Marc Levinson

Tag: Containers

  • Steel Confusion

    On May 19, the U.S. Department of Justice announced the indictment of four Chinese manufacturers of steel shipping containers and six of their executives for violations of antitrust law. Between 2019 and 2024, the indictment alleges, the companies and their executives conspired to limit container production and fix prices. Their conspiracy, the government contends, “affected domestic competition for imported goods in the United States by fixing a component of global shipping costs—that is, the price of standard dry shipping containers—paid by United States importers.”

    On June 18, after the U.S. International Trade Commission determined that U.S. manufacturers of chassis, the steel frames on which trucks haul shipping containers, have been injured by cheap imports, the Department of Commerce imposed duties reaching 109 percent on chassis from Mexico and even more on chassis from Thailand and Vietnam. The new duties will increase the price of chassis, including those used to transport containers filled with imports.

    In other words, the Trump Administration is blaming Chinese companies for raising the cost of importing goods in shipping containers even as its own actions raise the cost of importing goods in shipping containers.

    If this leaves you scratching your head, remember that containers and the chassis on which they ride have one thing in common. Both are made largely of steel—a product that federal policy has made extraordinarily expensive in the United States.  

    The underlying problem is that U.S. steel mills, for the most part, are not cost-competitive with large mills abroad. Some of their disadvantage has to do with poor productivity: output per worker at U.S. steel mills has tumbled since 2018. In addition, foreign governments’ subsidies to steelmakers are often more generous than those in the United States, allowing foreign mills to export steel at prices that would otherwise be unprofitable.

    Rather than countering foreign subsidies with domestic subsidies that would weigh on the federal budget, Washington has chosen to support the steel industry by taxing its customers. It has done this since 1969 by forcing up domestic steel prices in a variety of ways. At present, tariffs add 50 percent to the cost of most imported steel products, with some imports facing much higher rates.

    Protection for steelmakers is punishment for industries that use steel. Thanks to import barriers, steel sells in the United States for nearly three times as much as in China and at least one-and-a-half times as much as in Brazil, South Korea, or Europe. That is one reason production of containers and chassis migrated out of the United States in the first place.

    Making containers cheaper and chassis more expensive probably won’t have much effect on import prices; each of the eight thousand pairs of shoes filling a standard forty-foot container will probably cost just a few cents more to transport. This policy confusion, though, should give pause to the increasingly loud advocates of industrial policy. There are valid national security reasons to preserve a domestic steel industry, or at least a North American one. But the way to fight the Chinese container cartel and artificially cheap imported chassis is to keep the domestic price of steel low rather than forcing it up. As long as the United States has the world’s most expensive steel, relying on imported containers and chassis to transport our foreign trade makes perfect sense.

  • Bloodbath

    Since it first carried international trade in the 1960s, the container shipping industry has been notoriously cyclical: years of strong trade growth and strong profits have been followed by periods of less robust trade, excess capacity, collapsing cargo rates, and the exit of carriers too weak to survive in a sea of red ink. That story would have repeated itself in 2024 were it not for the Houthis’ attacks on shipping through the Red Sea; sailing between Asia and Europe around the Cape of Good Hope rather than through the Suez Canal made voyages approximately 30% longer, soaking up capacity and keeping rates high.

    The cycle is about to repeat. The headline is growth: UNCTAD’s latest Annual Review of Maritime Transport, published September 24, projects that the volume of containerized trade — not adjusted for distance — will rise approximately 12% over the next five years. But UNCTAD also warns that the shortening of supply chains, uncertainty about trade policy, and the return of shipping to the Suez Canal “could further dampen growth” of the total mileage traveled by containers moving by sea.

    Even as demand weakens, shipbuilding is going gangbusters. According to Alphaliner, which keeps track of such things, vessels able to carry 9.5 million twenty-foot containers are on order, equivalent to 29% of the industry’s current capacity. This comes on top of 9.7% capacity growth in 2024. Scrappage of container ships, the only moderating force, has been very low since 2020.

    With hundreds of ships coming into a market with limited growth prospects, a bloodbath lies ahead. How will it play out? Nearly two thirds of the capacity on order has been commissioned by the largest carriers, Mediterranean Shipping, Maersk, CMA CGM, and China Ocean Shipping. Of those four, all but Maersk plan to increase the number of boxes their fleets can carry by more than 30%. Those companies probably have strong enough balance sheets to survive the coming rate war. As in past shipping downturns, carriers with tenuous financial situations are unlikely to be so lucky.

  • Reality Sets In

    Despite ample signs to the contrary, global economic institutions have remained remarkably optimistic about the state of the world economy. This week, that suddenly changed. The World Bank and the World Trade Organization both downgraded their economic outlooks. Even more significant, both finally acknowledged that we are experiencing not just a cyclical downturn, but a long-term decline in the rate of economic growth.

    “Across the world, a structural growth slowdown is underway,” according to the World Bank. “[A]t current trends, global potential growth—the maximum growth the global economy can sustain over the longer term without igniting inflation—is expected to fall to a three-decade low over the remainder of the 2020s.” Meanwhile, the WTO cut its forecast for international trade in 2023 by more than half, to a scant 0.8%.

    The WTO still forecasts trade to grow by 3.3% in 2024. I expect that forecast to be revised downward as well — particularly because the organization also acknowledges that the share of intermediate goods in international trade has tumbled. If fewer intermediate goods are moving through supply chains, neither the volume nor the value of goods trade is likely to expand very much.

    Both reports attribute much of the slowdown they now forecast to geopolitical events, such as the war in Ukraine and increased tensions between China and some of its major trading partners. That is not incorrect. But as I argue in Outside the Box, slowing population growth and aging populations are likely to be long-term drags on consumer spending on goods, while technological changes will reduce the need for widely traded goods such as auto parts and components for industrial machinery.

    Meanwhile, deliveries of new container ships are at a record high, and container terminals around the world are racing to add new capacity. I’d be interested to understand why.

  • Too Much Stuff

    The U.S. distribution system is stuffed with stuff. Business inventories in April were up nearly 18% from a year ago. Inventories at non-auto retailers were up 20%. One merchant after another — Target, WalMart, Costco, even mighty Amazon — has reported disappointing earnings and is marking down excess merchandise like crazy. Merchant wholesalers — a category that includes companies that import everything from washing machines to smartphones for sale in the United States — show much the same trend.

    The reason for the excess inventory? Simply enough, consumers have stopped spending with abandon. As shopping habits revert to prepandemic norms, inflation decimates buying power, and home sales stall, the demand for consumer goods is stalling as well. This trend, visible in Europe as well as North America and parts of Asia, means that fewer consumer products and the inputs required to make them are moving through manufacturers’ and retailers’ supply chains. International trade in goods, which soared in 2021, is facing a decline. Construction of new distribution centers is grinding to a halt.

    The logistics industry has been slow to pick up on the implications. Some transportation companies and freight forwarders have issued glowing forecasts for the months ahead. Many ports are expanding in expectation that the trade boom will linger, and some that have rarely seen a container ship are investing to lure vessels that may never arrive. Shipbuilders’ order books are full, including many orders for vessels large enough to carry 24,000 20-foot containers. As globalization enters an era in which manufacturing value chains matter less and consumer spending is anemic, this enthusiasm for adding capacity is hard to understand.

  • Too Damn Big

    Not too long ago, I had a chat with a high-ranking executive at a major container shipping line. The subject was new ships. “Those guys on the operating side always talk about how the bigger ships have lower costs,” he said, shaking his head. “They don’t see the bigger picture.”

    The bigger picture is that the container shipping industry’s enthusiasm for size has brought it nothing but headaches. Changes in trade patterns, still in their early stages, are likely to make the problems worse. And yet most of the major ship lines can’t help themselves. In October, Mediterranean Shipping Company, the Switzerland-based company that is the world’s second-biggest container carrier, said it would acquire five megaships, each able to carry 23,000 20-foot containers — equal to 11,500 truckloads. Evergreen Marine, a Taiwanese line, just ordered six ships of the same size. Hyundai Merchant Marine has a dozen ships of that size on order, with deliveries to begin next year. CMA CGM of France, the fourth-largest container line, has several on the way. All of these vessels, it is worth noting, are larger than any containership now in commercial service.

    The attraction of megaships is clear enough: if it is filled to capacity, a ship able to carry 23,000 twenty-foot-equivalent units — TEUs, as they’re called — has much lower operating costs per container than a tiddler carrying, say, 15,000 TEUs. But that is a very big “if.” With international trade growing slowly, there’s a lot of unused capacity on voyages from Asia to Europe, and on the reverse voyage from Europe to Asia empty containers, which travel at very low rates, are often the main cargo. The ships are too big to call at many ports and to fit through the recently enlarged Panama Canal, so they don’t serve North America. While a fully loaded megaship is highly efficient at sea, it can cause chaos in port by discharging or loading thousands of containers at a time, delaying customers’ deliveries and erasing many of the putative benefits of large vessels.

    Recent economic trends pose an additional challenge. The world’s ten largest container ports all are located in Asia, seven of them in China. This is important for containership economics, because only a very large port is likely to amass enough outbound cargo to justify frequent calls by very large ships. But due to rising wages in China, trade sanctions in the United States, and businesses’ increased attention to risk, manufacturing of many widely traded goods — clothing, footwear, consumer electronics, toys — is shifting from China to such countries as Vietnam, Bangladesh, and even Ethiopia. This shift is visible in the fact that Chinese ports such as Hong Kong, Qingdao, Xiamen, and Dalian, all of them larger than any port in North America, have seen traffic flatten out or decline. Few of the new manufacturing hotbeds, though, export enough to Europe to justify a 23,000-TEU ship dropping by.

    A few people in the shipping industry appear to recognize the insanity of the race for size. The chief financial officer of Maersk, the largest container line, said in November that “there are no intentions now to invest in any large vessels.” Cosco, the state-owned Chinese ship line, seems to have retreated from rumored plans to order 25,000-TEU vessels. No doubt, operating such vessels would bring prestige. But when it comes to making a profit, they’re too damn big.