28-01-2021 Making dough, By Sam Chambers, Splash Extra
I’ve been holidaying in Provence this month. It has been fantastic, albeit not cheap. The single boulangerie in the village is rammed every day, masked customers forming a sweaty queue down the street for their baguettes and croissants, which locals tell me are marked up in price for the hordes of rich Parisians who pile down south every summer. “Come back in September and that pain chocolat is 20 cents cheaper, and there’s no queue,” one local confides.
It’s kind of like the situation across the container sector these days. Prices are up on pent-up American demand and a system that has quaked under extreme duress brought about by the pandemic. American politicians and regulators are sharpening their knives, ready to have a pop at liner companies. Carriers, on track to post their highest ever profits, likely triple the previous all-time highs, argue that they are not the actual cause of today’s supply chain chaos; look at the ports, the hinterland connections, the unprecedented consumer appetite, all this is beyond our control goes the argument.
They do have a point. In normal times there has been a container ratio that has worked for decades. The number of containers needed to move the world’s goods has been a simple formula – ship teu capacity multiplied by 1.6, meaning there are 24.5m teu worth of ships trading today, which when multiplied by 1.6 means in normal times we need just shy of 40m containers to move goods effectively. However, when a pandemic comes along and terminal dwell times increase by 50%, street-turns double and ships wait seven days for a berth, suddenly, the world needs a heck of a lot more containers that simply do not exist – and, I’d argue, will not be needed by next year.
It’s important not to have too much of a knee-jerk reaction to today’s extraordinary, one-off earnings liner environment. Let’s not forget that this is a sector that has for most of this century been brilliant at burning cash. In 2018, McKinsey published a report looking at the previous 20 years of profitability in the container shipping industry. The report from three years ago estimated that the liner industry had destroyed more than $100bn in shareholder value over the previous 20 years. All right, a little like the packed bakery here, they might recoup all those losses in the space of one year, but we need to be careful not to tamper too much with the system that has delivered globalization in spades over past decades.
Nevertheless, carriers need to tread very, very carefully now. Appear humble and ease up on heaping new ways to bill hard-pressed clients. I winced the other day when I saw Hapag-Lloyd’s new ‘Value Added Surcharge’ on the transpacific, set to add another $4,000 per teu from August 15. The talk of price gouging will not die down with moves like that. Via one well-placed media lapdog this month the liner community let it be known that the Box Club, the informal gathering of carrier CEOs that has sparked previous collusion investigations, has been disbanded. Further missives like that will be vital to keep anti-collusion investigators at bay.
However, when the dust settles, like the flour at the bread maker, we all need to take a breath and realize what we’ve been living through in 2021 is unlikely to be replicated anytime soon. Alan Murphy, founder of box consultancy Sea-Intelligence, writing in his company’s regular Sunday Spotlight newsletter earlier this month, summed this up rather neatly in the following statement: “Any model built to predict the future of container shipping has been designed in a world populated entirely with white swans, and suddenly, the world has run out of white swans, and there is now a 2,000 dollar surcharge to even secure a black swan.”