High shipping costs weigh on the economy
It cost John Logue about $ 6,600 to ship a container of hazardous chemicals from Shanghai to Chicago. Now the CEO of the Royale Group is paying up to $ 29,000 – and that’s if he’s lucky enough to find space on one of the most sought-after freighters plying the Pacific trade routes.
Logue’s headaches at sea are mirrored on land, where Royale Group shipping containers regularly find themselves stuck in traffic jams at train stations resulting in costly and unpredictable storage costs. Earlier this month, BNSF, one of the nation’s largest railroads, increased fares in Los Angeles and Chicago, exacerbating Logue’s problems.
The Royale Group’s double-barreled freight issues, which hamper both existing operations and Logue’s efforts to return manufacturing to the United States, exemplify the market power of the handful of shipping companies and railroads that move goods from distant factories to American homes.
âWe are at their mercy,â Logue said. “Sometimes we throw our arms up in the air … It’s madness.”
Recently, President Joe Biden called on regulators to crack down on consolidation in the shipping and rail sectors, as part of a broad executive order promoting competition across the U.S. economy.
Freight may seem like a prosaic subject for presidential attention. But the smooth flow of goods has perhaps never been more essential amid the explosion of e-commerce that accompanied the pandemic. Transportation bottlenecks in June helped fuel the highest inflation in 13 years, shaking Americans with stickers on merchandise such as used cars, airline tickets and bacon.
Indeed, some regulators and executives warn that unusually high shipping costs and related supply chain disruptions could lead to scattered shortages this year as the US economy recovers. Imports of products such as tires, food and water purification chemicals could be affected, said Carl Bentzel, a commissioner for the Federal Maritime Commission.
“I am extremely concerned now about the economic impact caused by the current situation. This may be the first time the public has seen the impact of shipping disruptions since World War II,” he said.
But global freight carriers and U.S. railways insist the administration misdiagnosed supply issues. The country’s ports, terminals, trucking fleets and rail lines are overwhelmed by an increase in imports linked to the pandemic, and not strangled by monopolies, they say.
Either way, with industry groups opposed to the new regulations, a quick unraveling of harassed US supply chains is unlikely.
White House officials who drafted Biden’s order say high transportation costs resulting from a lack of competition are a drag on the entire economy. Nine freight carriers, organized into three maritime alliances, control more than 80% of the global ocean-going vessel market. Likewise, there are only seven major railways, up from 33 four decades ago, according to the report. White House.
“It’s like interest rates or oil,” said Tim Wu, the president’s special assistant for technology and competition policy. “It gets less attention, but for US consumers and exporters, the price of moving goods is very important.”
However, it is difficult to distinguish between the effects of industry consolidation and the pandemic. Importers and exporters have been complaining for more than a year about skyrocketing transport costs, amid a shortage of sea containers, truck frames, drivers and dockworkers.
Biden’s aides recognize that the pandemic is responsible for much of the disruption. But they say the lack of competition has allowed freight carriers and railways to exploit the pandemic by pushing prices to all-time highs.
Industry officials and some independent analysts disagree. Drafting regulations to deal with the current situation risks unintended consequences once the economy recovers, said Lars Jensen, CEO of Vespucci Maritime in Copenhagen.
âThe current situation is extreme and is entirely due to the knock-on effects of the pandemic. It tells us absolutely nothing about the general structure of the industry,â he said.
In the past four years, eight of the 20 largest shipping lines have disappeared; nine survivors sought to escape a history of meager profits by organizing into three rival alliances.
Shipping consortia function as pacts of the airline industry, with carriers alternately cooperating and competing with each other. Members of an alliance share space between their ships, even when operating from some of the same ports.
The arrangement has paid off for the major carriers. Maersk reported a record profit of $ 2.7 billion for the first three months of this year, up from $ 185 million for the same period last year.
As demand crunched in the first months of the pandemic, alliances quickly canceled more than 400 departures, according to S&P Global. This avoided ruinous losses due to collapsing prices, but led to exporters complaining of price gouging.
Then, the demand for cargo space unexpectedly increased, with Americans buying laptops, furniture, and electronics for the working-from-home era.
Over the past year, the cost of shipping a container from China to a port on the west coast of the United States has increased by more than 156%, reaching all-time highs, according to the Freightos Index.
Yet in the long run, there are few signs of price spikes. In the first three years of the Alliance Age, this cost only increased by 14%. Prices from China to Europe over the same period actually declined slightly, according to Freightos.
âThe shipping costs didn’t matter,â Jensen said.
They are doing it now.
At Royale Group, based in Bear, Del., Logue said he spent twice as much time managing his supply chain than he did just a few years ago. Last week, a carrier abruptly canceled a shipment, leaving it to scramble.
Many Royale shipments contain chemicals hazardous to the pharmaceutical, automotive and electronics industries which require special handling. So carriers often choose to avoid the hassle if they can instead carry a routine product, Logue said.
âThe Big Three alliances have a lot more bargaining power and control than they’ve ever had before,â said Matt Godden, CEO of Seattle-based Centerline Logistics, which provides refueling services.
After years of offshoring production, Logue tried to bring work back to the United States. Crowded ports, overcrowded marshalling yards and a shortage of truck drivers make it improvise.
But he blames a host of factors for the current freight difficulties, including outdated port infrastructure and technology, tariffs, tensions between the United States and China and the pandemic. Lack of competition “may be part of the problem,” Logue said.
US consumers could feel the impact of stressed supply lines.
La-Z-Boy this month blamed “shipping container problems” for late deliveries and shortages of electrical components for some of its more expensive and profitable power recliners. Likewise, KushCo Holdings, which makes packaging for cannabis products, told investors that rising transportation costs were a “drag” on profits, and Constellation Brands said it was struggling to keep up. retailers stocked with Ruffino and Kim Crawford wines.
Clothing maker Levi Strauss bypasses worst backlogs, including at ports in Los Angeles and Long Beach, Calif., By shipping more cargo by air and rerouting ocean cargoes to the east coast, Harmit analysts told analysts. Singh, CFO of Levi Strauss. during a recent call for results.
âA lot of people talk about not being able to get containers, not being able to get on a ship,â Singh said. “[Our] The team did an amazing job of ensuring us guaranteed space – guaranteed prices too, which helps us keep our costs under control. So it’s a big challenge for the industry. “