue driving container demand.
Freezing spot prices will offer modest respite to importers but it’s minimal. The pricing pendulum will take some time to swing back to a more sensible resting place and inevitably the sky-high cost of shipping – a consequence of many businesses favoring efficiency over resilience for too long – will along with many other factors result in significant changes to operations. Near-shoring and other strategies to insulate businesses from future disruption will be critical. And for the shipping companies it could mean that relatively empty gestures could lead to increasingly empty vessels if the importers have long memories…