What caused the rapid increase in shipping?

Author: Guangzhou Shangwei Supply Chain Technology Co., Ltd.

Link: https://www.zhihu.com/question/485684312/answer/2165179502

Source: Zhihu

Among the many problems in Zhihu, many people are paying attention to the problem of rising ocean freight. But in fact, in the past year and a half, not only ocean freight has soared, but the transportation cost of almost all modes of transportation has soared, causing many shippers. We are confused as to why the situation has not improved. For example, in the United States, if you look at the spot rates of the four main modes of transportation by sea, air, truck, and rail, their graphs look like the ECG of a comatose person after using a defibrillator.

The epidemic is indeed the root cause of the soaring sea freight, but the epidemic is actually just a kind of fuel additive placed on the burning gleam. In other words, regardless of the direction of the epidemic, the supply chain is moving towards congestion and high costs to some extent. The following mainly introduces Sino-US transportation. 1. I was prepared for the economic recession, but I did not expect the surge in demand. Due to excessive stimulus to the economy, the rapid economic growth in 2017-18 stimulated rapid investment. However, in 2019, the economy began to shrink, industrial production was sluggish, and growth was negative for the past year, business and infrastructure investment stagnated, and the economy entered a stage of risk aversion and integration. The freight market is also experiencing a period of oversupply and stagnant demand, and freight rates are basically flat. The first wave of the epidemic broke out in the United States in March last year. Many companies prepared for the worst by canceling orders and temporarily layoffs employees and entered survival mode because they expected the economy to be destroyed by the epidemic.

So the US government quickly passed an economic stimulus plan to push consumer demand to new heights. After a frustrating April, the lifestyle of most Americans has changed from commuting from 9 to 5 to working from home, because the epidemic can only stay at home, and people don’t have to drive to work, buy new clothes, or go out. At dinner, everyone used the money saved and the government's stimulus money to remodel their houses and buy electronic products. The durable goods market is booming. The unexpected demand shock caught most retailers, shippers and transportation providers by surprise: No, we all expect the epidemic to cause another economic depression.

Soon, they found that the backlog had been exhausted, and they needed to order more goods at once to meet the large demand of consumers. 2. Consumer panic hoarding As the epidemic interrupted production and transportation, shippers began to place orders not only to replenish inventory, but also to avoid missing income. Most durable consumer goods, such as electronics and furniture, come from overseas, mainly Asia. Most of the population lives in the eastern half of the United States. In order to ship goods from China to New York City, it takes several weeks from the date of initial order. Therefore, in order to prevent insufficient inventory, retailers and shippers need to place orders with China several months in advance. Transportation providers, whether it is trucks on land, railways, or ships floating at sea, reduced their capacity before the epidemic, and transportation demand quickly exceeded supply. As various transportation methods became tense, retailers have increased frantically. Order.

We all know what happened next. The demand for shipping has skyrocketed, and this is the beginning of the nightmare. To make matters worse, the construction of new ships has been cancelled or postponed due to the epidemic, and it will not be possible to build them until at least a few years, because China has a large number of exports and there is a shortage of containers. The number of containers (teu) imported into the United States has increased considerably in the past two years.

3. The shipping company invested more shipping capacity on the China-US route. The shipping company invested a lot of capacity on the China-US route, and the port's onshore processing equipment capacity could not keep up, causing port delays. Sea-Intelligence, a shipping consulting agency headquartered in Copenhagen, has conducted an in-depth analysis of the deteriorating liner congestion. The latest data in August show that, globally, due to ship delays, a total of 3.1 million TEU of capacity has been lost. In fact, it is equivalent to a 12.5% reduction in capacity. From this perspective, it is equivalent to 3.5 times the consequences of Hanjin's bankruptcy. Ships blocked outside the port can’t move, and the capacity is reduced, causing supply to fall short of demand. For cargo owners, such delays and rising freight rates are a "survival crisis", but for many shipping companies, it is an advantage. At a good time, the performance of each shipping company this year is skyrocketing.

4. Slow growth of transportation capacity supply side/infrastructure The growth of transportation supply side infrastructure is much slower. Not only is it restricted by manufacturers, but the transportation capacity of each link of the supply chain itself is insufficient. That's a bit convoluted. For example, truck suppliers need to purchase trucks from truck manufacturers because the supply of semiconductor chips is limited, and few trucks are in operation, or some chips are waiting on ships lined up outside the port, resulting in all 8 types of truck orders. It cannot be produced quickly and usually takes six to nine months to complete. Therefore, the cabinets arriving in the United States can only be piled up at the docks, and there is a lack of trucks and chassis to carry the boxes, such a vicious circle. The epidemic has also caused a shortage of dock workers, unable to handle incoming ships. According to the latest annual review and forecast report of global container terminal operators released by global shipping consulting company Drewry, the surge in demand for containerized cargo after the coronavirus pandemic has led to a significant improvement in the outlook for global terminal capacity, but the accelerated investment in port capacity is still insufficient to support freight demand increase.

As more and more ships arrive at American ports, expanding the port is a long process, and it cannot be done overnight. The focus on technological improvement of the port has been behind for many years. Until now, the supply chain is congested. Pay attention. Now it’s too late to transform. The port is a large-scale project. It will take at least a few years to expand the port, and it also requires a lot of money. So the biggest question now is how long will this cycle last?

According to the reality, even toilet paper has begun to be in short supply in the United States, and only a slowdown in demand can loosen the tight supply chain. Ronalds Gonzalez, co-director of the Tissue Packaging Innovation Lab at North Carolina State University, pointed out that “as long as shoppers don’t buy more than they need, there is no reason for a shortage in supermarkets.” In other words, everything starts with “consumer behavior.” Like dominoes, slowing consumer demand will promote the gradual relaxation of all links in the supply chain.