Origins of the Crisis
According to German-based Statista Research Department, some 80 percent of all goods globally are carried by sea including oil, coal, grains. Of that total, in terms of value, global maritime container trade accounts for some 60 percent of all seaborne trade, valued at around 14 trillion US dollars in 2019. This ocean shipping has become the arteries of the world economy for better or worse.
This is a direct consequence of the 1990’s creation of the WTO with new rules favoring out-sourcing of manufacture to countries where production was far cheaper, that is as long as ocean transport was cheap. After China became a WTO member in 2001, they became the greatest beneficiary of the new rules and within a decade China was called the “workshop of the world.” Entire industries such as electronics, pharmaceuticals, textiles, chemicals as well as plastics were transferred to China with then the world’s lowest wages, for factory assembly. It worked because the cost of shipping to Western markets was comparatively low.
As the economic output of China grew, China became a world shipping giant, shipping their goods cheaply to places such as Long Beach or Los Angeles, California in the US or Rotterdam in Europe.
The China shipping expansion combined with that from Japan and South Korea to make up the major ocean container shipping traffic worldwide. That vital economic flow is now under unprecedented stress, which could soon have catastrophic global economic consequences for the world goods supply chains.
When what was termed by WHO as a novel coronavirus, first appearing in Wuhan, was declared by the WHO as a global pandemic in March 2020, the impact on world trade was immediate and huge as countries locked down their economies, something unprecedented in peacetime. Orders for products from China and other Asian producers were frozen by Western buyers. Container ships were cancelled everywhere in 2020. Then as US and EU governments released trillions of dollars in unprecedented stimulus, demand for containers from Asia to the West in relative terms exploded, compared with supply, as people began using stimulus, especially in the US to buy online, most of which was “made in China.”
That has had a serious disruptive impact on what was once a minor cost—ocean container shipping.
In 2019 before the pandemic crisis, the cost of shipping a 40-foot-long container from China to Europe by sea cost between US $800-2,500. For the bulk of products such as textiles, pharmaceuticals or smart phones, ocean containers were clearly the best low-cost option for Asia-Europe trade despite rail possibilities. For Asia-North America trade it was almost the only option, as air was a costly alternative. Today with a corona-linked 50% reduction in air travel, container ships are virtually the only long-distance option.
Now port-to-port spot rates, for example from Shanghai, China’s largest container port, to Los Angeles, have exploded from around $1,500 per 40-foot container just before the WHO Pandemic in early 2020, to $4,000 in September 2020, and to $9,631 in the week ended July 8, 2021, according to Drewry Supply Chain Advisors. This is an increase of over 600% from early 2020, pre-pandemic. And this is just one source of the global inflation we now see erupting.
This is not the worst. According to Drewry, “We have heard reports of $15,000 from China to the West Coast and are aware that carriers are charging additional premiums on top to prioritize the loading of a late booking ahead of normal FAK [Freight All Kinds] rate cargoes.” From $1,500 to $15,000 in two years is a rise of tenfold. And rates from Shanghai to Rotterdam have also skyrocketed from below $2,000 in early 2020, to over $12,000 in July, or 600%.
To cite one product that experienced panic buying at the start of the Pandemic, China is the world leader in exports of toilet paper with 11% of global supply. A 600% rise in ocean freight cost makes it inevitable that the price of something as ordinary as toilet paper is slated to rise significantly or become in short supply in key places globally. When such pressures are coming all across the product line, ocean container rates become a significant driver of general inflation.
Bottleneck of Containers
In early 2020 as nations around the world went into unprecedented panic lockdowns over coronavirus fears, global shipping froze. Factories everywhere were closed. Later in 2020 the flows slowly resumed as China opened up.
When lockdowns had spread globally by April 2020, suddenly millions of containers were stranded in various ports unable to return to China.
Danish consultancy Sea-Intelligence estimates that as much as 60% of the container imbalance in Asia today is due to North America, most due to lack of investment in California and other West Coast ports which have the worst port congestion problems.
Onshore as the pandemic lockdowns in especially California kept thousands of workers from the major US-Asia ports in Los Angeles and Long Beach, it was not possible to clear the very large backlog of containers before more started arriving, a bit like the plague of the Sorcerer’s apprentice. North America currently faces a 60% imbalance; which means that for every 100 containers that arrive only 40 are exported. Sixty out of every 100 containers continue to accumulate.