Politicians attacked ocean carriers as opportunistic price gougers, but now the companies risk unprofitability as container rates collapse.
Politicians attacked ocean carriers as opportunistic price gougers, but now the companies risk unprofitability as container rates collapse.
I t wasn’t that long ago that ocean-shipping lines were paragons of greed and price gouging in the minds of some politicians. In late March, Senator Elizabeth Warren (D., Mass.) partly blamed ocean carriers for inflation and called for congressional action against the “anti-competitive nature” of the industry. In his 2022 State of the Union address, President Joe Biden announced a “crackdown” on carriers, saying that “these foreign-owned companies raised prices by as much as 1,000% and made record profits.”
Now, international ocean-shipping prices have been falling for months, and ocean carriers will likely be struggling to break even soon.
Despite what Warren, Biden, and others say, international ocean shipping is a competitive industry. We know that because new carriers entered the market to take advantage of the extraordinarily high shipping rates between Asia and the West Coast. And now we have further evidence of competitiveness: prices are in freefall in response to sagging demand.
In a truly monopolistic industry, prices would not be responsive to market conditions. If firms were actually raising their prices out of greed or a desire to exploit, they wouldn’t turn around and lower them when demand dries up.
Container rates from Asia to the West Coast dropped 16 percent just in the last week and now sit at $2,516 per container, according to today’s Freightos Baltic Index email newsletter. It explains:
This rate is still 88% higher than in October 2019, but was last seen in June 2020 when prices first started climbing during the pandemic. This price is just 5% higher than in October 2018 when importers were rushing to beat the roll-out of tariffs on Chinese goods in January 2019.
That return to more normal prices might seem as if it would be no problem for ocean carriers, but as Bill Mongelluzzo writes for the Journal of Commerce, carriers face significant challenges.
Carriers have been affected by inflation as well, and their operating costs are now much higher than they were in 2019 or 2020. That means the breakeven rate at which they can profitably carry cargo is higher than it was. In 2019, Mongelluzzo writes, carriers believed the breakeven rate to be about $1,600 per container. Now, rates in the low to mid $2,000s have carriers concerned about profitability, and they’ve already been blanking sailings and, in some cases, canceling entire services in response to declining load factors.
There’s a last-in-first-out effect at play as well. Many of the smaller carriers that entered the transpacific market in 2020 and 2021 in response to the high profits will be in the toughest position now that prices are crashing. Mongelluzzo writes that many of those smaller carriers charter their vessels, and they won’t be able to renegotiate two- or three-year contracts they signed last year. The number they agreed to last year may have been profitable at least year’s container rates, but it might not be anymore.
Adding to the challenges of changing market conditions are regulatory hurdles. New emissions standards from the International Maritime Organization, a U.N. group that regulates ocean shipping, can in many cases be met only by sailing at slower speeds. Slow-steaming is more fuel efficient, but it creates new scheduling challenges. Some ships have been sailing faster to catch up on delays this year, but that won’t be an option for many when the new IMO regulations kick in on January 1, Mongelluzzo writes.
These regulations will have the effect of reducing shipping capacity. To give an example with simple numbers: If a voyage that used to take ten days now takes 15 days due to slow-steaming, a ship that could make that voyage three times in a month can now make it only twice in a month. Even with the exact same ship, that third sailing effectively disappears, which reduces freight capacity in a particular market. Multiply that effect over hundreds of ships, and it’s easy to see how slower speeds can cut into capacity and schedule flexibility for carriers.
Less than a year after politicians were vilifying ocean carriers for their massive profits, the companies are now facing a market with declining freight volumes, higher operating costs, costly environmental regulations, and crashing prices. That conditions have changed so fast and to the detriment of the carriers is a strong indicator that international ocean shipping is indeed a competitive market. If these carriers were as powerful as Biden claimed, with the ability to set prices based on greed, they wouldn’t be cutting their prices now and putting themselves at risk of unprofitability.
Politicians will also be left without one of their favorite inflation scapegoats. Blaming the greedy foreign-shipping companies for higher prices when freight rates are collapsing isn’t very convincing. That was never how inflation worked to begin with — shipping prices are relative prices, and they don’t represent a general increase in the price level — but now there isn’t even circumstantial evidence to support the scapegoat story.