I always feel that the market is about to come off the boil when the wider media starts reporting how great it is. Certainly it is a sign of entering into bubble territory, as documented by my favourite transport geographer, Jean-Paul Rodrigue. I find this graph cannot be reshared enough:

As far as container shipping is concerned, the boom, pandemic driven and supply chain tightened is bringing in profits galore for both the liner operators like Maersk Line and Hapag Lloyd, but also the tonnage providers for these services. But as usual with widespread media coverage, there is a knowledge gap that commentators leap over in order to jump to erroneous conclusions. I will attempt to fill in that gap now. My apologies to all those in container shipping who obviously know all this stuff and more, but for many inside shipping – and more outside – the basics are worth revisiting.

Liner shipping is basically defined as those services that trade on fixed schedules that are advertised beforehand, and space can be booked on these services. They can be compared to public transport systems in as much that they leave one location at a certain time, and arrive at another, calling at scheduled stops along the way. The ships – in the past general cargo vessels with tweendecks, but now mostly containerships – carry lots of different cargoes from many different shippers to many different receivers. The advent of containerisation has enabled and facilitated the rise of globalisation, and in fact the voyage by sea is just one leg in a series of multi-modal transport services (truck, train, barge, feeder, deep sea), and means that cargo can be stored en route rather than hanging around in warehouses or depots. The just-in-time supply chain beloved by manufacturers and retailers alike is built on the efficiency of this service.

But the supply chain only works if the sea leg of the journey is on time, and predictable, and efficient.

For those of you on holiday in Greece at the moment, ferries are also a liner service and work in much the same way. The ferries leave ports at certain times and arrive at others; some lines have many ports of call and work on a round trip basis (anyone been to Amorgos this summer?), others are just one port to one port (for example Piraeus – Iraklio, or Dover Calais). The routes and the number and size of ships that service them are determined by a a combination of time, volume of traffic and seasonality. What you pay depends on what you want. If you are like me, it’s for a Vespa and an unreserved seat on the deck, where I can smoke, drink coffee and read watching life unfold around me, and the evening sky fade into the horizon of the wine dark sea. If you are more demanding – or have a family – it’s a car, a cabin, and the bill to go with it. Sometimes, like now, the high-water mark of the holiday season, it’s full and expensive, and all sorts of schemes are being tried to get space on a ferry. Other times – mid week in June even – it’s easy and comfortable, and fairly cheap. And like containerships, the journey by ferry is usually one part of a longer journey using different modes of transport.

For containerships and ferries, the routes are put in place, advertised, and the ships are filled, or not, but nonetheless sail whether full, half-full or empty. How they are filled, and how much they charge is up to the liner operators (although the ferries’ prices are fixed some time beforehand) and in normal times these prices are reasonable enough not to invite much comment or complaint.

One other thing should be clear too, and that is that the availability of space on board these ships is inelastic, i.e. there is not much to be done in the short term – or even the medium term – to increase capacity. Ships cannot expand at will, and although smaller ships can be substituted by larger ones (subject to port restrictions of course) this is expensive and can be risky. Once capacity is reached there is only one way for prices to go and that is up.

Container shipping has some additional issues mostly about the containers themselves. Firstly, the supply of containers. These are more mobile than the ships themselves, and there is a finite supply of them. If they are out of position, it is difficult to create supply out of nothing. Secondly, a container takes up the same amount of space whether it is empty or full. Thirdly, no container ship can load a full cargo of full containers. I realise that this may sound a bit confusing, so let me try and explain.

Every container, every metal box, carries cargo that varies in type, weight, volume and density. Very simply put, a container of steel products will be bottom heavy and not fill all the available space, where as a container full of televisions will most likely full all the space available, and still be relatively light. When you think about all the different cargoes carried in containers – clothes, fruit, whisky, car components, scrap, washing machines, cigarette lighters, furniture, the list is literally endless – this is by no means a homogenous cargo. Containerships are designed to have as much space – slots for containers – as possible on a minimum draft, but the majority of that space is above deck, and so care has to be taken not to make the ship itself top heavy, and therefore capsize or at the very least cause stability problems with attendant loss of cargo. Any container ship can only carry between two thirds and three quarters of their capacity with containers filled with cargo. The capacity of a containership is usually shown like this:

CONTAINER CAPACITY:

Nominal 13,082 TEU

Homogeneous 14MT / TEU 9,174 TEU

(Thank you Danaos for a nice website to find this extract.)

What this means that although Hyundai Speed has space to carry 13,082 twenty-foot boxes, it can only load 9,174 with each container laden with 14t of cargo. Even if you say that these ships are huge, their capacity is restricted by what they can feasibly load, especially when you consider the almost infinite combinations of different weights of containers on board. The next time someone tells you that shipping is not technologically up to date, remind them that these large ships are in and out of port in a matter of hours, and the stowage calculations – including the distancing and placing of dangerous goods on board – take place whilst the cargo is still en route to port, and the vessel is still at sea.

Let me add another layer of complexity in: the difference between spot rates for boxes (the price paid to move a container immediately from place to another) and those slots booked for freight forwarders and NVOCCs (non-vessel owning common carrier) in advance. To move a container now, you will have to pay a lot of money.

Such is the consternation felt at these developments, US lawmakers have decided to weigh in. Rep John Garamendi, Dem. California, is trying to introduce a new law that makes sure there us no unreasonable refusal to carry freight, allows the Federal Maritime Commission to initiate investigations and creates new procedures to address.

Despite all the fanfare, this legislation does not challenge the monopolistic might of Maersk or MSC or whoever, but can only enforce the liner agents in the US do what they can to get US export containers on board.

Rep Garamendi said:

“Unpredictability [in securing containers] is not healthy for the marketplace… if you are going to be a common carrier, if you are going to use American ports, to be able to be part of the stream of commerce, then you need to be able to accept some very basic rules of the road…including not unduly discriminating against American agricultural exports.”

I think the problem he faces, apart from confusing roads with the sea, is proving that liner operators discriminate against American agricultural exports.  What we can prove however is that we have a supply squeeze, of containers, of ships, of time, of space. Expect this to continue indefinitely until the freight rates being charged actually stop goods being shipping, and start changing freight routes, and delays in shipping cargo begin affecting the proper functioning of existing supply chains rather than inconveniencing them. If neither of these is proving a barrier to doing business, then fundamentally nothing will change. It is not in the container lines’ interests to readjust routes or optimise cargo flows whilst supply remains so tight. It is fairly difficult to ease capacity on one route and not affect others. We also need to remember that not all ships can get into all ports due to size restrictions. Port facilities in the US for example do not have the capacity to deal with the biggest ships. Maybe lawmakers should be looking to the ports as much as the carriers.

So when will things change? There is a large backlog of newbuilding containerships to come into the fleet, but most of it will only come from 2023 onwards. How quickly and easily that is absorbed two or three years will decide how quickly boom ends, but I would put a bet on second half 2023.

No-one knows of course, but we can look at the graph above to have an idea. We are firmly in mania territory – everybody is talking about this, from memes about Ever Given stuck in the Suez Canal to anecdotal evidence that Christmas presents will be more expensive because of evil ship owners. Everybody knows something about it, but that knowledge is incomplete. My knowledge is as incomplete as anyone else’s, but at least I have seen it happen before. Shipping is cyclical, and I expect the market to start crashing almost immediately after someone says “new Paradigm” or “this time it’s different”. Not just anyone you understand, but someone significant like the CEO of a freshly listed company, or someone promoting a merger, or building a mega series of mega ships, something really stupid that we will all think is a great idea until it isn’t. And, as night follows day, the container shipping cycle will begin all over again. In the meantime, a message to all the containership owners out there: enjoy the ride, but don’t forget to sell at some point on the way up. I’ve given you a time frame, so don’t say you haven’t been warned.

Simon Ward