Why Has There Been a ‘Container Shortage’ Recently?
The reduction in economic activity caused by the coronavirus continues to have an impact on the shipping industry. When the economy slowed down in March and April 2020, shipments came to an abrupt halt.
As global lockdowns began to ease, and economies tried to recover, the demand for goods rose drastically by August. Because China was the first to gain control of the virus, their manufacturing was back online before other countries were up to full operating capacity.
This resulted in more demand for Chinese-produced goods, which in turn increased demand for shipping containers. This was the onset of what has now become an ongoing shortage of shipping containers. Here’s why that container shortage continues to put a strain on the shipping container industry around the world.
The Pandemic and Recovery
As already mentioned, the pandemic had a huge negative impact on global economies. The complete shutdown of manufacturing in the early months of 2020 led to backups in the delivery of consumer goods. Because the virus first impacted China, they were the first country faced with the challenges of the shutdown, and then the first to experience recovery once they reopened their economy.
As the rest of the world struggled to get the virus under control, China was up and running, making them the number one country in demand to deliver goods. This came at a time when manufacturers would traditionally begin to increase production to meet the demand for the holidays. On top of this, it was also around the time China ramps up production before shutting down for their national holiday season in October.
Supply and Demand
As China ramped up their production to get delivery out for their holidays, and North America ramped up for Christmas, the demand for shipping increased. However, the North American ports receiving shipments were unable to keep up, as there was a shortage of drivers, chassis and manpower.
As a result, although shipments had increased, the ability for North American ports, warehouses and retailers to deliver and receive the containers fell sharply behind. This left shipping containers sitting at port authorities for unusually long periods until businesses were able to receive them.
Meanwhile, unloading holdups in China, in hand with other countries not being able to deliver the containers, caused a delay in how quickly containers could be returned to Asia. This worsened as many ports quarantined incoming shipping for 14 day periods reducing the number of available containers even more. Countries reduced the number of ships they would usually send to pick up empty containers, and the shortage issues were complete.
Considering that during the pre-holiday season China would traditionally send as many as 900,000 containers to North America every day, the number of containers that became stranded, either full and waiting for delivery or empty and waiting for pick-ups from Asia, took hundreds of thousands of containers out of circulation.
The Usual Turnover
Usually, when containers deliver goods from Asia there is an ongoing cyclical process that loads, delivers, unloads and then ships the containers back for the next load. This sees an average stay of 45 days for empty containers at depots. However, that has expanded to as much as 66 days in American and Chinese ports. In 2020, the U.S. experienced a drop by as much as 13% in deliveries for the first quarter of 2020 due to the pandemic, the lowest level ever experienced.
In Asia, the container turnover dropped by 19.5% in Shanghai, and outbound containers dropped by 25% compared to 2019. As a result, North American and European strategies have shifted away from looking at bookings to receive products. Instead, many are focusing on filling orders to ship empty containers to get more back into circulation and help business recovery. Plus, in Asia, they have a limit on the number of containers that can be returned to overcrowded terminals.
Weakened Demand for Asian Products
Adding to shortage issues, demand from Asian markets had weakened in 2019 which caused an imbalance in trade flow. However, the returned demand for Chinese manufactured goods in 2020 positioned China to offer more aggressive, higher pricing to shipping container suppliers. To hold onto their increased orders, manufacturers were willing to pay much higher freight rates, knocking North American and European bidders out of the running and leading to the container shortage for these continents.
Impact of Slow Returns
At the same time, many Asian companies are unwilling to pay the cost for liners to pick up and return empty containers. Since they are already paying higher fees to acquire containers to ship their goods, they don’t want to risk-taking on the transferred costs they will incur to bring containers back. As a result, despite turnaround times being high in China, availability is at record lows of 0.05 points. Anything lower than 0.5 indicates a container shortage.
Although American ports returned to operating at maximum capacity, labour and chassis shortages have led to port and yard congestion. The average utilization of containers is 80% to 85% right now, meaning despite all countries and manufacturers wanting to ship their goods, the container shortage is making it difficult.
Although more containers can be built, it takes time. China is the largest producer of containers, and they have ramped up manufacturing by extending hours from eight to 11 hours a day. The fruit of their labour has yet to be noted in supply and demand. This has led to many shipping container scams around the world taking advantage of people desperate to get their hands on containers.
Skyrocketing Shipping Freight Rates
As with any shortage in supply, container shipping freight rates have soared by as much as 300% to 400% for importing/exporting. If the backlog of containers isn’t resolved these prices could continue to rise. Some shipping lines are charging General Rate Increase (GRI) or Recovery Rate (RR) plans to help offset increased business costs. Reductions to free time windows have also been reduced in an effort to get containers back more quickly. Unfortunately, all of these cost increases will translate very quickly into raised costs for consumer goods.