Don’t shoot the carrier
Container lines cannot be held responsible for all that ails the supply chain
Record freight rates and delays are the result of a system under pressure in the midst of a pandemic. When the cost of a lean supply chain is paid in a lack of resilience, shippers need to look to their own housekeeping and not just blame carriers
FREIGHT rates on the Asia-Europe trade lane this week recorded their highest-ever levels, breaching the $6,000 per teu mark for the first time.
And there shall be much wailing and gnashing of teeth from the shippers and cargo owners who will have to pay these rates to get their goods from one end of the supply chain to the other.
Most, if not all, of that will be vented at the container lines that are taking the rates.
From a shipper perspective, this is understandable. Carriers, having had the most profitable year in their collective existence, and on track for another this year, are charging like wounded bulls and delivering a service that even they describe as unsatisfactory.
Trying to book equipment, find a slot on a ship and expect a delivery even close to when it was scheduled has become an exercise in futility. But one for which a shipper still has the privilege of paying top dollar.
For some products the cost of ocean carriage has meant container shipping is no longer a viable option, as it would suck any profit out of the sale of the product.
For those that can still afford the cost, supply chain management has become a matter of guesswork and good luck. The days when one could order parts from China and have them delivered to a factory on a known day two months later are gone, throwing whole sectors into disarray.
So far, so good for the shipper argument, but there comes a point in any comment piece where the writer must say: there is a ‘but’.
This is that point.
Nearly all the opprobrium thrown at container lines is misdirected and they are being accused of things that are outside their control.
Box lines are not responsible for congested port and terminals, shortages of rail, truck and warehouse capacity, the blockage of the Suez Canal or the outbreak of Covid-19 at Yantian.
Containerisation facilitated, rather brilliantly, the just-in-time supply chain, but it never required anyone to design production facilities to operate with only two days of stock in hand.
Lean supply lines are cost-effective, just as sourcing goods and components in Asia is cost-effective. But those low costs comes at the price of resilience.
Supply chains are not so much lean as positively anorexic. There is no fat on the bones and very little muscle. So when the vicissitudes of a pandemic start to punch the supply chain, the supply chain is just not strong enough to defend itself.
Shippers must bear some responsibility for this. The just-in-time supply chain permits cargo owners to avoid the cost of holding inventory, and they have chosen to invest in the cost of shipping rather than the cost of high inventories.
Had they sought to remove the stye from their own eye, they might have identified the weakness in the model and sought to remedy it.
A more resilient supply chain might not be in such desperate need for goods that it is prepared to pay over $6,000 per teu to ship a container from China.
While there are no doubt some avaricious sales men and women in the container shipping sector, to the best of our knowledge, none of them has ever held a gun to shipper’s head and forced them to pay a given rate.
Much of the reason that spot rates are so high is that shippers are outbidding each other in a market where demand exceeds supply. When the situation was reversed — it was only a few years ago that Lloyd’s List was constantly covering the overcapacity in the box shipping market — rates were low and no one was complaining about free-market economics.
The same free-market economics is driving the cost of a 10-year-old panamax to over $45m, and the charter rate for an 8,500 teu boxship to $60,000 per day as carriers throw every available slot of capacity into the market.
The argument that carriers should have somehow foreseen a pandemic, or that they would have to carry a year’s volumes in six months as they did last year, is spurious.
Yes, carriers have learned to not buy excessive amounts of tonnage, but that doesn’t mean they have neglected to increase their fleets with demand. If there had not been a pandemic, we would not be seeing the capacity crunch nor the sky-high rates and levels of delays.
Let us not forget that while the Shanghai Containerised Freight Index may have breached $6,000 per teu for the Asia-Europe trade this week, a year ago it was under $900 per teu and the five-year average, even including the recent peaks, is just $1,200 per teu. The average cost of transporting a box is estimated to be around $2,000.
Container lines rightly point out that for most of the past decade they did not make any money. The low-cost supply chain that shippers came to rely on was in fact a charitable donation from the container lines’ shareholders.
The Global Shippers’ Forum argued this week that the disruption in the supply chain and rising freight costs could lead to inflation as economies recover from the pandemic. One could equally argue that container shipping at below cost rates led to deflation that made shipping cheap goods half way around the world possible.
Box shipping, for all its faults, has done a remarkable job. Last year, it transported nearly the same number of containers it had in 2019, despite all the disruption of the pandemic.
The port of Los Angeles yesterday celebrated becoming the first port in the western hemisphere to handle 10m teu in a 12--month period. This is not a supply chain that has ground to a halt.
How the current crisis is resolved remains unknown. In most ecosystems, when demand exceeds supply, either supply increases to meet demand or demand falls.Supply will increase, but it will take two years for the latest swathe of boxship orders to hit the water. As for demand, that is one for the shippers to decide on.