Shipping Crisis

The Shipping Cycle

There is a concept in shipping and international trade called the shipping cycle. This is explained as a cycle of boom and bust in the rates of shipping transportation that repeat approximately every seven years. There are a multitude of factors and driving forces that influence this cycle, but it has been a cyclical pattern in the world of shipping as far back as 1741 as records indicate.

This cycle is roughly in following with the broader economic cycle of the world because shipping is a driving force in the global market and is subject to supply and demand of world economies. It is often cited that 95% of goods for global trade are transported by ocean shipping, and all physical goods will require some element of supply chain management. The industry saw this garner heightened attention during the pandemic and resulting quarantine last year. The world is becoming increasingly interconnected, especially in a supply chain sense. The fallout of shutting down borders and production across nations had many short and long-term ramifications.

Notable examples are the pharmaceutical supply chain in India and China disrupting finished product medical goods and supplies; food shortages seen through a variety of products especially meat and chicken; and a massive interruption in the supply of consumer goods with items like hand sanitizer and toilet paper: the objects of consumer product runs.

Taking into account the ebb and flow nature of the market, we could predict that COVID would have an immense fallout on the global supply chain. Everything from freight rates to the accompanying supply and demand-side forces has seen a dramatic swing. Now, a year and a half after the initial complications began, we are still seeing the impacts of disruption on the market.

Pandemic Forces

The pandemic stretched the supply chain and the shipping market in many ways, and it has still not fully recovered. We are seeing an astronomical rise in the container spot freight rates due to increased demand and kinks in the supply chain limiting proper supply. There are several factors at play.

The size of ships has been steadily increasing since containerization, but in the last 20 years, there has been an explosion in ship size. Major ocean carriers have been pushing for larger and larger ships in a series of escalations to capture economies of scale. For some carriers such as Hapag-Lloyd, the average carrying capacity of a ship in their fleet doubled from vessels built in the 2000s to those built after 2010.

The increased ship size did increase shipping lines profitability, but the profit margins remained razor-thin. Ships had to sail at around 90% capacity or more in order to make money for the shipping lines. This affects the market in many downstream ways.

It meant enlarging any supporting infrastructure that serviced these mega-ships including ports, channels and canals, intermodal supply, etc. There was more consolidation of cargo into fewer, but larger, facilities that could keep pace with increasing ship size by increasing cargo handling as well. This does achieve market efficiency, but also amplifies the effect of any potential disruption to the supply chain. If, for example, there is a port strike in Montreal, or a large backlog in LA/Long Beach, the effects can have a greater ripple effect on the market than in a more diversified setting.

When the coronavirus first started to spread, one of the first reactions from international governments was to go into lockdown. Factories in Asia were among the first to be shut down due to a large number of workers within a confined space, a perfect breeding ground for viral disease. It was unclear when production would resume, and what need there would be for shipping services in the meantime, so many sailings were canceled. And in the first half of 2020, the demand side of global trade was, in fact, greatly depressed.

However, this decrease in demand would not last long. By the second half of 2020, consumer spending not only rebounded, but saw great increases for a few reasons. Although there was some recession seen in the economy immediately after the government enforced shutdowns, the global economy on the whole was still surprisingly strong. Many had thought this may be a catalyst to a market correction event, but that was not the case. Despite many Americans being out of work, a substantial portion was either considered frontline workers carrying on with their essential duties or shifted to work-from-home arrangements. Stimulus money and unemployment benefits provided refuge to others, and while people had more time and money available with nowhere to go, they turned to online shopping. Sites like Walmart, Amazon, and IKEA saw online orders skyrocket, and demand for the shipping services necessary to provide these goods to customers was reinitiated.

Demand had returned and consumers were expecting products, but the flow of the supply chain was still greatly disrupted. A major kink in the line was and remains to be the container shortage issue. The containers themselves were not as much the issue as was the positioning of the containers. The vast majority of containers are manufactured in China with goods loaded for export from the country and shipped to large economic powers such as the US and Europe. Imports into the US from China have increased 54% year-over-year according to FreightWaves SONAR data, while US exports to China have only grown 4.4% in that same time frame. This means that the flow of goods is uneven and empty containers are not returning to where they are needed most. This effect is compounded with other factors such as delays in handling seen in large ports around the globe, and ships at anchor outside port facilities holding up the containers needed to conduct shipping as normal.

Examples

Increased freight rates have been positive for the shipping lines, but they have left the shippers bidding on higher prices for limited space with increased lead-time. The disruption and uncertainty have left some shippers looking for alternative means of booking. Home Depot is the third-largest US importer by volume of containers behind Walmart and Target according to data from the Journal of Commerce.

Retail has suffered from some of the COVID restrictions and logistical shortages of the past year, but the growth in the coming year is expected to be between 10.5% and 13.5% which equals growth between $4.44 trillion - $4.56 trillion by the National Retail Federation. With the anticipation of retail growth and gearing up for the holiday season, Home Depot has reportedly gone as far as to charter their own cargo ship for exclusive use in Home Depot shipments. While company spokespeople have declined to offer many additional details on information such as the ship size, name, or routing, this would not be the first time a large company has gone around ocean carriers.

Amazon is a licensed non-vessel-operating common carrier (NVOCC), and according to an American Shipper article, they have been told by a source that Amazon filled the majority of slots on several extra loaders during last holiday season, an extra loader being a container ship that is not a part of a regular service. We have also seen several freight forwarders fixing small ships for additional support services.

While this may be a short-term temporary workaround, and definitely an interesting case study, it also poses many unanswered questions. For instance, being that port blockages and delays are a huge bottleneck in the current supply chain operations, there is a question as to how effective booking a ship would be if the same ports are still necessary for unloading. Home Depot has many long-term high-volume handling contracts with transportation providers and carriers at lower-than-market rates, and the efficiency of chartering a vessel and handling end-to-end transportation will remain to be seen.

The past year-and-a-half has seen many challenges and obstacles thrown at the global supply chain, and despite offering some resistance, companies have by in large found solutions. The logistics industry is very much a problem-solving industry with customer relationships at the forefront of the business. All of the factors discussed and more have led us to a market experiencing delays and increased rates, but we are very confident in the ability of the shipping field to right their own ships.

Why We Are in a Shipping Crisis That's Sparking Shortages (businessinsider.com)

21-HBR-Global-Supply-Chains-Brief.pdf (coupa.com)

Home Depot contracted its own container ship to avoid shipping delays (cnbc.com)

Home Depot charters in ship to battle supply chain pitfalls - Splash247

Home Depot now has its own ship. That’s an ominous sign - FreightWaves

An Anatomy of Cycles in Shipping Industry, 1946-2020 (scirp.org)

Shipping Cycle In Shipping Industry | ipl.org