The world does not have enough containers in the right places to handle current cargo demand, with the shortage leading to sky-high prices.
Toy companies hoping for respite from the current container shortage challenges may have to wait a little longer than they had hoped for the situation to improve significantly. According to a report in Freight Waves, there are not enough containers in the right places to handle current cargo demand. Demand continues to outstrip the availability of containers, while the US pandemic situation has eased to the point where retailers are able to pass along higher transport costs to consumers without being accused of price gouging — with the result that costs are rising across the board.
Equipment leasing companies, which order containers from the very small number of Chinese manufacturers that build them and lease the boxes to shipping lines, have suggested that the current situation is likely to last for the remainder of the year, with one commenting in an analyst call last week: “There’s no indication from the shipping companies that they expect to see any easing of the tightness of supply that they’re dealing with. The horizon looks pretty good for us, at minimum through the end of this year, and likely well beyond that.”
Three Chinese companies produce around 80% of the world’s containers. Production has risen, with estimates for 6%-8% growth in container capacity this year. However, boxes aren’t being built anywhere near fast enough to ease the prevailing shortage. Another leasing company has admitted: “Despite the factories ramping up container production activity at the end of last year and beginning of this year, inventories of new containers remain very low. What’s sitting on the ground roughly represents only two to three weeks’ supply.”
The price of containers is an indication of ongoing scarcity. The price for a new container is now $3,500 versus $1,800 in early 2020 and $2,500 in late 2020. The cost has remained roughly steady at $3,500 for the past three months. Recent price gains have been more extreme in the used container market – the price of used containers in China has nearly doubled from $1,299 in November to $2,521 in March. The shortage of available containers has lead to prices increasing week-on-week as the inventory has been depleted.
This year’s rise in production comes after a period when orders were below market replacement requirements. Much of the container production which has happened this year is making up for low production volumes in 2019 and the first part of 2020 – in effect, the industry is still playing catch-up.
But in reality, Chinese factories are not expanding production capacity quickly enough to meet demand. Indeed, it appears that Chinese factories may even be keeping production tight to keep their newbuild prices high. This negates the hope that the market might be flooded with excess new containers, thereby bringing freight rates down.
Relief from container scarcity is not just about production. Many containers have been held up in port congestion and by issues such as the Ever Given incident in the Suez Canal. When such logjams clear, the theory is that more containers should become available. However, it has been suggested that ships are in such a hurry to turn around that they’re being forced to leave empty containers behind when they return to China. Apparently, because of the tight sailing schedules and the need to turn ships quickly, they are unable to wait for all the empty containers and leave with 5%-8% fewer containers on the return leg than they carried on the outward journey.
With all of these factors continuing to affect importers across the globe, one shipping industry executive has suggested: “Within this strong trading period, I haven’t heard any of our customers express confidence that they can remove the bottleneck from their operations. Our general view is it likely to continue until trade slows. Who knows exactly when that’s going to be – but I think the betting is probably sometime at the end of this year or early next year, when maybe the trade world starts to get back to normal.”
Shipping companies are also benefiting from the prevailing market conditions: Danish transport group Maersk has just recorded its best ever trading quarter, reporting a net profit of $2.7b for the first three months of the year, compared with $209m for Q1 20. The group attributed around $2b of the profit to what it called “extraordinary market conditions”. The Q1 result is just $2m short of the company’s earnings for the whole of 2020, and Maersk said it expected these market conditions to continue “well into Q4”.
Given the ongoing container shortages and shipping companies making hay while the sun shines, it appears that toy companies may face higher shipping costs for some while yet.