Who is profiting from the current capacity crisis?
About a year ago container shipping lines seemed to be in a very dire situation: the first COVID wave had hit China and global trade was expected to drop dramatically for several months. Many expected the volume drop would be followed by a rate collapse, which in turn would push some carriers to the brink of bankruptcy.
Today the situation has changed completely. Carriers are making money at a record level, some approaching 20% profit margins, thanks to very high spot rates and on-contract surcharges.
Carrier representatives as well as many industry experts tend to describe the current development as demand-driven. They justify the prices by emphasizing the effort made by carriers to move large volumes. Shippers on the other hand are increasingly agitated and dissatisfied with carrier behavior, calling on authorities to investigate the situation for an abuse of market power by the carrier oligopoly.
But are shippers right to accuse carriers of abusing the capacity crisis or even having engineered it? On many charges the carriers can clearly be acquitted.
The current crisis is not due to capacity cuts. Carriers did significantly (and surprisingly synchronously) cut capacity in the first half of 2020 in order to stabilize rates during the initial cargo volume drop. Back then this move was overwhelmingly welcomed by shippers who were worried that collapsing rates could destabilize the industry. But since October 2020, more or less the entire available fleet is in action, and the deployed fleet on the congested Transpacific is at a record high.
There is also nothing wrong with high spot rates. Demand for exports from the Far East currently exceeds the available capacity, and the current extremely high spot market rates are the “invisible hand” in action to establish an order of priority, meaning which containers get shipped and which don’t. This reasoning can be extended to carriers’ aggressive pricing in current contract negotiations. If the market situation allows for it, it is in no way immoral to ask for a significant price increase. Carriers had a string of bad years; they also deserve to make some profit form a market that has turned in their favor.
There is however one aspect of current carrier behavior that is very problematic: commercial unreliability. Carriers are free to ask any price they want in spot and contract tenders, but once they have agreed to move a container at a certain price they should do so (except if prevented by force majeure) and not abandon their customer the moment somebody else is willing to pay more. The impression many shippers have is that contract and “normal spot” cargo is often rolled because “the ship is full and there is nothing that can be done.” But if they go for the “super premium” offer, a free slot magically appears. In addition, some (not all) carriers put pressure on shippers with fixed contracts to accept very significant surcharges if they want their cargo moved. In more extreme cases, carriers are even reported to have unilaterally stepped out of contracts.
Beyond the ethical aspects, this is problematic because it destroys the basic trust between carriers and shippers, which is essential for a healthy business relationship. This lack of trust will slow down any joint effort on issues that are vital to shippers and carriers alike, such as predictability of volumes and end-to-end data exchanges.
While carriers are certainly not to blame for the capacity crisis, carriers should, in general, be careful that a perceived focus on short-term revenue does not turn out to be self-defeating long-term. Shippers often have limited choices in the short-term, but the damage to mutual relationships will be lasting, while the current lead time and transport cost explosion creates pressure on manufacturers to shorten their supply chains.