Shippers caught in a container trap

by Mark Cardwell

Shippers have seen a huge array of supply chain disruptions over the years, from labour standoffs, to blockades and fury of Mother Nature. But the havoc being wreaked on world trade and transportation over the past two years is unprecedented.

“I’ve never seen anything like it,” said Bob Ballantyne, who spent 40 years with Canadian Pacific before being named president of the Freight Management Association of Canada in 2002.

He stepped down a year ago but remains co-president of the century-old FMA, whose 65-plus member companies spend $3 billion annually on the movement of freight by air, land and sea. Ballantyne is also a board member of the Global Shippers Forum, an international body that represents cargo owners in 20 countries on five continents.

In a December statement, the GSF dubbed the shortage of ocean shipping container the ‘Great Shipping Crisis of 2021,’ saying it has caused many casualties as “shippers trapped between record rates and very poor service levels struggled to fulfill delivery deadlines for imports destined for the holiday sales season.”

For Ballantyne, the container shortage is the result of a perfect storm of elements that were both united and unleashed by the pandemic, exposing the inherent weaknesses and vulnerabilities of the modern world trade system.

Those elements include the globalization of supply chains, the advent of just-in-time inventory, and the avarice of the handful of international shipping companies that haul the lion’s share of the nearly two billion tonnes of containerized cargo transported by sea each year – roughly 60 percent of the US$14-trillion worth of annual seaborne trade.

No end in sight

And as countries, industries and companies the world over continue to grapple with Covid-19, Ballantyne doesn’t see an end in sight to the container capacity shortage that has led to sky-high prices and endless supply chain woes for shippers.

“The global supply chain is a great system when everything runs right, but not so good when things go wrong,” said Ballantyne. “It stretches capacity to the limit and if anything threatens that tight supply chain, it breaks.”

The solution, he added, is extra capacity and redundancy. But that costs money – and new investment is something he thinks is unlikely to occur in a global container shipping industry dominated by a handful of publicly traded, shareholder-focused shipping companies that have been making record profits the past two years.

According to independent maritime research consultancy Drewry, the pre-tax profits of shipping container companies could reach a whopping $150 billion in 2021, a six-fold increase over 2020, when the pandemic took hold.

Drewry predicts the industry will earn even more this year, helping to drive the price of consumer goods to new highs, while undermining the profits of manufacturers and retailers who rely on their services.

Container companies like Maersk, which Drewry expects to make $17 billion in operating profits in 2021 (a 300 percent increase over the previous year), argue that the soaring demand for containers and shipment is a result of breakdowns and delays in the global supply chain.

Blame game

GSF director James Hookham said recently that since shipping lines are blaming the container shortage on port congestion and inland logistics bottlenecks, container shipping capacity levels should increase as a result of dips in both post-Christmas consumer demand and Chinese output during their New Year celebrations.

“This recovery in capacity could accelerate if consumers switch spending to services rather than goods and interest rate hikes and higher energy costs take their toll on discretionary spending,” said Hookam.

Corinne Pohlmann certainly hopes the container shortage crisis subsides soon. As senior vice-president of the Canadian Federation of Independent Business, she said the increased costs and delays due to the issue are “vast and growing” on her group’s 95,000 members, small- and medium-sized businesses in all sectors of the economy. “It’s hard to quantify the impacts because each business is affected differently,” she said.

However, recent polls by the CFIB reveal the container shortage issue is the number one concern for retailers, wholesalers and construction businesses.

Pohlmann said it also likely explains why shipping and supply chain spending was the biggest product input cost for nearly half of business owners who responded to a poll in October 2021 – double the amount reported in a January 2021 poll.

“It doesn’t just cost them more to ship or receive products, it keeps their businesses from growing because they can’t fill orders,” said Pohlmann. “Our members simply don’t have the resources to deal with these increases, especially after many were ordered shut during the pandemic or couldn’t get products for the Christmas season. For many, that was the final nail in the coffin.”

De facto cartel

John Corey, co-president of the FMA with Ballantyne, doesn’t think the container situation will improve any time soon. “We are skeptical that this is a normal supply and demand situation,” said Corey, who joined the FMA in early 2020 after a 30-career with the Canadian Transportation Agency.

“(Container shipping companies) have not brought capacity back to pre-pandemic levels,” he said.

“Instead, they have taken advantage of the situation to enrich themselves. Their pricing is extremely high. Spot pricing is up six or seven times. And even when a shipper has a contract, they roll you by changing the spot price to get on board.”

“What is the incentive for them to go back to the way things were?” Corey asked. “There is a de facto cartel fixing pricing and controlling supply, and exporters and importers are simply out of pocket. Who knows, this could be the new normal.”

Alternatives to ocean

With available container shipping services fully booked and service patterns shifting to serve congested routes – particularly those out of Asian ports, where the most valued containerized consumer goods are produced – some shippers are searching for alternative ways of getting supplies or sending goods to market.

In Europe, for example, shippers are turning increasingly to long-haul trains to transport containers to and from Asia, especially when perishable and time-sensitive goods are involved. According to the Chinese government, a record 15,000 freight train trips carried 1.46 million containers between China and Europe in 2021, an 82-percent increase over pre-pandemic numbers. The same trip now takes up to 70 days by sea, the last 20 of which can be because the ship is waiting for a berth due to port congestion.

Ships, however, carry hundreds times more containers than trans-national freight trains, which must often deal with disruptions ranging from weather events and traffic snarls, to customs checks and labour shortages.

Some shipping lines have also introduced ‘shuttle services’ that make fewer port calls in specific regions, reducing the number of countries with direct connections to export markets and increasing the transfer of loads between services at hub ports. The Port of Montreal, for example, recently welcomed the first-ever container ship to arrive directly from China without cargo trans-shipment in the Mediterranean.

Commenting on the findings of the latest “Container Shipping Market Quarterly Review” published by GSF and MDS Transmodal, which showed an uptick in non-traditional container traffic routes and carriers, Hookham said it showed “the extent to which shippers sought out alternatives as shipping lines priced themselves out of reach and narrowed the cost difference with offerings from other modes.”

Shippers taking control

In ocean-bound North America, some retailers are creating their own container shipping supply chains to get around constrained capacity, huge delays and astronomical trans-Pacific freight rates.

In September, retail giant Canadian Tire unloaded 1,100 boxes in the Port of Vancouver from a chartered vessel. The shipment – the first of several privately planned deliveries – was transloaded 300 km inland at the Ashcroft Terminals, a rail facility owned by Singapore-based PSA, and in which Canadian Tire bought a 25 percent stake in August.

Gaining control of transloading is “another element in the supply chain that you can control, that you have the ability to scale. It’s about ensuring you have the capacity to run your business as well as having redundancy and resiliency,” Gary Fast, Canadian Tire’s vice-president, transportation, told Inside Logistics after the terminal deal was announced.

Major American retailers have made similar investments in cargo handling and warehousing centres near ports. Amazon, for example, is now constructing a one million-square-foot facility in Port St. Lucie, Florida, while Walmart is building one three times that size near the Port of Charleston, South Carolina.

“Warehousing is going bananas,” said Ballantyne. “These facilities are being leased before they’re even built. It looks like companies here are moving now towards a ‘just in case’ approach to supply instead of ‘just in time.’”

For Opher Baron, a professor of operations management and the academic director of the Master of Management Analytics program at the University of Toronto’s Rotman School of Management, chartering vessels, building warehouses and shipping by air may help to alleviate the pressures of container shortages for deep-pocketed retail giants. “But small ones will have to continue to suffer from delays,” he said.

Trade imbalance to blame

According to Baron, the root of the current container problem isn’t a lack of steel boxes, but rather the imbalance in the value and origin of trade between Asia and the rest of the world. “There is a lot of asymmetry and reverse logistics,” he said. “Goods are assembled and shipped in containers which are then sent back. That’s the whole idea of a high-scale, low-cost global shipping system that containers allow to standardize and increase scale.”

Baron said it is “hard to know” if and when the container shortage might end, as well as other transportation and supply chain issues like the shortage of drivers.

But he says the situation may lead to new ideas and opportunities in the transportation industry. “There could be opportunities for new players; maybe a merger of smaller shipping companies to meet demand,” he said. “Or maybe we’ll see an upswing in local production capacity or storage, like we did with PPE during the pandemic.

“Production costs are higher here, that’s why we started buying in Asia in the first place. So maybe the increased shipping costs and delays will tilt the balance back. That would be good for local economies. It would result in reduced emissions too. So this could be a good thing.”