It’s been months since concern over sea freight first hit news cycles. First, it was just an imbalance: as a result of unprecedented demand, containers were becoming stranded at inconvenient ports. Then, it was a shortage: demand ramped up and the cost of moving freight became exponentially greater than it had ever been.
Now, we can’t help but wonder: is this a natural supply chain market correction or is it the result of collusion between shipping companies?
And if it is, what happens next?
Sea Freight Imbalance Drags On
“These truly have been unprecedented circumstances,” says Alicia Xu, Transportation Manager at Canadian Alliance Terminals. “The container imbalance, port congestion, and black swan events like the grounding of the Ever Given have made this an incredibly challenging year for anyone trying to move product through AsiaPacific.”1
The result is an increase in prices. Across the board, everyone from farmers to electronics manufacturers are facing price tags up to six times higher than has been typical. From Shanghai to Genoa, prices have increased 509% in a 12 month period.2 From Shanghai to Rotterdam? 570%.2
If you can’t pay, you can’t move your goods. And even if you can pay, depending on the volume of available containers, you may still not make the cut for transport.
As a result (and amidst new investigation by competition regulators), Hapag-Lloyd and CMA CGM both opted to freeze spot rate increases. Maersk has not yet implemented a similar policy.2
But, as pointed out by shipping specialist Lars Jensen who is quoted in the Global Trade Review, these spot rate caps may just represent a subtle push to force customers into long-term contracts in an attempt to diminish the spot market and drive reliability and profitability in the shipping industry.2
“In other words, setting a cap on spot rates is a different way of saying that a higher willingness to pay on spot is not necessarily what gets you space on the ship. And, of course, if the market is at peak anyway there is nothing lost in implementing such a cap,” Jensen wrote in a LinkedIn post.2
Consumer Prices Set to Rise As SMEs Struggle
As manufacturers struggle to afford and secure space on cargo ships, they’re forced to consider price increases.
“Small and medium sized enterprises can’t shoulder these freight prices very easily,” says Xu. “They have to find a way to disburse the extra cost. Because it’s highly unlikely that these high prices will decrease rapidly, this means handing the burden of cost back to the consumer.”1
Increased cost in the supply chain can be a harbinger of inflation to come.
But the alternatives aren’t any better—if consumers are unwilling to bear the brunt of price increases, manufacturers will have no choice but to pull out of the market. This could mean fewer available product variations and fewer international products on grocery store shelves.
There is another solution for multi billion dollar commercial giants like Walmart and Amazon: charter their own ships.3 But for SMEs, there’s no end to the struggle in sight.
Reuters reported last month that Walmart and its rivals had indeed moved forward with hiring their own cargo ships. The rationale is obvious: if we can’t get space on other ships, we’ll make our own.3
Hiring cargo ships and attempting to surpass log-jammed ports represents a veritable break in the system; for decades a small number of companies have controlled global sea trade—Walmart’s rebellion makes their monopolous grasp seem more tenuous.
How long until Walmart begins selling extra space on its ships for a fraction of the cost?
Shipping Lines Cash In on Price Spikes
For decades, shipping has not been an overwhelmingly profitable business. Profit margins have been razor thin, enabling more customers to ship goods farther. But extreme weather or black swan events eat into those profit margins very quickly so many shipping lines found themselves floundering. Then came 2020.
In addition to incredible demand, the pandemic brought with it an occasion to right the market, pad bottom lines, and make shipping a more profitable endeavour. But this price normalization may have gone too far.
According to Jensen in 2019, the ten largest shipping companies (including the likes of Hapag-Lloyd and Maersk) control 82% of the market share.4 That level of control constitutes an oligopoly. This imperfect competition has enabled shipping companies not to compete for business but rather to induce customer competition for their product. As a result, shipping lines can charge incredibly high fees for the same old services.
This may constitute collusion. Australia’s Competition and Consumer Commission has launched an investigation in Australia into whether the behaviour of shipping companies in the last 12 months constitutes a breach of competition laws.2
In the USA, the Federal Maritime Commission (FMC) is investigating “the timing and legal sufficiency of ocean carrier practices with respect to certain surcharges.”2
As yet, Daniel Maffei, Chairman of the FMC, reports they’ve not found clear evidence of collusion, but the FMC remains displeased with the comportment of the Big 10 throughout the pandemic period.5
“We have not seen any actionable evidence of collusion in price, or the removal of capacity,” Maffai told The Loadstar. “But, in detention and demurrage, carriers need to do a better job. And the added fees, congestion surcharges – one shipping line has a ‘value-added’ fee! What is that for, putting a bow on a container? These should be part of the rate, not some opaque set of charges … that don’t follow the spirit of the rules. We are asking carriers to do better.”5
“It’s clear that someone is benefitting from these exorbitant fees, and it’s not my customers,” says Xu. “Shipping companies probably have very little interest in tempering container prices and, without regulatory intervention, I don’t see this changing.”1
So when will it end? According to Kelvin Leung, Asia Pacific CEO, DHL Global Forwarding, container capacity won’t increase until Q1 FY23. Until then, consumers may simply have to take it on the chin.5
Citations
1 Personal communication between Rose Agency and Alicia Xu, June 2021.
2 Global Trade Review (GTR). “Freight Costs Keep Surging despite Shipping Giants Freezing Prices,” September 21, 2021. https://www.gtreview.com/news/global/freight-costs-keep-surging-despite-shipping-giants-freezing-prices/.
3 Reuters. “‘Containergeddon’: Supply Crisis Drives Walmart and Rivals to Hire Their Own Ships,” October 7, 2021. https://www.reuters.com/business/autos-transportation/containergeddon-supply-crisis-drives-walmart-rivals-hire-their-own-ships-2021-10-07/.
4 “Container Carriers: The New Oligopoly of Container Shipping.” Accessed October 13, 2021. https://www.joc.com/maritime-news/container-lines/new-oligopoly-container-shipping_20190704.html.
5 Lennane, Alex. “‘You Can Build in Robustness, but That’s Just a Nice Word for Overcapacity.’” The Loadstar, October 10, 2021. https://theloadstar.com/you-can-build-in-robustness-but-thats-just-a-nice-word-for-overcapacity/.