By Dado Tafra, MBA
Ninety percent of everything we own most likely came to us or to the nearest store in a container. From the beginning of the Covid-19 pandemic until today, the prices of container transport have increased by about 20 times.
The last world crisis that had hit us in 2008 resulted in tens of millions of people being left without jobs, life savings and their homes. Investigations later revealed that the main culprit for the global collapse was corruption on Wall Street and in global banks.
At the moment, we are threatened by an even bigger crisis with more catastrophic consequences, but this time it seems that banks, brokers, pandemics and war are not to blame. It is alleged that the only ones to blame are the big container shipping companies, which are currently being investigated in several countries around the world. Since I am not a judge, jury, or economic expert, I will refrain from any accusations, and I will leave it to the readers to make their own opinion based on the facts.
Prior to 2020, the transport cost for a 40-foot container (FEU forty-foot equivalent unit) from Asia to Europe or the United States was between US$1,000 and $2,000. From the beginning of 2020 until today, prices have not stopped rising, so now the client has to pay from $10,000 to $15,000 for that same container. And in some cases, the client has to pay $20,000. Unfortunately, the rise of freight rates is not over, and further rise is expected during this year as well.
Blank sailings and worrying inflation
Having in mind that 90 percent of the world’s goods are transported in containers, it would be fair to say that all those price increases and tariffs are being paid by the end customer, that is, all of us.
Shipping companies have justified those astronomical prices with restrictions caused by the Covid-19 pandemic, that the pandemic caused a stalemate in production and exports from Asia, as well as the accumulation of cargo that occurred during 2020.
Container ships are sailing according to the strict line schedule, and the situation when one or more ports on that schedule are omitted is called “blank sailing”. Blank sailing can happen due to many reasons (maintenance or ship repairs, weather conditions, strike of port workers, etc.).
Blank sailing is a solution to compensate for the line sailing schedule when used reasonably. However, if the shipping company decides on a large number of blank sailings, it may result in increased demand for cargo space on board, and a rise in prices. The report of the EeSea platform showed that shipping companies have performed 990 blank sailing globally in the first half of 2020 alone. The number was slightly lower in 2021, according to S&P Global.
On April 1, the London Associated Press published worrying data on inflation. For the fifth month in a row, there is record inflation in the Eurozone. Prices of goods and services in 19 countries which use the Euro rose by 7.5 percent at an annual rate in March, according to Eurostat. Inflation in Europe in March reached 5.9 percent, which is the highest record since 1997. Partially, it was also due to the war in Ukraine, as well as the ongoing pandemic.
The maritime container sector is dominated by three alliances, i.e., 10 companies which are in control of around 85 percent of the global market. In addition to container transport, the vast majority of these companies own ships for other types of cargo, passenger ships, logistics companies, cargo aircrafts, freight trains, ports and container terminals. So, we can say that they literally have monopoly over the whole global freight transport.
2M Alliance (AP Møller-Maersk, MSC), Ocean Alliance (CMA CGM, APL, COSCO, OOCL, Evergreen), The Alliance (Hapag-Lloyd, ONE, Yang Ming).
It should also be noted that the shipping company CMA CGM ended 2019 with a net loss of $229 million, and Maersk with a net loss of $84 million. Hapag-Lloyd made net income of $418 million and COSCO $308 million at the end of the same year.
U.S. President Biden has ordered an investigation into container shipping companies for suspected illegal business practices, including forming a cartel. According to US media and the White House, the shipping companies are responsible for a tenfold increase in freight rates between early 2020 and September 2021.
Trade margins of large shipping companies rose from 3.7 percent to 56 percent. They are also responsible for charging additional fees to cargo owners, although the same owners were not able to move their cargo from ports, because of a lack of ship capacity and the accumulation of cargo in ports.
All this resulted in great profits for the shipping companies. It is estimated that the total profit of container transport in 2021 alone was $190 billion. That number is five times higher than the total earnings made by the same companies in the period from 2010 to 2020.
An investigation is also currently conducted in Africa. Container News reported that Maersk, CMA CGM and the United Africa Feeder Line (UAFL) are currently under investigation by the COMESA Competition Commission on suspicion of price fixing and violations.
The Commission explained that the investigation had been launched according to the Article 22 of the COMESA Competition Rules, on potential infraction of Articles 16 and 19. The report also stated the suspicion that the fares of the above-mentioned companies were a form of coordinated behavior or concerted practice.
The European Union is also aware of the problems. Splash247 reported that the European Association for Forwarding, Transport, Logistics and Customs Services (CLECAT) has called on the European Competition Commission to investigate shipping companies operating in the EU.
Nicolette van der Jagt, Director General of CLECAT, among other things commented: “The vertical integration is particularly unfair and discriminatory as carriers – enjoying an exemption from normal competition rules – are using the windfall profits to compete against other sectors that have no such immunity.”
To date, there is no report of the start of an investigation.
In March, the U.S. Committee on Oversight and Reform’s James E. Clyburn, chairman of the Coronavirus Crisis Subcommittee and Raja Krishnamoorthi, chairman of the Economic and Consumer Policy Subcommittee, sent letters to AP Møller Maersk, CMA CGM Group and Hapag-Lloyd AG to ask for an explanation on reasons for the drastic increase in container freight rates.
“Affordable shipping rates are critical to ensuring that small- and medium-sized business owners can continue to make a living and provide goods and services to consumers at reasonable prices,” they wrote. “We are deeply concerned that [Maersk, CMA CGM, and Hapag-Lloyd] may have engaged in predatory business practices during the pandemic, making scores of essential goods needlessly expensive for consumers and small businesses.”
The letters also provide the following information.
- Last year’s operating costs of Maersk increased by only 21 percent, but Maersk raised fares by an average of 83 percent.
- In the first nine months of 2021, CMA CGM made higher profits than in the previous nine years combined, and paid almost $900 million in dividends to shareholders throughout the year.
- Hapag-Lloyd had raised fares on average by 66 percent, and fares for certain routes, including the trans-Pacific route (Asia – US West Coast) by 75.3 percent. Thus, in the first nine months of 2021, Hapag made approximately 10 times higher profits than in the same period last year.
The entire congressional letters can be read at the following links.
Maersk’s stock was worth a little less than $7,500 at the end of September 2019, and is currently worth about $20,500. Hapag Lloyd’s stock was worth $38 at the end of July 2019, and is currently worth just over $320.
Apart from freight rates, shipowners had also made very good income on daily charter rates. The largest container vessels currently sailing have a nominal capacity of 24,000 TEU (twenty-foot equivalent unit). In September 2021, Splash247 released information on a record daily charter rate of $200,000 for a six-year-old ship with a nominal capacity of 6,865 TEU.
In June of the same year, Freightwawes published that a ship with a nominal capacity of 2,800 TEU was chartered at a daily rate of more than $100,000 for a period of 65 to 80 days. It is interesting to note that the construction cost of the same ship in 2008 was $8 million.
Is it fair that we are paying the highest shipping costs in the history of container shipping, and in return we get the historically worst service ever? Ships are late, certain cargoes are delayed for months because the containers they are in are not a priority, line schedules are unreliable, ships are waiting in front of certain ports for several weeks, there are not enough empty containers, cargo is being lost at crowded terminals, etc.
Shipping companies are still blaming the pandemic, which is not affecting their business in Asia for a long time. At the very beginning of the pandemic in Asia, everything was closed, but only for a few months.
High freight rates are also justified by the high price of crude oil. In the first waves of the pandemic, the value of crude oil was below zero, meaning that it was more cost-effective to donate the crude oil than to store it. Petroleum products and crude oil were so cheap that ships sailed around the Cape of Good Hope to avoid paying for the passage through the Suez Canal. Shortly afterwards, fares for the Suez Canal were significantly reduced to accommodate shipowners. All that time the container transport prices have only been rising.
Original article in Croatian can be found at Morski.hr.
Photo credit: iStock/ AvigatorPhotographer