Shipping disruption: The perfect storm for recovery and the New Normal!

The current shipping disruption seems like the perfect storm:

1. Originating countries had production interruptions due to illness or shortage of materials to build their widgets.

2. Shipping companies have capitalized on the inventory shortage by hiking up shipping costs to retailers. No one is saying the shipping companies shouldn’t make a profit, but the price gouging and collusion amongst the shipping companies is out of control. There’s only 4 or 5 shipping companies that control about 95% of all shipping….so they can and do control the pricing.

3. In fairness, ships are now sitting outside various ports waiting to be offloaded. They have to keep the engines on and their staff paid while their ships are idle, so a modest shipping increase to cover these additional costs is reasonable.

4. These ships are also losing money while they sit for weeks at a port waiting to be unloaded. it’s called ‘opportunity cost’ – where the ship loses potential revenue because it’s parked waiting to unload and cannot take on new shipments to new destinations.

5. At the ports, there are shortages in labour to unload the ships (illness, retirement, low wages as well.

6. Once unloaded, now these containers have to be trucked or railway’d to distribution points – where more trucking is needed…but there are not enough truckers to do this. Plus, their own operating costs have increased (gas/diesel super pricey now)… And they have low wages too.

7. More volume is being shipped. With the pandemic stay-at-home issues, more people are ordering online from all over the world. This means increased volumes being shipped.

8. All this means the cost of an item for the retailers is higher. Retailers pass on the increased shipping costs to their buying public (but this is not more profit for the retailers, simply increased cost of items).

This supply chain problem is likely to continue for another 12-18 months before things are caught up – assuming no more catastrophic interruptions due to pandemics, wars, etc.

So what happens then? Once supply interruptions are fixed, will retail prices come down? Or is the present pricing going to become our new normal?

Here an example from BBC:

“We’re trying to do the best we can, but this is crippling us,” says Scott Humphreys. “Before the pandemic we were paying $2,500 to $2,800 (£1,800-£2,000) to bring a 40-foot container from China. Now we’re paying $16,000 – if we can get a booking.”

Mr Humphreys is managing director of Peppermill Interiors, which supplies furniture for homes as well as to the bar and restaurant trade.

Like many importers, Peppermill is feeling the effects of serious bottlenecks in the global container shipping industry, which have led to delays and pushed up prices.

The company, based near Cannock, in Staffordshire, has been operating for 25 years, and currently employs 40 people.

Although it does use suppliers in the UK, roughly half of its stock is imported from East Asia, mainly from China. It will typically bring in between 200 and 250 containers each year.

Now, Mr Humphreys says, the rise in shipping costs is taking a heavy toll on his business. “We physically can’t absorb the extra costs. We have to pass them on,” he explains.

“A single armchair used to cost us £12 to bring in from China. It now costs us £100. So the price we sell the chair for has gone up by 25% – but that isn’t extra profit for us.

“Some of the cheaper items, they’ve doubled in price. There’s no point bringing them in any more,” he said.

He makes it clear who he blames. “It’s all going to the shipping lines. They’re working together. It’s like a cartel out there.”

The price rises have been triggered by a long-running period of intense disruption in the container shipping industry, initially provoked by the Covid outbreak.

A collapse in demand during the early stages of the pandemic was followed by a period of frenzied activity, as people who were forced to stay at home rather than travel or socialise ordered large quantities of consumer goods.

But this provoked a raft of problems, including acute congestion around deep sea ports and a shortage of containers for new consignments, because too many of them were sitting on quaysides around the world.

‘Staggering’

The Suez Canal blockage closed one of the world’s busiest shipping lanes for nearly a week. It created a traffic jam of hundreds of ships, making matters worse because it played havoc with schedules and exacerbated congestion at ports when the delayed vessels began arriving at ports.

Most recently, an outbreak of Covid 19 in China’s Guangdong province had a significant impact on the Yantian International Container Terminal, one of China’s busiest ports – triggering yet more hold-ups, and prompting warnings from experts that the knock-on effects could last for months.

Yet, while shipping lines have been struggling to navigate these choppy waters, and their customers have faced delays in receiving their shipments, or struggled to book space aboard vessels at all, their own earnings have not suffered.

Industry analysts Sea Intelligence have highlighted the fact that 11 of the biggest deep-sea carriers made a combined operating profit of $16.2bn in the first three months of the year. That was significantly more than the $13.3bn they generated across the entire second half of last year.

Sea Intelligence describes these figures as “staggering”, with all 11 carriers earning more in the first quarter of this year alone than they did in the same period of the previous ten years combined.

While it is clear that a shortage of capacity has been a key factor in driving prices upwards, a number of importers have told the BBC they believe a lack of competition between shipping lines has also been having a major impact.

Port congestion

Andy Blakemore agrees. He runs Arcadia Freight Services, in Walsall. A freight forwarder, he arranges the shipment of goods from supplier to customer.

“There’s collusion, definitely“, he says. “In China we deal with about 12 shipping lines. Our agents are supposed to get the best rates.

“But even though they should be completely independent, they’re all sticking around the same prices. And if they’re all sticking together, it’s something we have no control over,” he said.

Gavin van Marle is managing editor of the logistics industry newsletter, The Loadstar. He says there’s no question that liner companies are taking advantage of the capacity crunch.

“They’re certainly making hay while the Sun shines“, he says. “It’s definitely opportunistic, but whether there’s active collusion is another question“.

Deliberate price fixing between shipping lines on European routes was banned by the EU in 2008. But that, he says, doesn’t mean they can’t match each other’s prices informally.

“They all know what the others are doing“, he explains. “Everyone knows the ballpark prices. But the simple fact at the moment is there’s more demand than there is capacity to meet it.”

Higher prices

Importers in Britain, meanwhile, face another problem. Congestion at UK ports, particularly Felixstowe, last year prompted shipping lines to cut the number of direct services – with many vessels from East Asia heading direct to European ports such as Antwerp or Rotterdam.

That in turn means significant extra costs for importers – because space on direct services is at a premium, while containers offloaded at EU ports have to be shipped onwards to the UK.

One importer, a housewares supplier who preferred not to be identified for fear of being “blacklisted” by shipping firms, told the BBC consumers were in for a shock over the coming months.

“There’s going to be a shortage of products, and prices will be much higher“, he said. “We start shipping now to get stocks in for Christmas.

“Prices for houseware, giftware and so on – they’ll be going up, maybe as much as 40%.”

Meanwhile, Peppermill Interior’s Mr Humphreys has written to the prime minister, and several other government ministers, calling for action to combat what he calls “unethical business practices” by shipping lines.

So far, he says, he has had no response. [BBC]

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