Shipping container prices may be leveling off after a year of worsening service, threats of regulation, and complaints from retailers as prices skyrocketed.
The cost of a 40-foot container declined modestly from $10,377 the previous week to 10,360 last week, or 0.2%, according to the World Container Index by Drewry, a London-based maritime research firm that tracks East-West routes. The rate is triple the price compared to a year prior thanks to high demand in the US and congested ports tying up ship capacity.
Simon Heaney, the senior manager for container research at Drewry, says average spot rates have plateaued over the last two weeks because carriers, notably Hapag-Lloyd and CMA CGM, two major container lines, announced in September that they would be freezing rate increases after steeply raising them for 22 straight weeks. “We believe other lines are doing similar, but unofficially,” Heaney said.
The spot rate cap by CMA CGM is set to expire in February 1, 2022, while Hapag-Lloyd did not set a fixed date.
Hapag-Lloyd said they froze rates because they had hit their peak, while CMA CGM said it was prioritizing its long-term relationship with customers given the “unprecedented situation in the shipping industry.”
Heaney noted that shipping lines “are under significant pressure from shippers and regulators,” to rein in their rates. Freezing the spot rates at such a high level, “this is a relatively cheap giveaway,” Heaney said. “Some shippers are asking why now and why not go further?”
Shippers—the importers and retailers who pay to put their products on container ships—have expressed anger at what they saw as “price-gouging” from shipping lines reaping record profits unheard of in leaner times. One CEO of a Philadelphia home décor firm, filed a complaint with the Federal Maritime Commission, the US agency tasked with ensuring that the ocean supply chain is competitive and equitable. In an interview with The Loadstar, a supply chain trade outlet, he called the high rates and low service, “outrageous conduct,” on the part of the shipping lines, that would “reverberate throughout the US economy,” and accused them of operating a cartel.
James Hookham, a director at the Global Shippers’ Forum, reacting to CMA CGM’s announcement, told The Loadstar: “It’s like the torturer asking the prisoner ‘aren’t you grateful I’m not turning the screw on the rack any further?’”
The historically high rates have drawn the attention of the Biden Administration, which issued an executive order in July indicating that regulators are watching the industry for non-competitive behavior. According to reporting in the Washington Post, “The White House officials who drafted Biden’s order say high freight costs, resulting from a lack of competition, are an economywide drag.” The aides acknowledge that the pandemic caused much of the disruption, “But they say the lack of competition enabled cargo carriers and railroads to exploit the pandemic by driving prices to historic highs.”
Profits or profiteering by shipping lines?
Companies are driving up the cost of shipping by competing for limited space on the worlds’ container ships. While snarled supply chains have raised some operational costs, Heaney said, carriers are “making more money than they ever have,” with revenue far outpacing the uptick in costs.
That’s delivered extraordinary profits for shipping lines. In its August earnings statement, Copenhagen-based Maersk, the world’s largest container line, announced a net profit of $3.7 billion in the second quarter of 2021, an eightfold increase from the same period last year, citing “exceptional circumstances in Ocean.” For Hapag-Lloyd, revenues increased by 51% in the first half of 2021, with profits of $3.3 billion. CMA CGM, likewise posted record profits of $3.5 billion, a 2,500 percent increase from the same period last year.
That’s having a big impact on small- and medium-sized retailers, which cumulatively make up a significant portion of manufactured goods traveling between Asia and the United States, but whose individual annual sales may take up only a handful of containers a year. These smaller businesses are at a disadvantage, unable to compete on either volume or capital.
Many are priced out of that market, watching their inventories run low as the all-important Christmas season closes in while their goods sit in a container in Shanghai. Nothing short of a miracle would get them on a ship in time.
Even when they can secure container space, retailers selling low-value products on thin margins (like a squeaky cat toy, for example) , are “probably having a very hard time right now,” says Nathan Strang, a senior manager of ocean operations at Flexport, a San Francisco-based freight forwarder. The price to ship a container can be more than the profit they can expect to earn from what’s inside it.
Massive retailers like Costco, Walmart, Home Depot, and Target have gone to extreme measures to ensure that their goods arrive on time. They’ve chartered their own dedicated ships—a costly and unusual move—and locked in premium rates upwards of $20,000 to guarantee that their containers are loaded onto a ship, or shipped goods meant for Christmas in June, paying for several months of warehouse storage.
Unquenched demand versus China’s power crunch
The relief from rising prices does not guarantee the trend will continue in 2022, says Strang of Flexport. Low inventories at retailers across the United States mean they will have to continue shipping goods to restock past the Christmas high season. A further drop in prices could spark more retailers to resume shipping, pushing up prices again.
A different disruption may be on the horizon. Power rationing in China last week forced temporary closures in its industrial manufacturing hubs and some shippers and freight forwarders in Asia have reported a drop in container rates. Caixin Global, a China-based outlet, reported that an executive of a Shanghai freight company saw container rates from China to the US West Coast nearly halve, from $15,000 to $8,000, following the drop in supply due to power outages.
It’s too early to tell, Simon Heaney of Drewry said, whether a slowdown in manufacturing in Asia will affect overall container prices. It remains to be seen how long the rolling blackouts will last, and how deeply they will affect the ability of Chinese factories to continue turning out goods for the US. “Until then I can’t really give you a confident assessment,” Heaney said. But if this does happen, Heaney added, it could force a slowdown in US demand. This would allow shipping, ports, rail and trucking to recover and begin restoring a smoothly functioning supply chain—and that would bring down the price of freight.