Shipping companies are having a bumper year, racking up profits while they can

Manufacturers, business owners and ordinary Americans have been mired in a supply-chain morass for months…

Manufacturers, business owners and ordinary Americans have been mired in a supply-chain morass for months now — one that only looks to intensify as the holidays approach. For the heavyweights in the ocean freight business, though, the current environment is akin to an all-you-can-eat buffet — complete with the prospect of heartburn in the form of greater regulatory scrutiny and legal actions over allegations of price manipulation.

“I would argue it’s purely a supply and demand question. Supply is maxed out right now, in terms of everything that can move containers is either chartered or being occupied,” said Willy Shih, a professor at Harvard Business School. “You see some of the companies like Home Depot or Walmart even chartering what are called project cargo ships that normally don’t even carry containers,” he said.

“The incentives for business to find creative workarounds are immense. Recent anecdotes of large retailers chartering their own freight ships as well as cargo being rerouted to smaller, less congested ports around the U.S. offer a case in point,” Matt Colyar, associate economist at Moody’s Analytics, wrote in a recent research report. “The good news is that household balance sheets are in very good shape and consumers are sitting on a significant amount of excess savings, which will help limit the impact of higher costs on household purchasing power,” he said — but the longer the logjam remains, the less resilient both businesses and consumers will become.

Historically, said Patrick Donnelly, senior analyst at Third Bridge, surcharges tended to be one-off events triggered by short-term delays or mix-ups. “Initially, there were seasonal surcharges but standard shipping rates,” he said. “We’ve never seen ongoing surcharges to this extent.”

Sending a 40-foot shipping container from China to California used to cost between $1,500 and $3,000, Donnelly said. “Today, we’re looking at pricing about 10-fold that… We’re now in the range of $15,000 to $17,000,” he said, once surcharges are added.

Donnelly predicted that shipping costs will remain at this elevated level not only though the holidays, but likely through the first half of next year.

Danish container shipping giant A.P. Moller-Maersk A/S told investors in August that revenue was up by more than 60 percent in its second quarter, and upgraded projections for the high end of a key annual profit metric of $6.3 billion to $15.5 billion. Analysts say these eye-popping numbers are par for the course for the industry this year. Watchdog groups have called on regulatory agencies in the U.S. and overseas to do something.

The Biden administration said earlier this month that it will initiate 24/7 operations at the ports of Long Beach and Los Angeles, through which an estimated 40 percent of freight vessels bringing goods to the U.S. pass. Earlier this week, the agency that manages those ports announced that, beginning Nov. 1, it will levy fees on shipping vessels that occupy terminal space without being unloaded after a set number of days (the number of days varies depending on whether goods are being moved overland by rail or by truck). Charges will start at $100 per container and increase by $100 increments daily — a potentially hefty fine, since freight vessels can carry thousands of containers apiece.

But analysts say there is no single, clear-cut solution for untangling this maritime traffic jam.

The roots of the current logjam stretch back to early 2020, Donnelly said. “This started way back in March and April of last year at the start of the pandemic with a lot of canceled sailings coming out of China. When they were experiencing the initial surge, ports were at a standstill,” he said. “We’re still feeling the impacts of those initial canceled sailings to this day.”

When the first wave of the pandemic arrived in the United States, officials took rapid, sweeping action to prevent economic collapse, enacting an unprecedented series of monetary and fiscal policies that shored up ordinary Americans’ buying power in spite of the widespread curtailment of commercial and social activity.

“What was not anticipated was that consumer demand remained relatively strong and e-commerce volumes exploded,” Donnelly said. “We’ve seen e=commerce continue to grow at a pace that is unprecedented. That’s adding to the extreme amount of demand on ocean freight shipping,” he said.

In addition to a dearth of room on ships, there also is a lack of space for those vessels to dock, especially when arriving to the California coast. “The real bottleneck is at the port level and the amount of congestion that exists within the ports,” Donnelly said.

“Last week, like 78 or 79 ships were waiting to get into Los Angeles and Long Beach,” Shih said. “When ships are waiting, they’re holding either cargos or empty containers. That effectively removes capacity from the system,” he said, citing one estimate that some 13 percent of global capacity has been taken offline by these bottlenecks.

On the ground, trucking capacity remains an issue. With a growing number of older workers electing to drop out of the workforce rather than risk contracting Covid-19, an existing shortage of truck drivers was exacerbated by the relatively advanced age of fleet operators, while the shift from people buying goods in stores to ordering them online and having them delivered scrambled typical ground transportation logistics and created new pressure points.

“It’s not just that demand has picked up, but demand has picked up in a very different way,” said Suresh Acharya, a professor at the University of Maryland’s Robert H. Smith School of Business. “Increasingly, stores are glorified showrooms,” he said. “It’s quite possible that this will continue to be our shopping behavior going forward.”

The sudden shift to e-commerce impacted the availability of containers in addition to the amount of available space on vessels, Acharya added. “What goes into a container, rather than being uniform things, is a hodgepodge of things, which means you need more containers,” he said.

And while shipping containers themselves have been in short supply because the factories where they are made — also largely in China — have been affected by Covid-related shutdowns, as well, shipping conglomerates as well as the companies that manufacture the containers have hesitated to crank out more to meet demand, in case the shift in how people shop is only a temporary change.

Historically, the ocean shipping business has been characterized by boom-and-bust cycles driven by spikes in demand leading to an overcompensatory addition of supply. With the tides turned in their favor, shipping companies are racking up profits while they can, Shih said.

“Now, they’re using that high demand to recover their cost of capital and try to make some money,” he said. “There’s also been consolidation among the shipping lines,” he added, comparing container shipping market contraction to the merger activity that shrunk the number of U.S.-based airlines — with each triggering a rise in prices as competition decreased.

“We’re still in a period where we don’t fully understand if this is a ‘coming out of a pandemic’ thing or a long-term norm. I think it’s anyone’s guess,” Acharya said. “What the container companies are gauging is, is this near-term pain or is this here to stay?”