Container lines: Profiting or profiteering?
High freight rates and equipment shortages are a consequence of the pandemic, not market manipulation
Recent complaints by shippers have seen regulators showing an interest in box carriers again. But is there really any case to answer?
It is easy to see why cargo owners’ hackles are raised. Freight rates are rocketing, with the Shanghai Containerised Freight Index last week reporting rates of over $4,000 per teu on Asia-Europe trades for the first time.
Alongside the high rates are a severe shortage of equipment and delays at ports and in inland distribution, all of which are causing additional costs. Shippers and forwarders are not a happy lot, and with good reason.
Laying the blame for the current crisis at the feet of container lines is convenient. They, after all, are the ones calling the shots and asking for the rates, even if much of the problem, such as overcrowded warehouses and congested ports, is beyond their control.
Some have gone as far as to say lines are profiteering from the crisis, making undue amounts of money from the suffering inflicted by the pandemic.
The calls for investigations and control of the lines seek to rein in their power and suggest that they are acting unfairly to take advantage of customers.
While the past decade of consolidation has seen the number of truly global container lines shrink to fewer than 10, grouped in just three major alliances, every previous investigation into carrier practices has failed to prove any collusion, price setting or market manipulation.
When carriers took capacity out of the market at the start of the pandemic, it was not to increase rates, but to survive.
As one line pointed out, a 20% fall in volumes in a month reflects a $200m loss of revenue. And blankings were being done at a time when cargo owners were frantically trying to cancel orders and seek storage in transit.
The rebound in demand in the second half of the year surprised everyone, but lines were quick to restore capacity. By the third quarter, deployed capacity was higher than it had been in 2019.
Even now, blankings in the lead up to Chinese New Year are virtually non-existent. Layups are at near record lows and charter rates at record highs as all available ships are pressed into service. That is hardly the way to manipulate a market.
There is no doubt that carriers have benefited from the surge in demand; third-quarter results for 2020 were the best in many years.
But that is a simple outcome of the laws of supply and demand and a basic tenet of capitalism. If there is an excess demand for a limited supply, those who want the supply most will pay more for it.
And having a few profitable quarters needs to be put in the context of having a decade of unprofitable quarters. Since the global financial crisis, carriers have struggled to pay for the cost of their capital, far less provide returns for their investors.
A stable, and profitable, container shipping sector should be welcomed. One doesn’t need too long a memory to remember the carnage that came out of the collapse of Hanjin Shipping in 2016.
If carriers are to continue to invest in services and in new, environmentally friendly ships, they need to be able to pay for those.
Some perspective is also needed. Shippers balking at $4,000 per teu freight rates will remember that last October the SCFI spot rate to Europe was less than $1,100 per teu. In 2015, it went below $250 per teu. In the five years to the end of 2020, the average SCFI figure has been below $900 per teu.
Rates like these add only pennies to the price of goods when they get to shops, a remarkable benefit of containerisation. Moreover, the current high spot rates cover just a portion of the cargo shipped, with the majority going under contract arrangements.
Shippers allege that carriers are ignoring these commitments, but if market conditions were going in the opposite direction, with spot rates falling below contract rates, carriers would be accusing shippers of breaking their contract terms.
Lines have been trying for years to make container shipping less commoditised, and to have greater price predictability, but it takes both sides to achieve that.
The current crisis is just that: a crisis. This is the first time in the history of containerisation that the industry has faced a global pandemic. It is a mark of the maturity of the sector that, for the most part, goods are still being delivered.
As with all crises, this too shall pass.