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THE SKY IS NOT FALLING IN OCEAN TRANSPORT


cargo ship carrying containers in the ocean

The news is already filling with the opinions of experts who are predicting the gloom and doom hitting the shipping industry. Certainly, I don’t want to discount what is happening in the Red Sea, or the potential impact on consumer costs. The bigger picture revolves around several factors, however. Suez Canal traffic has dropped to half due to the attacks. Rates in the spot container market (worldwide average) hit nearly $4,000 per 40-foot container, not long after the first shots were fired. A great deal of the container trade coming to the US had previously shifted to the East Coast via the Suez Canal due to West Coast congestion. Another factor was the low water at the Panama Canal which has also cut their daily transits in half. The container trade was already soft with world container rates stable at around $1,500 back at the end of the year into the beginning of 2024. So, what does this gumbo of world shipping constraints mean to our ports and eventually consumers?

 

We had already seen a drop off regarding world container trade and volumes in the US and Europe which was expected to continue into 2024. This was fundamentally because of the stockpile of goods that had been warehoused in North America and Europe as shippers focused on changing from products delivered not just in time, but just in case. Nearly 4% of the world’s container fleet was at anchor, empty containers were in such vast supply in China that carriers did not want to bring them back to Asia prompting complaints from shippers. Inflation had slowed retail purchases and consumer debt had reached high proportions. Oddly enough, this had a positive impact on the broken logistics system which we saw so clearly during COVID. Not because it was fixed, but because the decreased volumes had taken a huge amount of pressure off the system overall. Ports were clearing out boxes and undertaking new capital infrastructure projects with a good deal of Federal and State grant money freely flowing. As usual however, the “experts” began once again proclaiming gloom and doom like they did with the CS EVERGIVEN incident. The fact is that there are many constraints on shipping worldwide, but that is another story.

 

So, what will the future look like, at least in the short term? Well, if I could predict the future, I would be wealthy and sitting in my Caribbean villa right now with a fine scotch and hand rolled cigar. So, with a grain of salt, I believe that the industry is much more resilient than most understand. During COVID we saw container rates as high as $11,000 USD on some routes. The ocean carriers made record profits and reinvested in new tonnage which is still being delivered. Not only the biggest Super Ultra Large Container Vessels (SULCVs), but also a large number of Handy-size container ships that would service markets like North America where a SULCV would never fit. These Handy container ships, the Amerimax - under 18,000 TEU’s, of which many have been finished, launched and in some cases laid up. These ship deployments are pending stronger shipper demand, fundamentally from Asia. Ocean carriers however, have had a fundamental strategic approach to logistics by ensuring they have the right size ships, for the right size ports, to reach the right market and to make sure they can keep up with their service contracts. During hurricane Katrina, the industry long before the predictions of where it would hit were certain, the industry shifted cargo out of the Gulf Coast. When US West Coast ports became overwhelmed with volumes and the supply chain was jammed up at every segment, cargo shifted to the East Coast of the US. There was a drop of transits through the Panama Canal and growth in transits through the Suez Canal which could handle the SULCVs. Hub and spoke transits were finally coming into play which was evident in the building of new ships for the secondary market and expanded port partnerships. The major ocean carriers and smaller ocean carriers were opening new services in ports they had previously not considered as the entire industry prepared for the day when things return to normal. That being said, normal changes daily. The key was that the lines adapted the concept of flexible and adaptable, which any of my 2,500 students in my port executive management courses surely remember as being the key to survival in an industry that indeed changes daily.

 

So, what do I think regarding the shipping industry issues in ocean transport (keep your salt handy)? Until the water levels come up in Panama and the misguided terrorists in the Middle East stop shooting at ships, the industry will adapt. Trans-Suez volumes destined for North America will be softer, so will the volumes of cargo through the Panama Canal (70% North America bound or sourced) until the rains finally come back. Asian cargo volumes will pick up in West Coast North American ports. Mexican, US and Canadian ports through existing market reach will continue to serve the markets throughout North America. Will consumer prices increase? The industry’s higher rates will have some impact, but market forces will have the bigger impact being controlled mostly by distributors than transportation providers. Gas prices serve as a dynamic example of this principle. Every time something occurs in an oil-producing country, rates creep up in anticipation of things to come. Ocean carriers, no matter what cargo is being handled, are certainly hedging their bets. A 300% rise in container rates after the first few incidents is less related to actual cost than it is to anticipated cost. Rerouting cargo will make transits and deliveries take more time and rail and truck pricing will be a factor in the final cost to the consumer. However, there was that “just in case” approach to logistics which has gained a solid foothold and I believe will be the norm for the future. 

 

For the consumer, it will be a question of what will drive costs up at the retail level. Inflation, interest rates, politics, international unrest, weather, too many natural disasters, labor issues, etc. etc. etc. Overall, ocean carriers generate revenue from moving cargo, no matter what challenges and hurdles they face. The ships will sail, the ports will be shifted, the rail and truck issues will linger, warehousing capacity will wax and wane, but cargo will still move. If indeed the ocean carriers and the ports are flexible and adaptable, then consumer demand will be met, even as rates rise and fall with the perceived threat to ocean shipping. Indeed, the economies of the world depend too much on trade for consumers not to have what they need or even desire, so I suppose my scotch and cigar will be a bit more expensive.

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