Transportation & Logistics Analysis

Containers needed urgently…

December 04 2020

European, American and Chinese exporters have reported recurrent difficulties in recent weeks in obtaining containers from the shipping companies. The problem is less due to a shortage than to the inability of the shipping companies to reposition containers quickly to the places where they are needed.

In 2021, we will celebrate the 65th anniversary of the invention of the container, the freight packaging unit which has revolutionised international trade. Its inventor, the American Malcolm MacLean, would certainly be proud of its worldwide success if he were still with us - and rightly so. But he would no doubt be a little concerned about the erratic way that the market is currently working.

Because of the economic crisis created by the Covid-19 pandemic, world trade is on a downward trajectory. According to the forecasts in the last UNCTAD Review of Maritime Transport, international container volumes should fall 5.8% in 2020 to 143.3 million teu. Asia-Europe volumes are set to decline 6.9%, transpacific volumes 6.6% and transatlantic volumes 5.6%. At the same time, container digitalisation and traceability has never been so advanced as it is today. Nevertheless, despite the fall in volumes and the existence of these advanced management tools, European, American and Chinese exporters are not able to dispatch all their goods as they would like to because there are not enough containers.

1/ Empty container management under normal operating conditions

The shipping companies have traditionally included structural market imbalances in their forecasts:

  • On east-west transpacific lines, it is generally accepted that, for every 100 full containers leaving Asia for the US, only 60 come back in the opposite direction, leaving mountains of empty returned containers in Chicago and all along the east
    coast of the United States.
  • On the Asia-Europe corridor, for every 100 containers arriving from Asia, 80 come back full from Europe, with some disparities according to country. Germany and France, with their strong exporting capacity, have a good record with a reuse rate of 90%, while the United Kingdom struggles to reach a rate of 40%.

Under normal operating conditions, knowledge of the market and the usual seasonal peaks enable the shipping companies to send empty containers in advance from Europe and the United States to meet the higher level of demand in the other direction. Transporting "air" is not very good business but the companies accept it as a necessary evil and try to minimise its financial impact. The management of empty containers figures in their budgets as a component of their operating costs which, clearly, need to be kept to a minimum.

2/ Market conditions disrupted by the pandemic

Supply and demand balance, seasonal variations, transport options…All the usual features taken into account by traditional forecasting have been upset by the Covid-19 pandemic and the shipping companies are not organised in such a way as to be able to adapt quickly to the new situation.

  • US demand overheated

As we have seen, there is a structural problem in the United States, which has been aggravated by a number of other factors. Firstly, we see that demand in the eastbound transpacific trades has overheated, whether to the west or east coasts. Normally, at this time of year, the American retail sector has already built up its stocks ready for the festive season. As a result, ocean transport prices are generally flat. This is not the case this year, however, as domestic consumption in the United States has shown itself particularly dynamic.

  • Blank sailings

The increasing number of voyages cancelled by the shipping companies has reduced the industry's capacity to reposition empty containers.

  • Shipping containers used ashore

Another factor is aggravating the situation. A significant number of containers are no longer going on to ships! The Silk Road railways are taking over some of them, reducing shipping companies' stocks of empty container in the ports.

3/ Limited adaptability

Faced with the fall in volumes which occurred at the height of the first wave of Covid-19, the shipping companies took immediate steps to adapt ships' rotations, which they have kept under tight management ever since. With containers, however, they have been less efficient.

  • Lease market in the doldrums

After having struggled to balance their books in recent years, when the balance of power has clearly favoured the shippers, the shipping companies resorted to widespread cancellations of their container leasing contracts as a means of controlling their costs. As they made increasing use of their own containers, however, they deprived themselves of a mode of operation which gave them the flexibility to order containers where they needed them and return empty containers in areas where they were unlikely to be used. On average, leased containers represented 30% of the container fleet used by a company. The shock absorber effect offered by this mode of operation has now virtually disappeared, however, following a process which caused grave financial problems for the leasing companies while it was happening. It is now difficult for the shipping companies to go into reverse and sign leasing contracts on a market which, a few years ago, they almost pushed to suicide.

  • Bunker-style management

Shipping companies' management of empty containers is far from optimal. Relations between commercial services, which are deemed to be profit centres, and container logistics services, which are seen as cost centres, are often strained. In current market conditions, this kind of dysfunction is pushed to extremes and has a harmful effect on the fluidity of container movements.

4/ Time for action

The question of the availability of empty containers has become sufficiently acute for the relevant authorities to have become concerned about it. In the United States, the Federal Maritime Commission is currently carrying out an investigation among agri-food exporters into the suspected retention of containers by the shipping companies. If it finds that American export trade is being obstructed in contravention of the Maritime Act, some shipping companies could face action for refusal to sell.

It is high time for the shipping companies to tackle the problem seriously. When you look at the market closely, you can see that it is not suffering from a shortage of containers so much as an imbalance between the place where the containers are and the place where they are needed. There are solutions:

  • Bringing back large numbers of empty containers from the east coast of the United States to Europe. This practice, which the shipping companies considered to be heretical up a to a few years ago, is given more favourable consideration today since it has been economic justification by the healthy freight rates available in for exports to Europe. It would be a way of restoring balance and bringing fresh capacity into the East-West trades.
  • Bringing back large numbers of empty containers from the southern hemisphere and the Middle East to Asia.
  • Offering financial incentives (credit pick-ups) for the recovery of surplus empty containers from inland depots.

More than short-term action, however, it is more than ever necessary to look at the question of volume balance on a trade by trade basis. This issue, which is crucial in negotiations between the shipping companies and their 3/4PL clients, is more sensitive than ever in the current environment since the lack of visibility regarding loading is making the work of the shipping companies very much more complicated.

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Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).