There is a shortage of containers and strong demand! High freight rates and congestion delays become the "new normal"! Or until 2024

Since the second half of 2020, soaring demand in the container market and shortage of containers have greatly pushed up freight rates and caused widespread congestion in major ports around the world. The container shipping market is moving towards a "new normal". The high freight rates and the cyclical rebound of the market may continue for several years. Both shippers and logistics companies may face difficult times.

The problem of shortage of containers gradually went out of the narrow industry vision and began to arouse the attention of the mass media. "The New York Times" reported on this problem that is not new in the industry, and commented that the shortage of containers leads to inflation, and consumers will become the ultimate payers-"Demand... has exceeded the supply of containers", The epidemic in the United States has eased, and retailers can pass on higher shipping costs to consumers without being accused of price fraud-"The cost of almost everything is rising."

Many months after the container shortage first appeared

How serious is this problem still?

Equipment leasing companies are the most powerful entities that can answer this question. They order containers from a very small number of Chinese manufacturers, and then lease these boxes to shipping companies, and shipping companies will also order directly from factories.

Two top listed leasing companies-Triton International (NYSE: TRTN) and CAI International (NYSE: CAI)-commented on the availability of containers in their first quarter 2021 results announced last week.

The tighter the box capacity, the more profitable the container rental market will of course. Cargo shippers must pay more shipping costs to liner companies. This is bad news for American importers and exporters, but equipment lessors feel very happy and think the "future" will be smooth sailing until 2022.

Tim Page, the interim CEO of CAI International, one of the two top-listed leasing companies, said in a conference call with analysts: “The shipping companies have no indication that the tight supply situation they expected has eased. So...for us, the prospects are pretty good, at least until the end of this year, and probably far beyond this time."

Container leaser: only 2-3 weeks supply

According to US industry media reports, three Chinese companies, CIMC CIMC, Orient International DFIC, and New Huachang Group Co., Ltd. CXIC, produce about 80% of the world’s containers. The recent increase in production, it is estimated that this year's container production capacity will increase by 6%-8%. But even so, the construction speed of containers is still not enough to alleviate the tension in the market.

O'Callaghan, the global marketing and operations director of Triton, another top listed leasing company, said on the company's conference call that although the factory strengthened container production at the end of last year and the beginning of this year, the inventory of new containers is still very low. Those big guys (containers) sitting on the ground waiting to be moved are probably only two to three weeks of supply."

There is a shortage of containers and strong demand! High freight rates and congestion delays become the "new normal"! Or until 2024

The price of containers is a manifestation of continued scarcity. At present, the price of a new container is 3,500 US dollars/cost equivalent unit (CEU, which measures the value of a container as a multiple of 20-foot dry cargo unit), compared with 1,800 US dollars/CEU at the beginning of 2020 and 2,500 US dollars/CEU at the end of 2020. In the past three months, the cost has basically stabilized at USD 3,500 per CEU.

The recent price increase has been more extreme in the second-hand container market. Container xChange reports that the price of second-hand containers in China has almost doubled, from US$1,299/CEU in November to US$2,521 in March.

According to Triton’s O’Callaghan, “the shortage of available sales containers has caused prices to rise week by week as stocks have been exhausted.”

Why is the new cabinet still insufficient?

The increase in production this year occurred after a period when orders were lower than market substitution requirements. According to Triton CEO Brian Sondey, “a lot of container production this year is, to some extent, to make up for the low production in 2019 and the first half of 2020”.

CAI's Page believes that another reason why containers are not more abundant is that Chinese factories have not expanded their production capacity, and "manufacturers have no signs that they will increase container production."

When asked why leasing companies could not fight for market share and lower prices, Page said, “If the behavior of container manufacturers does not completely change — no one seems to think this is possible — they (manufacturers) must be willing to produce containers. And to fight for market share, the production of containers far exceeds the demand, and then there is a chance that someone (in the leasing field) will have a surplus of containers and drive the market in terms of prices."

In other words, Chinese factories are controlling production to maintain their new box cost. This negates the hope of cargo owners that the market may be flooded with surplus new containers, thereby reducing freight rates.

When can the container shortage be relieved?

Alleviating the scarcity of containers is not just a production problem. Many containers have been severely delayed due to port congestion and the Suez Canal Ever Given accident and other problems, and the turnover has failed. Only when these blockages are cleared one by one, will there be more containers available.

According to Sander of Triton, the disrupted "container speed" slowdown began with the closure of the city by the COVID-19 pandemic at the beginning of 2020, and then from later in 2020, "the flood of containers overwhelmed the flow of containers in and out of the port. Ability", followed by the "icing on the cake"-the blockage of the Suez Canal".

There is a shortage of containers and strong demand! High freight rates and congestion delays become the "new normal"! Or until 2024

CAI's Page also said that there is now an unusual situation in the destination port of Chinese cargo. The ships were so eager to turn around that they were "forced to leave empty containers when they returned to China."

"Several of our major customers have reported that almost every ship leaving China and other export areas is fully loaded, but due to tight schedules and need to turn around quickly, they can’t wait for all the empty containers. When they leave, (return journey) The number of containers in the) section is 5%-8% less than that in the (previous journey) section."

Triton’s Sand said: "What we have heard is that most customers (liner companies) don’t think these bottlenecks will evaporate quickly. But they don’t think these bottlenecks must be permanent... Doubt, as the bottleneck eases, this may free up container capacity.

"So, we are all trying to figure out what this transition process will look like. I haven't seen any of our customers express confidence that they can lift their business bottlenecks in this strong period. Our general view is , It may continue until trade slows down. Who knows when that is. But I think the bet may be at the end of this year or the beginning of next year, maybe the world of trade starts to return to normal."

Strong demand, shortage of containers, high freight rates and congestion delays become the "new normal"

Lars Jensen, an analyst at Vespucci Maritime, a maritime analysis agency, said that shippers and logistics companies will face a series of difficult years. The cyclical rebound before 2024 will be conducive to the stability of high freight rates and benefit container shipping companies.

He pointed out that the "new normal" of the container market is mainly the result of the congestion of the Suez Canal and the pandemic of the new crown virus.

"At present, it takes 4-6 months for us to have a real chance to return to normal operations. But this requires the world to be in a normal state to some extent, which is not the case." Jensen said, "When the demand is extremely strong, Container liners are in the process of digesting excess capacity. For a long time, excess capacity has been a feature of the container market to cope with congestion."

There is a shortage of containers and strong demand! High freight rates and congestion delays become the "new normal"! Or until 2024

In the current situation, the number of ships planning to enter the market is much smaller, and demand will continue to soar. Jensen emphasized that the ships currently ordered to meet the growing demand will be delivered before 2024.

This also means that the container industry will face a cyclical rebound, which will benefit container liner companies and make customers more expensive.

This trend can be felt in logistics companies such as DSV. Anders Oldenborg, director of product shipping for DSV Air & Sea, described the period of December, January and February as "crazy, which we have never experienced." The disruption of the Suez Canal at the end of March exacerbated the misfortune.

He said: “Due to insufficient capacity, everything can’t work. There are not enough containers to meet the demand we have seen. The carrier is fully loaded by June.” He added that, therefore, DSV has begun to consider chartering a ship. Respond to current market pressures. Oldenborg said: "We have no intention of operating container shipping, but at the same time, when we encounter challenges like the present, we feel the need to find available alternatives."

Regarding DSV’s interim report for the first quarter of this year, its CEO Jens Bjørn Andersen emphasized that the current high price and low quality situation is a misfortune for shippers.

"This is really an incredibly bad combination. Freight transportation is more expensive than ever, while the quality of shipping services is worse than ever." Andersen said in the interim results report. "From what we see in the market, it is not unimaginable that the abnormal situation will continue for the rest of the year. Then we will see what else will happen."