An international superstar visited Britain last Tuesday. The Ever Given, a 400m-long container ship that rose to global renown when it became stuck in the Suez Canal, blocking the crucial waterway for almost a week, docked at Felixstowe in Suffolk in the mid-afternoon on Tuesday – around four months late.
Freight at the centre of a storm that threatens entire global economy
By Louis Ashworth
Daily Telegraph UK·
8 mins to read
The Ever Given arrived in Britain last Tuesday, where around 2,000 containers were lifted from the colossal ship.
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When the ship ran aground in late March, the global shipping market was already under stress. Spot container rates for goods leaving Asia, which had rarely ventured far above US$2,000 (£1,436) for a standard 40-foot unit, had soared to over US$7,000 a pop for the crucial Shanghai–Rotterdam route that links Asia with Europe.
Since then, short-term prices have more than doubled again, leaving them about seven times higher than a year ago. What some observers had thought might be a temporary storm has developed into a full-blown crisis for many businesses, which now face higher costs and shortages.
On Thursday, research groups said benchmark prices for the China to United States route had broken US$20,000.
"We've never seen rates this high, especially on the spot market," says Shanella Rajanayagam, a trade economist at HSBC.
The surge reflects what industry insiders call a deadly cocktail of factors: disruption at ports, container shortages, pandemic-linked closures, a lack of haulage drivers, soaring demand and an increasingly cutthroat market for spots on ships.
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"You just keep on having these minor stressors in a system that already has zero tolerance," says Eytan Buchman, from online freight marketplace Freightos, "and that's where we are today".
It carries big repercussions for the world economy, threatening to starve global demand just as lockdowns are being lifted in many parts of the West, and create longer-term inflationary pressures as importers pass costs onward.
Soaring rates have created a nightmare for businesses. Where big importers are often able to leverage long-standing relationships with shipping companies to guarantee spots, companies with less financial clout are finding themselves squeezed by an ever-increasing array of surcharges.
"It's a kind of an Animal Farm [situation]: 'some people are more equal than others'," says John Glen, an economist at the Chartered Institute of Procurement & Supply.
Full steam ahead for the major players
The situation has begun to attract the attention of regulators and politicians around the world. In the US, President Joe Biden has spurred efforts to challenge anti-competitive practices, while the UK's Competition & Markets Authority has said it is following developments.
It has drawn focus to a market dominated by 10 major players who control the vast majority of global freight, and appear to be winning big for soaring rates. The largest, Copenhagen-headquartered Maersk, has posted two successive quarters of record profits.
John Butler from the World Shipping Council, which represents the major shipping companies, says the current situation is just the market at work.
"It's simply a matter of supply and demand," he says. "It's no more complicated and no more simple than that."
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He insists that shipping companies are not simply squeezing clients who have nowhere else to go, saying they want to "keep their customers" once things have settled.
"I'm confident that those conversations are occurring," he says. "Do the conversations always result in an outcome that makes everyone happy? Probably not. That's the nature of having a disrupted market."
James Hookham, an executive at the Global Shippers Forum, which represents importers and exporters, says shipping companies have benefitted from "remarkably generous" exemption from competition laws.
He says: "Our frustration as a representative body is not so much with the shipping lines themselves, because they're just making hay while the sun shines.
"Our real frustration is with the regulatory authorities, the competition authorities in the different jurisdictions."
He reserves particular ire for the European Commission, which he says seems disinterested in the state of shipping.
"I think they are going to be embarrassed just because every other major economy in the world is at least having a look," Hookham says.
"Monstrously cheap"
Before the pandemic, shipping was "monstrously cheap", says Buchman.
"For a long time, until the beginning of 2020, it was probably cheaper to throw goods into a container and ship it around the world than it was to store it in a warehouse facility," he says.
For importers, that meant shipping usually constituted a fairly negligible part of costs, and bringing in goods from the Far East could often prove cheaper than getting them from far nearer neighbours.
That wasn't a happy situation for everyone. The shipping industry depicts this period – from roughly 2015 to early last year – as lean times, in which profits were squeezed to virtually nil.
"We recently have seen a very long period where the industry didn't make any money whatsoever," says David Kerstens, a shipping analyst at Jefferies. "From around 2014 or 2015, the average profitability in the container shipping industry has been at around zero."
Freight has always had extra costs attached, but with businesses at their mercy, shipping companies have even begun treating shipping itself as a premium service. Rolling – in which a container is not loaded onto the vessel it was supposed to sail on – is commonplace, with shipping companies apparently willing to leave clients in the lurch if someone comes along with a better offer, a practice similar to gazumping in the housing market.
Because companies simply buy container space, the situation is more acute for businesses that sell cheap or large goods – or worse, both. Hookham says this is proving particularly painful for some African exporters who sell large quantities of cheap commodities. "They're just getting screwed," he says. "It's as simple as that."
No change on the horizon
Economists expect sky-high spot rates to hold for the rest of the year, and perhaps only dipping once China's Lunar New Year – and the factory shutdowns usually associated with the national holiday – has passed, in February. "It's gonna get worse before it gets better," says Buchman.
Some companies simply don't have that long to wait, and will soon be scrambling to reorganise supply chains and shield themselves from the next shipping shock.
But with China so dominant in global goods production, it might not be enough to produce a true sea change. When procurement teams look out into the world, the manufacturing powerhouse's charms may be irresistible.
"You'd have to believe that the cost of doing business in the current climate is so much higher than the switching costs of looking for new suppliers, and maybe even setting up new factories," says Woan Foong Wong, an assistant professor at the University of Oregon.
Ultimately, that will mean a future in the arms of the same set of shipping companies – a relationship that may not feel so cosy for stung businesses. But Hookham is hopeful that if the issue gets enough attention from politicians and competition watchdogs, it could be possible to at least stop this occurring again.
"It needs a different model if this is to continue," he says. "Because this is just a licence to print money."
In the meantime, Britons face ongoing lessons about what happens when supply chains are strained.
"In good times, we don't even know this stuff goes on," says Glen. "Most people aren't aware of what the logistics industry and what the procurement industry actually does, because it does it so efficiently and so smoothly in the background."
The coming months may be a reminder that out of sight doesn't always mean out of mind.
