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This crazy shipping crisis, explained

As we head closer to the second anniversary (if that’s the right word for it) of the pandemic, it’s clear we’ve made some great progress fighting COVID-19.

We have testing and vaccines that work. We know masks and social distancing are effective. Despite the nagging disruptions that mark much of what we do — and even worse the horror of continued sickness and death — in some ways, we can hope that the worst is behind us.

But not all of it. An under-recognized characteristic of any pandemic is its nonlinear course, which delivers, in true viral fashion, shocking, unanticipated consequences. That brings us — 20 or so months into the COVID-19 pandemic — to a vast oceanic parking lot dotted with scores of giant container ships off the ports of Long Beach and Los Angeles.

No doubt you’ve heard how the world’s supply chain is being stressed like never before, resulting in shortages and delays in everything from semiconductors, to cars, sneakers, exercise equipment, and Rolexes. Initially this was because factories in Asia (for example) had to close for weeks or even months because workers were sick with the coronavirus. That was true and still is the case in Vietnam, for instance.

Now the pain point has shifted to ships. What we are witnessing is a massive, unprecedented traffic jam of humankind’s largest sea vessels that is at the very core of the conundrum.

“I don’t think anyone’s ever seen anything like this in their careers, anyone who’s alive,” says a board member of a large shipping company whose family has been in the business for decades. “Containergeddon,” is what Steve Ferreira of shipping consultancy Ocean Audit calls it, according to Reuters.

How bad is this? How did it happen? What does this mean going forward? How will this impact the U.S. economy? And how and when does it get resolved?

Let’s start at the very beginning, (as Maria von Trapp might say). First understand that 90% of the world’s global trade is shipped by sea, with 70% in containers. Over the past two decades, a number of trends have shaped the business.

First, when it comes to the United States, we have been increasing our outsourcing and reliance on imported goods. Example: In January 1985 (as far back as data went), we imported $293 million of goods from China (and had a positive trade balance). Flash forward to today, in August of this year, our imports from China totaled nearly $43 billion. That’s up 146-fold in 36 years. Our imports from Asia across the board are up. China is the No. 1 exporting nation to the U.S., but Japan, South Korea, and Vietnam are also on the top 10 list.

Second, companies and consumers increasingly count on just-in-time inventory systems to order goods. That makes for lower inventories, which reduces costs for U.S. companies and allows consumers unprecedented immediate gratification from a global cornucopia of goods. Example: If Pottery Barn needs 50 couches from China, the company orders it, and two weeks later or three weeks later, the couches are on the West Coast of the United States.

Third, the shipping business over the past decade has not been very profitable — ”a fricking nightmare” my source called it — until now (see below), which meant there was little investment in new ships. Meanwhile in the U.S., railroads have been cutting costs and reducing headcount. This on that last point from an AP story:

“More than 22% of the jobs at railroads Union Pacific, CSX and Norfolk Southern have been eliminated since 2017, when CSX implemented a cost-cutting system called Precision Scheduled Railroading that most other U.S. railroads later copied. BNSF, [owned by Berkshire Hathaway] the largest U.S. railroad and the only one that hasn’t expressly adopted that model, has still made staff cuts to improve efficiency and remain competitive.”

What all this means is that the global supply chain, particularly the part of it that connects Asia to the U.S., has been running at full capacity with no margin for error.

“When you have a problem anywhere in the supply chain, it’s going to have a ripple down effect, like playing dominoes,” says Cathy Roberson, founder and president of supply chain consulting group Logistics Trends and Insights LLC, and former market analyst at UPS Supply Chain Solutions. “If freight is late arriving at port, that means the time scheduled for the truck to be at port is wrong; now you have to go back and reschedule. That will cause additional delays and costs; now you have to put the items in a temporary warehouse if you can find space. Incurring additional costs for that. From there, once you finally get a truck, moving it inland you have to constantly reschedule delivery times. Having to jungle all that, monitor that, takes time and takes people and costs extra money.”

“We’re living on our grandparents’ investments here,” says John Porcari, the port envoy to the Biden-Harris Administration Supply Chain Disruptions Task Force, who was appointed in August to address port congestion. “As global commerce increased, as the e-commerce economy increased, we haven’t made infrastructure investments keep up. Seams in the structure were showing pre-COVID. The pandemic laid bare the underlying reality.” Porcari also points out that the domestic supply chain (ports, rail, and trucks) is almost entirely in the hands of private sector players that do very little data sharing.

So you take all that and then, enter COVID.

When the pandemic first hit full-bore last spring, and much of the world went into lockdown, global trade slowed as factories in China and elsewhere closed. The volume of goods to ship dropped. Meanwhile shell-shocked consumers, not knowing how long they’d be stuck at home, bought food and little else. So both supply and demand fell, ergo shipping volume and rates slumped. But not for long.

By late spring 2020, it became apparent that work from home wasn’t just until Memorial Day weekend, it was until, well, who knows. That’s when Americans began to buy Pelotons (PTON), patio furniture, and hiking boots in earnest. As factories came back on line in Asia, trade began to boom and boom and boom. All that money that once went to movie theaters, MLB games, and tropical resorts began to go instead to buying stuff. Stuff made in China.

Today, ports in the U.S., particularly on the West Coast and especially Long Beach-LA, where 36% of U.S. imports land, are unloading record amounts of cargo. And that’s where the traffic jam is the worst.

It’s an understatement to say that demand for cargo ships is extreme. More accurate is off the charts. Check out the Howe Robinson Containership Charter Index, which essentially shows the cost of chartering a giant container ship. Yes, it’s up 10X over the past year. The previous record was set back in June 2005, when it hit 2,093 points. (NB: You can see the little dip I was talking about when the pandemic first hit.)

What does that mean in practical terms? Well, shipping companies are mining money, for one. And companies like Walmart (WMT), Costco (COST), Home Depot (HD), and others have responded by chartering their own ships. For how much? Below are two examples. I can’t be more specific because the companies are loathe to have these crazy numbers put out there.

Item: One of America’s largest big box retailers, just chartered a cargo ship for $80,000 a day for one year. A year ago, that would have been $10,000 or $15,000 a day.

Item: One of Japan’s “Sogo shosha,” or giant holding companies, is looking to charter a ship for $130,000 a day for three years, which would have been $20,000 a year ago. The company will have to put up $35 million for the first nine months in cash, on day one.

Wow! Who’s going to pay for all that? We are of course, via higher priced goods. If that doesn’t scream inflation to you, you must be high. And I’m talking about non-transitory inflation here, as in real inflation that sticks around for years.

Another issue here is that while those big companies can afford to charter their own ships to get their goods, smaller companies can’t, which confers a big advantage to the big players at the expense of the little guys. Consider the economic implications of that.

The Washington Post ran an excellent piece recently that got into much of this. Here are just two of the many bullet points worth noting:

“This month, the median cost of shipping a standard rectangular metal container from China to the West Coast of the United States hit a record $20,586, almost twice what it cost in July, which was twice what it cost in January, according to the Freightos index.”

And:

“The seven largest publicly traded ocean carriers — including companies such as Maersk, COSCO and Hapag-Lloyd — reported more than $23 billion in profits in the first half of this year, compared with just $1 billion in the same period last year.” Talk about flush times.

The Post article goes on to describe a system in the U.S. where shippers, ports, truckers, and railroads don’t communicate with each other nearly enough or as much as in other countries. It’s also the case that truckers are overworked and overwhelmed. There are reportedly now 16 containers waiting for every available truck at the port of LA. Railroads are scrambling to hire (back) workers.

So just how bad is that traffic jam off of southern California now? At last count there were 60 ships lined up off Long Beach-LA. (There were some delays there even pre-COVID. Check out these satellite pictures.) There are now too many to anchor — new ships are being told to just drift in deep water. A few weeks ago it was even worse. Last month Popular Science reported that “a record 88 ships were sitting on the horizon, forming a line of vessels stretching south over 40 miles, from the entrance of the Port of Los Angeles all the way down to Dana Point.”

If 60 ships doesn’t sound like much, understand that these ships are monsters, carrying as much as 23,000 TEUs (or twenty-foot equivalent units) containers, or half that number of FEUs (forty-foot equivalent units), the latter being the more common intermodal size that you see trucks hauling. Each FEU container can hold up to 29 tons.

Example: An average dishwasher weighs 77 pounds and displaces some 16 cubic feet, (yes, I factored in packing materials.) So one forty-foot container, which can hold up to 58,000 pounds and about 2000 cubic feet of cargo, could contain roughly 125 dishwashers In theory then, doing the math, a single ship could hold 1.4 million dishwashers, (125 dishwashers X 11,500 FEUs per ship) which is about 16% of the total number of dishwashers shipped in the U.S. in a recent year.

Unfortunately, as in the case of bad storms for air travel or a car crash for a highway trip, the delays are spreading. Shippers have been bypassing choked West Coast ports and sending vessels east to Savannah and New York. Now there are 24 ships off of Savannah (which is unprecedented) and seven to nine (depending which day you count) off New York City. Volume coming in is overwhelming the facilities in both locales. “Everyone is so focused on Los Angeles/Long Beach that the other ports are getting passes,” Craig Grossgart, senior VP global ocean at Seko Logistics, tells GCaptain. “Savannah is a mess, New York/New Jersey ports are a mess…”

The crisis has brought out bad behavior and unintended consequences. First, fear of shortages has caused businesses big and small, never mind consumers, to engage in precautionary orders, (hoarding) in anticipation of delays. This of course only exacerbates the problem, by stuffing more goods in the supply chain. Then there’s also additional air pollution created by the ships waiting in those traffic jams.

And you have wing nuts posting false information on social media, like this gem: “There are now 56 cargo freighters anchored off the coast of California from Oakland to Long Beach in what can only be considered a manufactured supply-chain halt.” False. This is not a “manufactured” halt. Facebook reportedly flagged this and other posts like it.

The Washington Post reports that shippers “often decline to send containers inland to collect American farm exports, preferring to rush them back to Asia to capitalize on high eastbound freight rates. That’s why the LA port exports three times as many empty containers as full ones.” Guess what that’s doing to our trade balance.

‘This is a wake-up call’

What’s being done about all this? Here’s John Porcari, Biden’s port envoy: “We’re focused first on the short term, next 90 days, and second on longer term structural changes that need to be made. Doing both simultaneously is important. In the short term, we have to work with the system we have and the existing private operators have to increase the tempo on what they have. Over the longer term, as we build a better system — truly a system, not a bunch of individual elements that are flying in loose formation — there’s certainly a role of public investment to augment private investment.”

And so yes, LA and Long Beach are expanding their working hours, which is great. But remember the truckers and railroads are working flat out. There are also plans “for more data sharing and squeezing more productivity out of the system,” according to Freight Waves. Fair enough.

I agree with Christopher Tang, a professor at UCLA’s Anderson School of Management, focusing on the global supply chain, who has consulted for companies such as Amazon and IBM. He says: “This is a wake-up call. I think globalization was under the assumption that global trade is frictionless. When you click, you get the product. American consumers in the pandemic have come to understand over-dependence on foreign supplies.

“It’s time for the U.S. to rethink how to coordinate the supply chain. For some products, it’s time for us to produce them in the U.S.; for others, we can diversify the supply chain.”

Or maybe Americans just need to buy less stuff. (Ha!)

I don’t want to be alarmist, but it’s hard to see this completely clearing up anytime soon. Experts say that the snarls could be with us through 2022. Just one, for instance: “Operating ships is far more difficult now,” says my shipping source. “With COVID [protocols] you’ve got 200 countries with 200 different rules.”

And now, enter the holiday shopping season.

You may recall, back during an August visit to Singapore, U.S. Vice President Kamala Harris warned about supply chain disruptions, saying: “If you want to have Christmas toys for your children, now might be the time to start buying them, because the delay may be many, many months…”

On the other hand, this holiday season you might want to consider giving your loved ones boxes of holiday cookies. Locally baked or homemade, of course.
Source: Yahoo!Finance

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