November 14, 2019 - By : ZoomAdmin
Shipping companies will reap $150 billion in 2021 as a result of the supply chain crisis
Shipping rates are expected to remain elevated well into 2022, ensuring another year of booming profits for global cargo carriers – and leaving smaller companies and their customers from Spain to Sri Lanka paying more for nearly everything.
The spot rate for a 40-foot container from Asia to the U.S., with surcharges and premiums, was more than $20,000 last year, up from less than $2,000 a few years ago, and was recently near $14,000. Additionally, tight container capacity and port congestion mean that long-term rates set in contracts between carriers and shippers are running 200% higher than a year ago, implying elevated prices in the near future.
Large customers of sea-borne cargo, such as Walmart Inc. or Ikea, have the clout to negotiate better terms in those deals or absorb the added expenses. Most small importers and exporters – especially those in poor countries – rely on carriers to transport electronics, clothing, grains, and chemicals, and are unable to pass those costs on or weather long periods of stretched cash flow. The situation spotlights the market concentration of shipping lines, and their immunity from antitrust laws.
“Small- and medium-sized enterprises are particularly affected,” said Amruth Raj, managing director of Green Gardens, a vegetable processor based in rural India. More than 50% of his company’s capital was wiped out when European buyers balked at higher container rates in the past year. We were exploited.
Developing countries face more than just business survival at stake. At a recent UN trade body conference call, Achil Yamen, of the Cameroon National Shippers’ Council, raised concerns about inequities in Africa.
The risk of inflation and food security can grow very high if nothing is done to reverse the trend, Yamen said.
At the same time, the backbone of the postwar march toward globalization is emerging from the pandemic in the strongest position in its history – a stark reversal of years of losing money in capital-intensive sectors. Ocean freight carriers made estimated profits of $150 billion in 2021 – a nine-fold jump after a decade of struggles.
Last year, A.P. Moller-Maersk A/S, the world’s second-largest container carrier, was on track to match or exceed its combined results of the past nine years. This month, its shares hit a record high, as did those of Hamburg, Germany-based Hapag-Lloyd AG, the No. 5 player. Mediterranean Shipping Co., the largest, is a privately held company in Switzerland controlled by the powerful Aponte family in Italy.
The dangers of inflation and rising shipping costs
Since the extended windfall has touched a raw nerve across the political spectrum, economists warn that persistently high transportation prices are stoking inflation and clouding the recovery. Freight prices, which used to spark only brief bouts of inflation, are becoming a longer-term feature of economies in the United States and elsewhere.
In the past, a 15% increase in shipping costs led to a 0.10 percentage point increase in core inflation after one year, according to Nicholas Sly, an economist with the Kansas City Fed. Rather than being temporary or transient, shipping rates are currently a persistent challenge, he said.
Sly said that such shocks tend to last 12 to 18 months.
Shippers around the world are urging regulators to rein in ocean-freight carriers as forces upend traditional business models. The British International Freight Association called on the British government to investigate “distorted market conditions” in the global container-shipping market.
Over the past few years, the British freight lobby has emphasized concentration. The largest container lines based in Asia and Europe, including Maersk, MSC, CMA CGM SA, and Cosco Shipping Holdings Co., control nearly 85% of the capacity for shipping goods by sea. Approximately half of the global capacity was controlled by the top 20 companies 25 years ago.
Despite being rivals, nine of them have vessels-sharing agreements called “alliances” that coordinate schedules and share space on ships. Most major economies, including the European Union and the United States, have long allowed carriers to operate without anti-competition laws.
Shipping’s impact on the pandemic
In the first instance, the pandemic demonstrated just how adept the carriers have become at managing the market’s supply of cargo capacity, initially curtailing it when COVID-19 first struck, and then ramping it up when demand rebounded strongly, driving prices higher than ever. Shippers have complained that the alliances’ lock on capacity – the ships, their schedules and speeds, as well as the millions of steel boxes in circulation – has translated into asymmetric pricing power.
A Pennsylvania-based importer, MCS Industries Inc., filed a complaint against carriers MSC and Cosco last summer before the Federal Maritime Commission. Cosco and MSC allegedly “operated in tandem to exploit the COVID-19 disruption to profit at the expense of US consumers.” MCS reached a confidential settlement with Cosco, while legal proceedings against MSC continue.
“The market is not working for everybody,” said James Hookham, director of the Global Shippers Forum, an organization that represents importers, exporters, and cargo owners. We believe that this market needs some investigation to make sure that those customers are not being exploited.”
The carriers insist that the high prices are a natural result of imbalances in supply and demand caused by a pandemic. John Butler, chief executive officer of the World Shipping Council, an association of container lines, said the alliances make the entire system more efficient. Despite strong consumer demand in the U.S., Butler attributes many of today’s disruptions to problems with land transportation.
“Pre-pandemic, we have had plenty of capacity, really low rates, and plenty of service,” Butler said. “Since then, nothing major has changed structurally in the industry.”
A “confluence of factors” has led to the tangle of the global supply chain in the wake of the pandemic, according to Mario Cordero, former chairman of the FMC and executive director of the Port of Long Beach, which is one of the nation’s largest ports. While he expects port congestion and shipping prices to return to normal in the second half of 2022, he is still cautious. “I don’t think this is the end.”
Modern American shipping laws date back to 1916, a time when bulk goods were loaded by nets and cranes onto ships. The U.S. government was concerned at the time that foreign carriers and monopolies were endangering American businesses and undermining a nascent domestic commercial fleet. Congress responded by exempting carriers from antitrust laws, but requiring them to report pricing agreements to regulators.
Although shipping laws have been reformed over the years, the last major update was in 1998, before China was admitted to the World Trade Organization. Despite the FMC losing some of its watchdog authority, the industry has remained exempt from antitrust laws.
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