A storm at sea: Soaring prices and rampant unreliability in global shipping

The spot price paid by customers for ocean-going container shipping has now risen by about 500 per cent over 2019 figures. Photo / APNZ HeraldBy: Kate MacNamara

All of Nick Coubray’s steel fabrication machines scheduled for export in May were either delayed or cancelled. One machine, destined for Australia, was prepped for shipping and the container was delivered to his factory for loading. At the last minute, Coubray got word that the vessel on which the machine was booked wouldn’t call into New Zealand. The container was collected, still empty.

Coubray, chief executive of Auckland-based manufacturer Howick Ltd, says his Australian customer was fuming. That’s hardly surprising. After much scrambling the machine was booked on a freighter aircraft a month later for $19,000 – three times the original cost.

The process is now painfully familiar. Howick, which makes machines that manufacture steel components used in construction, still has three orders for US customers, originally scheduled to ship in mid-June. Two will leave this month and one is booked for mid-September, fingers crossed. He’s got a Canadian shipment that has been similarly delayed.

“I’ve got customers who’re worried that shipments from this part of the world just won’t come; I’m stockpiling nuts, bolts, steel, things you’d never think you’d run out of. Shipping prices are way up, and the turnaround time for getting machines to customers [almost all of them overseas] is all over the place. We’ve just never seen issues like this,” Coubray says.

In a world of “just in time” delivery, where components for almost all goods flow from around the world and the finished products are typically exported again, the cost of container shipping turns up in the price of just about everything. Like the oil price, it’s ubiquitous; close to 60 per cent of world trade moves by ocean-going container, according to United Nations data. And in the last year the system has gone completely haywire.

The spot price paid by customers has now risen by about 500 per cent over 2019 figures, according to Copenhagen-based Sea-Intelligence. And the profits reaped by Maersk alone, the world’s largest shipping line, topped US$2.7 billion in the first quarter of this year, greater than the sum total of all the company’s first-quarter profits in the preceding decade.

But the problems in shipping aren’t limited to the sky-rocketing price of service. Beyond that are a rash of surcharges – for empty containers due back at overflowing container yards, for example – and of “blanked ports”, when a regular port of call is simply dropped from a route, often because the scheduled vessel is full or can be more lucratively deployed elsewhere.

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It was originally hoped that a lull following Christmas 2020 and the subsequent Chinese New Year holiday period would resolve the worst of the trouble. But contrary to these optimistic predictions, the problems have only intensified in 2021. Demand for goods is still surging, ports are congested, lockdowns and labour shortages persist, and ships and containers remain caught in the tangle. And around the world, governments are taking considerably more notice.

A role for government

So far, the New Zealand Government has involved itself mainly at the periphery of the problem. For example, it has smoothed the way for more foreign workers to join Ports of Auckland, where full automation at the container terminal has been painfully slow.

In March, the Ministry of Transport began a series of workshops that included parties from across the supply chain, including port representatives, shipping lines, freight forwarders and importers and exporters, to look for ways to alleviate the difficulties.

So far, the meetings have largely facilitated the airing of problems and provided a forum for floating ideas to solve them. A further meeting between industry players and Ministry of Transport officials is planned for August 25, with the focus on supply chain data.

Many of the proposed changes are for better data systems; one idea is for officials to help create an Expedia-type platform that could search available ships, comparing factors such as price and timing.

The ministry is also working on a long-term strategy for the country’s supply chain. Among ideas under consideration is the possibility of a role for government in increasing domestic, coastal shipping, to better distribute goods and empty containers, and to alleviate bottlenecks.

Among the measures it has been asked to consider is subsidising the cost of heavy-lift aircraft to help keep goods moving, in much the same way that it has underwritten the cost of freight on Air New Zealand.

Coubray’s firm Howick is among the small and medium-sized businesses that support this option. In November last year, and again several months ago, Coubray priced leasing an Antonov aircraft to get machinery to customers in Europe. The cost was prohibitive. But the idea made its way into a set of proposals presented to Phil Twyford, the Minister for Trade and Export Growth, by another specialised manufacturer, Auckland’s Exeloo, which makes public toilets.

Transport Minister Michael Wood declined to indicate what further help the Government might offer.

“Severe disruptions to global containerised sea freight persist due to pandemic-driven global consumer demand outstripping available shipping and port capacity,” Wood says.

“I am seeking ongoing advice about the appropriate role for government to mitigate these impacts, and am keeping an open mind.”

Competition questions

Some shippers also believer there’s a bigger role for government in policing competition. Late last year the Customs Brokers and Freight Forwarders of New Zealand (CBAFF), which serves as a logistical middleman between importers and exporters and the shipping lines, quietly took a shopping list of concerns to the Commerce Commission.

President Chris Edwards describes the meeting as a “preliminary discussion” based on a handful of key concerns about the shipping lines: the timing of rate rises among consortiums of shipping lines; the size of those increases; the issue of deteriorating services and schedules against a backdrop of massive price inflation; and some billing practices (typically, charging for delayed return of empty containers when circumstances like full container yards make return impossible).

The commission, Edwards says, offered the advice that it may ultimately be possible to pursue some of the practices in court under amendments to the Fair Trading Act.

The new provisions will hold that smaller contracts, worth under $250,000, are unfair if they would cause “significant imbalance” in the parties’ rights and obligations under the terms of the contract.

Such a change might provide some legal recourse to thousands of small importers and exporters, currently smarting over extra charges that are often levied at short notice.

One example that had shippers seething is a US$1000 “container drop off fee” introduced last month by the shipping line MSC for its Auckland customers. From July 8, shippers who “dehired” their Australian import containers in Auckland (where they docked) would be subject to the surcharge, per container, on top of the negotiated freight rate. The alternative is to return the empty container to Tauranga at the shippers’ expense.

However the legislative changes aren’t expected to take effect for another year. And the Commerce Commission appears to have its hands full. It has a final market study of New Zealand’s supermarket duopoly due out this year, and a planned investigation of building materials pricing is to follow.

A commission spokeswoman says, “the commission explained [to CBAFF] how the Commerce Act operates, in particular in relation to the shipping exemption (which shields some shipping conduct from the Commerce Act but does not prevent its application to cartel conduct).”

“The commission continues to follow issues in the shipping supply chain sector and seeks information on anticompetitive conduct relating to the shipping supply chain sector.”

Shipping lines

The Commerce Act exemption allows shipping lines to co-ordinate and share vessel capacity on routes. But it remains prohibited to either directly or indirectly fix prices, unreasonably limit capacity, or allocate markets.

The World Shipping Council, which represents shipping lines, maintains that the industry “remains highly competitive by any measure” and a lack of competition is not the cause of cargo congestion.

“The Covid-19 cargo congestion brought on by extreme demand in combination with operational disruptions is very real and felt across supply chains globally,” says spokeswoman Anna Larrson. “Even though deployed vessel capacity is at an all-time high, with all available ships carrying cargo, the large and sustained increase in global demand has physically overwhelmed the available capacity on land as well as at sea.

“Congestion in ports and inland transport is causing bottlenecks that suck up capacity. It is a tough situation for all, and like shippers, container carriers are also very frustrated at the disruption and strain of not being able to meet customer expectations on service levels.”

Alliances

It is true, however, that after years of consolidation, container traffic is now dominated by nine major players, organised into just three distinct alliances. A decade ago, the list of major lines was roughly 20 and their coverage of container trade was less than 30 per cent.

The three alliances – 2M (Maersk, MSC); Ocean Alliance (Cosco-OOCL, CMA CGM, Evergreen); and THE Alliance (Hapag-Lloyd, ONE, Yang Ming) – now control more than 80 per cent of overall container trade and operate some 95 per cent of the total ship capacity on East-West trade lanes (Asia-Europe, Asia-US, US-Europe), where the major containerised flows occur, according to the International Transport Forum.

The first alliances emerged in the 1990s, largely as a way for smaller and mid-sized operators to compete with the larger players by sharing vessel space. Now, however, they are a dominant feature of the industry, and include all the biggest lines.

Foreign jurisdictions

Shippers in New Zealand aren’t alone in their growing suspicion of these alliances. This month business groups in the UK, including the British Chambers of Commerce, wrote to the competition watchdog asking for a formal investigation into the shipping industry. The UK Competition and Markets Authority says it is consulting international counterparts while it considers whether to take further action.

The issues have prompted an even noisier response in the US. Last month, US President Joe Biden asked regulators to crack down on consolidation in a range of industries, including shipping. His executive order noted that “the global container shipping industry has consolidated into a small number of dominant foreign-owned lines and alliances, which can disadvantage American exporters.”

Independent observers

One problem, many independent observers say, is that much of the ire directed at container shipping lines is related to the current tangle of high prices and lousy service. And both of those factors are easily explained, at least in large measure, by supply and demand.

John Mangan is a professor of logistics at the University of Newcastle in the UK: “I think we’ve got a lot of obvious reasons for the price spike. Now there might well be anticompetitive practices in container shipping and other sectors of shipping. But if it is an issue, I think it would take a lot of proving. Remember that even beyond the alliances there is a lot of vessel sharing between lines, they’ll buy slots on competitors’ services. And it happens in other sectors too. If you go to DHL you’ll often see FedEx boxes.”

Alan Murphy is chief executive and founder of Sea-Intelligence, a Copenhagen-based data and analytics firm that tracks the container shipping industry.

He says that until last year, shipping alliances had been driving prices down rather than up.

“Essentially, shipping lines bought mega-vessels, they formed alliances to fill all of that capacity, and they ended up in price wars because once they have the same routes and the same terminals, price is the only place left to compete,” he says.

“From 2010 to pretty much 2020, all we wrote about was how the shipping lines were struggling, and how long could this go on and everything was horrendous for them.”

At the centre of the upward price spiral in the last year is not a global cabal, says Murphy, but the US consumer.

“Unless Biden has a bunch of vessels in his back pocket he can’t do anything. I don’t see how regulation can help.”

A fly in the ointment

A final difficulty for governments scratching their heads over ways to unknot the supply chain is that larger importers and exporters tend to sign long-term contracts with shipping lines, and so far they have they’ve been more insulated from price spikes than their smaller counterparts.

Simon Beale heads the New Zealand Council of Cargo Owners, which represents many of the country’s largest shippers. His organisation has been relatively conservative in its requests of the Government.

In a recent letter to Minister Wood, the council asked that the Government make no changes to labour law to discourage 24/7 work, and that it make no change to the current “cabotage” policy that allows international vessels to move empty containers around New Zealand. Much of the letter reads like an appeal not to interfere.

That tack doesn’t surprise Nikos Nomikos, professor of shipping finance and risk management at City University of London.

He thinks the bigger moves available to governments could backfire spectacularly. New ships and containers won’t alleviate the capacity shortage any time soon, but orders placed by shipping lines have skyrocketed in the past six months. And when that new capacity does arrive, next year and beyond, the shipping lines are counting on the efficiencies of vessel sharing to fill it.

“Suppose you disallow alliances,” Nomikos says, “maybe now you just get a wave of mergers and acquisitions and you create even more industry concentration.” Perhaps the biggest risk is thinking things can’t get any worse.