Shipping containers shortage threatens global trade
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By Guillaume Dhamelincourt, Business Development–Product Specialist, JK Capital Management Limited, a La Française Group-member firm
The past year has taken many tolls on the global economy and on trades particularly with shutdowns in various parts of the world shifting supply chains and products mixes around. One looming issue that recently started adding to the turmoil is the growing shortage of shipping containers in Asia.
Containers are the backbone of global trade. 90% of goods around the world are transported in the 25 million containers in circulation. They are usually considered a commodity which has little impact on the underlying trade but lately a shortage of containers has led to a significant jump in the freight prices with the cost of shipping one container from Shanghai to Rotterdam rising from under USD2,000 to over USD8,000 between October 2020 and February 2021. Container manufacturers are scrambling to meet the surge in demand, but even with container manufacturers working at full capacity in three shifts, the shortage is unlikely to ease for months, slowing down international trade and impacting prices.
The problem finds its roots before the pandemic hit. Late 2019 Chinese manufacturing hit a low point on the back of the trade war and sluggish demand. This caused shipping companies to slow their new container orders. Then the pandemic hit in Asia, industries shut down and shipping companies, bracing for a tough time, stopped all new orders. For the first 5 months of 2020, there were almost no new orders of containers from the Asian shipping companies. The feeling was also that there was an excess of containers then, with the equivalent of more than 3 million empty 20-foot containers at Chinese ports at the end of March last year and 1.2 million in storage at container manufacturers.
But then the dynamic completely shifted. Asia, and China in particular, got out of the crisis when the rest of the Western world was entering it with factory shutdowns in the West leading to a boom for Asia-made products. The revived manufacturing and shipping quickly absorbed the container surplus waiting in Chinese ports leaving shortages for the shipping companies.
Adding to the problem, the containers shipped to the West have barely been returning to Asia. The situation is particularly flagrant in the US. Not only did the factory shutdowns lead to fewer goods to ship, but massive workforce disruptions also due to coronavirus restrictions affected ports and cargo depots all across the country. Without adequate staffing, containers started to pile up. It is estimated that for 100 containers arriving to the US only 40 are re-exported. This is staggering when over 1 million containers are shipped from China to the US every month.
Shipping companies can currently charge 66 cents per container per nautical mile on the Shanghai to Los Angeles route compared with 10 cents on the way back. With such advantageous margins the pressure is on to get their hands on containers and orders for new ones are going through the roof. The Chinese container manufacturers, which dominate the market, are now charging USD 2,500 for a new container, up from USD1,600 last year. Even with this new supply, the shortage situation is unlikely to ease until Western economies are back in gear and start returning all the stored containers they hoarded.
From our portfolio perspective, we are exposed to SITC in our equity portfolios. SITC is a shipping logistics company that has a network of 72 service routes that cover 76 major ports in the intra-Asia region including China, Japan, South Korea, Taiwan, Hong Kong, Vietnam, Thailand, the Philippines, Cambodia, Indonesia, Singapore, Malaysia, and Brunei. The rising cost of containers could have had an impact for SITC which leases 80% of its containers while 20% of the containers are self-owned. As per our recent interactions with the management, container rental costs accounts for approximately 5% of sales. Management expects the ongoing vessel and container shortage to persist in H1 2021, helping shipping prices to remain firm. Fortunately, the surge in container costs has a minimal impact on SITC as the company has no long-term lease agreement expiring soon, their leased containers falling typically under three to five-year lease agreements. Intra-Asian trade also does not face the same strong imbalance as China – US/Europe routes do.
Sources: Bloomberg, Hillebrand and CGTN.com; data as of March 2021
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