The once-booming ocean carriers, vilified by politicians last year, are now struggling with collapsing prices and oversupply.
The once-booming ocean carriers, vilified by politicians last year, are now struggling with collapsing prices and oversupply.
L ast year, it was a common refrain that the market for ocean freight was insufficiently competitive. It was, according to Elizabeth Warren, yet another supposed example of a handful of powerful firms using their unfair market power to raise prices and gouge consumers. Congressional Democrats introduced legislation to change antitrust law and allow government to go after ocean carriers with more vigor. Joe Biden claimed to be “viscerally angry” that there are “nine major ocean-line shipping companies that ship from Asia to the United States” in a speech at the Port of Los Angeles.
The legislation didn’t pass, the ocean carriers weren’t broken up, and Biden’s anger has apparently subsided. Yet, ocean-freight rates have returned to roughly their pre-pandemic levels, and ocean carriers invested so much in new vessels that they are struggling to figure out what to do with them.
That’s not what one would expect from firms in an uncompetitive market. Monopolistic firms wouldn’t allow prices to fall so drastically, and they wouldn’t feel much pressure to invest in increasing service. They’d jack up prices, keep them high, and hoard the profits.
Global container rates have been falling for almost a year now, and the decline has been roughly as steep as the incline we saw in 2021. That is the sort of thing you’d expect to see in a competitive market that experienced a significant demand shock.
A significant demand shock is exactly what the market for ocean freight experienced. Federal maritime commissioner Rebecca Dye released a report in May that considered the evidence from the ocean-freight market and concluded that soaring prices were the result of “unprecedented consumer demand . . . that overwhelmed the supply of vessel capacity.” The supply of vessels at any moment in time is essentially fixed because it takes a long time for vessels to be constructed and delivered. Higher demand plus fixed supply equals higher prices, no foul play needed.
We also know that new carriers entered the market on particularly in-demand routes. Contrary to Biden’s claim of “nine” carriers in transpacific trade, 23 carriers had operated services between Asia and the West Coast at the time he made those remarks in June. Thirteen of those carriers were outside the major shipping alliances that ordinarily dominate those routes. They sailed routes they wouldn’t normally because prices were high, so supplying more capacity would be a good profit opportunity. Again, that’s exactly what you’d expect to see in a competitive market.
As prices have declined, so has the number of market entrants. What was profitable for smaller carriers at the high prices of 2021 is no longer profitable at the lower prices of the past few months. The major alliance carriers, which benefit from economies of scale, have regained much of their market share. The progressive obsession with market share doesn’t do much good to explain why the “less concentrated” market of 2021 saw much higher prices than the “more concentrated” market of today.
That’s because market share, on its own, is not very useful in determining whether a market is competitive. Firms should be judged by their behavior, especially as it relates to prices and supply. We’ve already seen prices collapse, which is not monopolistic behavior. And now we’re entering into an ocean-shipping supply glut, too.
Carriers plowed their record profits (which were truly extraordinary) into new vessels — a lot of new vessels. As Brendan Murray writes for Bloomberg:
According to Drewry Maritime Research’s most recent tally, the order book stands at more than 900 ships, with deliveries this year alone expected to add 1.4 million TEUs (twenty-foot equivalent units, a standard measure of cargo capacity). That’s equal to about 5% of the current global total. New capacity is expected to increase by a record 2 million TEUs next year and 2.1 million in 2025 to reach 27.2 million, up almost 50% from a decade earlier, according to Drewry.
A 50 percent increase in capacity over only ten years is something you wouldn’t expect from monopolistic firms. Using record profits to invest in the future of the industry is exactly the sort of thing everyone should want firms to do.
In fact, ocean carriers invested so much that they’re concerned about their profitability going forward. “Although some aging vessels will be dispatched to scrapyards, and some orders can be delayed, the industry faces a self-inflicted problem of oversupply that could keep shipping costs in check and kick off another round of consolidation — particularly if, as many are predicting, major developed economies sink into economic downturns,” Murray writes.
Maersk, one of the largest ocean carriers, announced last week that it is leaving its shipping alliance to focus more on ground-based logistics. The Danish firm is “transforming from a shipping line to a transport company handling almost the entire supply chain for its customers,” Bloomberg reported. Lars Jensen, a shipping-industry analyst, said, “This should be seen as the first domino of many to fall over the next one to two years.”
What we witnessed in ocean freight over the past few years was not nefarious behavior on the part of ocean carriers, but rather an industry-level business cycle in a competitive market. The facts show that, but don’t expect any politicians to apologize for branding them as robber barons last year.