The logistics industry is suffering from a shortage of containers, but container shipping companies are making a top result – The basics of maritime economics 1

The logistics industry is in turmoil. An export container to Asia or an import container from Asia costs many times more than a year ago. In addition, security of supply has deteriorated and delivery times can be very long.

The reason is the lack of containers. The world simply does not have enough containers to provide for transportation needs. This is partly due to the fact that demand for consumer goods and semi-finished products (which are transported in large quantities in containers) has increased as pandemic restrictions have eased. But the main reason is that pandemic restrictions are slowing down port operations and the unloading of ships, as well as loading in ports.

Such a large proportion of containers are, in fact, outside ports on ships waiting to enter the port, and thus there are not enough containers to transport cargo. The blockage of the Suez Canal by Ms Ever Given did not, of course, alleviate the situation when a large number of ships had to wait to pass Africa or circumnavigate the mainland.

Figure 1. A year ago, overseas container shipping prices ranged from one thousand to three thousand. Now, at worst, the price can be as much as triple. Source: https://unctad.org/news/how-cushion-consumers-high-maritime-freight-rates

At the same time, container companies are currently making a wild profit. Although port problems are slowing down operations and less cargo is being transported to customers, there is such a shortage of containers that customers pay multiple prices compared to the increased costs of operations.

In principle, successful shipping business is very simple. Anticipate. When the world economy enters a boom, global market demand for products and raw materials rises, there will be a shortage of transport equipment, that is, ships’ prices will rise, and whoever has the equipment to supply will make a big profit.

Conversely, when the world market enters a downturn, demand for products and raw materials falls, there is too much transport equipment, their prices fall, and one who has a lot of money stuck in the equipment makes a big loss. The most vulnerable ones end up in bankruptcy. The most significant example of recent years is the bankruptcy of Hanjin Shipping, the world’s seventh largest shipping company, in 2017, when its competitors were able to reduce their costs by increasing the size of their fleet.

What makes the shipping business challenging, is the ability to order new ships or make long charters up to a few years before the boom period in order the vessesls to be in use when the boom occurs. When the rise then comes, the shipyards are full of order books and prices are cloudy, and no rental equipment is available for anything. Or, alternatively, you need to know how to sell or give up rental equipment even before the fall season. No one will take stock when the landing occurs.

The figure below shows how in the year before 2008 the rise shipping prices was sharp and followed by a collapse as the world transitioned from an upturn to an economic recession. This led to major economic problems in almost the entire maritime transport sector.

Figure 2. The Baltic Dry Index shows the transport price level of certain dry cargoes. Source: https://tradingeconomics.com/commodity/baltic

Sometimes, however, surprising things happen in the transportation market that are independent of world market cycles. In the fall of 2019, the daily prices of oil tankers rose significantly. The reason was the changes in the sulfur content of bunker oil that took effect in 2020, which led several operators to deplete their stocks of high-sulfur oil and then started buying low-sulfur oil from the market again after that. At the same time, ships were also out of service when they were upgraded to meet new restrictions. In this way, a considerable number of ships were quickly needed and charter prices rose.

In the spring of 2020, with the start of Covid-19 restrictions, oil tanker prices skyrocketed for the second time in a year. At first glance, the matter seemed confusing, since pandemic restrictions had reduced oil consumption, so how miraculously did tanker prices rise.

The reason was the opposite. However, as oil consumption declined as a result of pandemic restrictions and oil prices fell, oil-producing countries did not reduce production, but at worst even increased it to generate sufficient export earnings. As a result, world oil stocks were filled up and ships began to be used as storage facilities, which eventually pushed their prices to the skies as well. However, production was cut relatively quickly, and oil tanker prices fell.

Figure 3. Price level of some tankers in recent flows. Source: https://www.bimco.org/news/market_analysis/2020/20200908_tanker_shipping

The maritime transport market is constantly facing rapid price rises and falls, as described above, and the success of shipping companies as well as bankruptcies. As the world market situation changes, the companies with the capacity will make large profits and some don’t even have a chance. Those shipping companies that anticipate a wide range of options for the future, know how to secure their operations and take advantage of the opportunities that lie ahead, will win. There are always disruptions in the market that no one can predict, such as the Covid-19 pandemic and its effects, which this time have benefited container companies.

Basically, in transportation, every mode of transportation and even ship size are all different markets with their own customers and commodities. In practice, however, when a market is badly disrupted, it does spill over into other sectors. Eg. at present, goods that would otherwise go in a container are transported by air, trucks and trains. Now, in the container crisis, Asia is currently becoming a record number of containers on trains, the most urgent cargo is flying, and even bulk carriers have begun to carry containers.

Personally, I would predict that the effects of this current market disruption will go well into next year before the containers move “normally” again. But will there be some new disruption again, perhaps, and probably in any case before long before the market fluctuates again. The global transportation market is always volatile and always has an impact on supply chain prices and security.

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