A year ago, we were worried to read how global supply chains were at a standstill. Media around the world were writing that Christmas presents would not reach children by Christmas – and that’s what really happened in many families.
The reason for Santa’s problems was the ports. Dozens of huge container ships full of containers of Christmas presents and other goods were waiting outside the ports, but the containers could not be emptied in the congested ports. There was a shortage both of labour (which had been reduced since the Covid-19, and many of whom were quarantined) and of physical port space for intermediate storage of containers.
At the same time, container shipping companies were making huge profits. With ships waiting outside the ports, there was a shortage of both ships and containers. Buyers of goods were prepared to pay unprecedented sums to get their own container moving. So container freight rates skyrocketed.
The situation calmed down over the past year. Pandemia restrictions and port congestion eased. Now container freight rates have almost fallen back to the levels of a few years ago. Can we breathe a sigh of relief? Is there finally calm in the shipping industry? Will Santa Claus bring the presents?
However, this is exactly what the textbooks on logistics and shipping economics warn us about (those interested can read about the bullwhip effect or the volatility of the shipping market).
When the supply chain slows down, companies invest in more capacity to get the goods moving. Container shipping companies made huge profits from high freight rates, and spent the money on what they could do and what was in short supply. Shipowners ordered new and bigger – and therefore more competitive – ships and, of course, containers.
The end result is that today we already have too many containers and container ships, and more are on order. We are already seeing that demolition yards are currently receiving a significant amount of container tonnage to be scrapped – to make room in the market for new ships.
Situation are good for the consumer for a while – if there is money left over from rising energy prices, the supply chains will bring the goods to Santa Claus. Container shipping companies, on the other hand, need to prepare for difficult times. A lot of bigger and bigger ships are coming onto the market, which means that container transport prices will fall. The most vulnerable shipowners may run out of money to pay for their operations and new vessels.
In the worst case, over-investment by container shipping companies can lead to the bankruptcy of shipping companies, as we saw with the bankruptcy of Hanjin Shipping in 2017 as a result of the banking crisis. Which in turn will mess up Santa’s supply chains as containers get lost around the world. But that won’t happen this year.
This year, Santa Claus will set off with his presents. And let us remember those families who, because of war or high energy prices, will not be able to have Santa’s presents.
This story has been published in Finnish in Navigator Magazine 22 Dec 2022.
Tales of Talsinki 