Globalisation rests on supply chains, and they rest on some assumptions.
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Globalisation's bedrock - container shipping - faces crisis
- The story: Globalisation assumes free flow of abundant goods across the seas. But many factors are now working against the smooth flows in global trade, including record-breaking shipping rates, armadas of vessels waiting outside ports, Covid-induced shutdowns, and of course, a blocked Suez Canal!
- Dramatic rise in costs: Container shipping costs for standard large containers (a 40-foot-equivalent unit, or FEU) have surpassed $10,000, some four times higher than in 2020. The spot price for sending such a box from Shanghai to New York, which in 2019 would have been around $2,500, is now $15,000. Late bookings on the busiest route, from China to the west coast of America, could cost upto $20,000. Clearly, the cost dynamics have spiralled out of control.
- Desperate times, desperate measures: Firms are now desperate!
- Some are switching to air freight, but costs are also sky-high there (double those in January 2020), because capacity is constrained by curbs on international flights.
- Home Depot and Walmart, two American retailers, have chartered ships directly. Pressing inappropriate vessels into service has proved near-calamitous.
- An attempt (in July '21) to carry containers on a bulk carrier, which generally carts coal or iron ore, was hastily abandoned when the load shifted, forcing a return to port.
- More containers are travelling across Asia by train. Some are being trucked from China to Europe then shipped across the Atlantic to avoid clogged Chinese ports.
- But trains, planes and lorries have their limitations in shifting goods half-way around the planet.
- Power of ships: Container ships take around a quarter of the world’s traded goods by volume and three-fifths by value. Globally 8m TEUs (20-foot-equivalent units) are in port or waiting to be unloaded, up by 10% year-on-year. At the end of August over 40 container ships were anchored off Los Angeles and Long Beach, USA, serving as car parks for containers, to avoid clogging ports that in turn lack trains or lorries to shift goods to warehouses that are already full. The entire supply chain has become clogged.
- Shipping, globalisation's bedrock: For many years, container shipping kept supply chains running and globalisation humming. Shipping was so cheap that it was almost immaterial. As disruption heaps upon disruption now, the metal boxes are losing their reputation for low prices and reliability.
- Shipping is strained because the industry, which usually steams from short-lived boom to sustained bust, was enjoying a sanity in the run-up to the pandemic.
- Then came Covid-19. Expecting a collapse in trade, shipping firms idled 11% of the global fleet. But trade held up and rates started to climb. And, flush with stimulus cash, Americans started to spend.
- A system stretched to its limits was subject to a “cascading effect”. Rerouting and rescheduling would once have mitigated the closure of part of Yantian, one of China’s biggest ports, in May and then Ningbo, another port, in August after Covid-19 outbreaks. But without spare capacity, that is impossible.
- Empty containers are in all the wrong places. Port congestion puts ships out of service.
- Change in product cost: The impact of higher shipping costs depends on the type of good being transported. Those hoping to buy cheap and bulky imported goods such as garden furniture might be in for a long wait. But the effects on product prices so far have been dampened, as around 60% of goods are subject to contractual arrangements with shipping rates agreed in advance and only 40% to soaring spot prices. But for most products, shipping costs tend to be a small percentage of the overall cost. Some container-shipping firms are capping spot rates for ocean freight.
- Decarbonisation costs: This new cost will push rates to eventually settle at a higher level than those before the pandemic. Yet research shows that this may not affect customers much. Even if sustainable fuel cost three times as much as the dirty stuff, increasing per-container fuel cost to $1,200 across the Pacific, for a container loaded with 8,000 pairs of trainers, the impact on each item would be minimal.
- Nearshoring: There is so far little evidence of “nearshoring”, except in the car industry. But the combination of trade war, geopolitics and covid-related disruptions may together lead trade patterns to tilt away from China. Some Chinese firms and the companies they supply are relocating production to lower-cost countries to diversify supply chains and circumvent trade barriers.
- EXAM QUESTIONS: (1) Explain the structural problems that have led to a chaos in global shipping lines. How can it be resolved? (2) Globalisation assumes smooth shipping of unlimited amounts of goods, over the seas. When can this assumption break down? Explain.
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