Since early 2020, container freight rates have been on the increase, and since the third quarter of that year they have been shooting up, breaking numerous records. The costs of shipping passages from Asia to the US or to Europe have increased eight-fold over their 2019 prices. The shipping giants point to higher than expected demand due to a rush for products after the Covid-19 shutdowns, and to logistical problems caused by closed Chinese harbours on account of renewed Covid outbreaks.
That this is – at best – only a part of the truth, and that the price explosion of shipping rates isn’t merely on account of a lack of containers, becomes apparent when looking at the quarterly results published by shipping companies.
AP Moller-Maersk increased its earnings before interest and tax almost five-fold to $4.1bn in the second quarter of 2021, compared with the same quarter in 2020, while Cosco Shipping’s profits of $6.77bn (42.9bn yuan) for the first six months of 2021 dwarf the $299.98m profit made in the first six months of 2020. Similarly, second-quarter group profits of Hapag-Lloyd made a healthy jump from $287m in 2020 to $1.83bn in 2021.
Shipping’s oligopolistic market
There is nothing wrong with earning a decent return on invested capital, especially as these companies and there shareholders are also shouldering a risk. But the excessive profits of the shipping industry these days have little to do with hard work and taking risks. What we have seen over the past few years has been an unprecedented concentration in the market. On account of a string of mergers and acquisitions (Cosco and OOCL, CMA-CGM and APL, Hapag-Lloyd and United Arab Shipping Company, Maersk and Hamburg Süd, and Nippon Yusen Kabushiki Kaisha and Mitsui Osaka Shosen Kaisha), and the now remaining players operating in three large ‘alliances’ that corner well over 80% of the global shipping market, we have arrived in an oligopolistic market, with all the outcomes one might expect.
There is a feeling of ‘shame on those who think evil of it’ when these players announced that they had to reduce the available shipping capacity in 2020 owing to market conditions, not least as this coincided precisely with the start of the rise of the freight rates, which have now escalated to record levels (along with the industry’s profitability). With these shipping companies ruthlessly squeezing supply chains, and demand for shipping capacity being what it is, there is little chance that freight rates will come down significantly over the next year.
It is important to remember that the objections to this set of circumstances do not only come from one type of company (those wanting the goods delivered) concerning the conduct of another type of company (those delivering them). The current situation in shipping will translate into significantly higher end-user prices, fanning the flames of inflation further – and the avaricious behaviour of some is now even threatening to jeopardise, or at the very least delay, the global economic recovery, and thus jobs and the livelihoods of millions of people.
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Who will bring the shipping companies to book?
With such a market concentration, and oligopolistic behaviour patterns (constraining supply and pushing prices up), one might justifiably ask what national and international competition authorities are doing? The answer seems to be ‘relatively little’, other than some monitoring activity by a few international bodies. While it is arguably difficult to address such behavioural patterns, given that shipping companies are famous for playing countries off against one another, flagging their ships wherever they get the best deal, the situation has become too grave to be ignored any longer.
Having arguably overplayed their hand, shipping companies ought to or will face three fundamental headwinds:
- Regulatory bodies have to step in, curbing the worst excesses of rent-seeking behaviour (for instance, the removal of exemptions for liner shipping ‘conferences’), as without doing so freight rates will exacerbate inflationary pressures and kill off a broad-based economic recovery for all sectors. Without regulatory pressure, shipping companies have little incentive to change their currently enormously profitable behaviour.
- In a more environmentally conscious era, consumers – as well as governments – will pay more attention to the fact that one container ship pollutes the environment as much as tens of millions of cars. If we are willing to risk the very existence of the automotive industry in some countries and force them to incur years of losses in order to entirely rebuild their product portfolio, then there is little reason why this should not also be the case for the shipping companies.
- Not least on account of the ruthless profit maximisation and currently highly unreliable delivery patterns of the shipping companies themselves, but more importantly on account of a rethink of supply chains, we will witness a major transformation of global trade. Globalisation as we know it is gradually on the retreat. With US-Chinese trade tensions, rising levels of protectionism everywhere and the emergence of automation and robotisation, which for the first time makes reshoring a realistic option, we will see a reconfiguration of supply chains. This will not be a uniform process. Over time, fewer and fewer goods will be imported from Asia, but instead manufactured closer to home. This phenomenon is called ‘regionalisation’ and it will drastically reduce freight volumes.
So in the medium term the picture will be an entirely different one. When shipping companies come calling for bailouts and financial help on account of higher costs to ‘green their industry’ or cope with collapsing demand, governments would be well advised to remember the shipping companies’ conduct in 2020 and 2021. Taxpayers – private and corporate – might object to bailing those out who have fleeced them so ruthlessly.
For more coverage across our publishing network of the issues created by the supply chain crisis, read the following:
- Supply Chain Vulnerability Index shows wide gulf between US and China – Investment Monitor
- Where are industries clustered in the UK? – Investment Monitor
- Who will be the supply chain winners and losers in 2022? – Investment Monitor
- The relationship between trade and investment in the UK – Investment Monitor
- The record profits of shipping companies will contribute to their demise – Investment Monitor
- How supply chains became headline news – Investment Monitor
- Taking ownership of supply chain emissions – Energy Monitor
- Booming EV sales challenge critical mineral supply chains – Energy Monitor
- Filings buzz in oil and gas industry: 37% increase in supply chain and logistics mentions since Q3 of 2020 – Offshore Technology
- The challenges facing food manufacturers on Scope 3 emissions – Just Food
- Preparing for future shocks: supply-chain disruption and food security in the UK – Just Food
- Predicting the unpredictable: The inflationary trickle-down on the food supply chain – Just Food
- Pressing issues for automotive supply chains – Just Auto
- Building supply chains for on-time, on-cost EV manufacturing – Just Auto
- How soon will the chip shortage end? – GlobalData survey results – Just Auto
- China’s resilience shines through in index of world’s most vulnerable apparel supply chains – Just Style
- Steadying the ship: Apparel supply chain pressure points and how to alleviate them – Just Style
- The 3D tools accelerating apparel supply chain lead times – Just Style
- Opinion: When apparel supply chains fail to supply – Just Style
- Direct to patient: rocky road to remote drug delivery in clinical trials – Clinical Trials Arena
- Covid-19 antiviral access: uneven supply patterns hinder US rollout – Pharmaceutical Technology
- Cutting the carbon footprint of pharma’s supply chain – Pharmaceutical Technology
- Molnupiravir supplies dominate in times of Paxlovid scarcity – Pharmaceutical Technology
- The end of the coal supply chain – Power Technology
- Broadcast and live events sector faces a two-year recovery from supply chain delays – Leasing Life
- Supply chain special – what’s the impact on wine? – Just Drinks
- Opinion: Why aren’t investors piling in to build new LNG projects? – Energy Monitor
- EU’s CBAM to impact Russia, China and the UK the most – Energy Monitor
- What the Ukraine conflict means for Europe’s energy crisis – Energy Monitor
- Will hydrogen trucks power the supply chains of the future? – Energy Monitor
- Supply chain tech startups have raised $7bn since 2018: Big winners from the crisis – Verdict
- Supply chain special – What’s the impact on soft drinks? – Just Drinks
- What can digitalisation do for the oil and gas supply chain? – Offshore Technology
- Concerns for mineral supply chain amid booming EV sales – Mining Technology