CNBC Interview with Redwood CEO, Mark Yeager, on Container Shortage
Since the beginning of the pandemic in 2020, the logistics industry has been presented with what seems like limitless hurdles. Now that the dust of the pandemic has settled a bit, the residual effects are starting to come to the surface in full force. One of the largest of these issues being a critical shortage of shipping containers.
In fact, industries in many parts of the world are navigating through the effects of a truly massive shipping container shortage, with Asia feeling the brunt of it.
Here is what he had to say.
Why is there a shortage, and why is the shortage more acute in Asia / China? How is the pandemic contributing to the issue?
“There definitely is a critical shortage in Asia, no question about it. The pandemic in many ways is contributing to that, but it’s a little more complex than that. The size of the worldwide steamship container fleet is really built around certain sort of underlying assumptions involving, trade flow, velocity balancing, processing speed, and so on. It’s all these variables that the steamship lines take into account when they’re determining how many containers they need and where those need to go. The problem is that under the current state, those assumptions simply don’t accurately reflect the market and it’s not able to respond as quickly, as you might think. And the reasons for that really are that Chinese exports are surging dramatically, while the rest of the world is really struggling to regain productivity under the strains of the pandemic.”
“There are essentially about 180 million steamship containers worldwide, but they’re in the wrong place, because, quite frankly, the Asian nations, particularly China, are just exporting way more than they’re importing right now. Just in November, the export from China was up 21.5%, while import grew as well, it only grew 4.5%. So what’s happening is what was already a trade surplus in China has turned dramatically more severe and the reality is, there are three containers going out for every container that’s coming in.”
“They’re trying to counter-act this by doing things like pushing up production of containers, which is really taking momentum, and repositioning empty containers from the US very aggressively. That, however, is creating its own kind of ripple effect, because there’s just more than they can correct for in the near term, especially as they’re also having trouble building more containers. And that’s in part pandemic-related as well, because they can’t quite get the adequate supply of steel and lumber, which you need to build containers.”
“Essentially, China is producing way more than other parts of the world and as a result, we are seeing surplus is built in some countries, while China itself is starved for containers. We’re hearing people are waiting weeks to get a container right now, their alternative is to pay a huge premium in the spot market. They’re just producing a lot and other places are not because the pandemic is really inhibiting ability to get up to full production.”
Has China’s recovery, versus weaker demand for goods from the U.S. / Europe contributed to the problem via uneven trade flows?
“Clearly, the recovery has been a key driver of this – you just got a lot more production and supply hasn’t been able to flex up. So I think that’s a part of the story. But it isn’t the complete story, because it doesn’t do any good to produce goods if there isn’t a market for them. And what we’ve seen hand in hand with the recovery, and it’s fortunate for the Chinese manufacturers, is a great deal of increased demand in the western world, particularly the US and Europe. Consumers are continuing to spend money – they’re taking what they would normally spend on vacations, entertainment and going to restaurants, and putting it into physical goods. And those physical goods are, in large part, coming from China. So despite the fact that there are tariffs in the U. S, demand for Chinese goods is at an all-time high at a time when exports from the U. S. are struggling and have been down really all year. So it’s both a production recovery and increased demand that have been impacting these dynamics.”
Has this problem driven up freight costs, and by around how much?
“If you look at the statistics, China to the U. S. is up nearly 85% since June; China to Europe is up 142%. And if you look at it since March, where you saw really the low points of pricing, it’s up something like 300% in those two markets. That’s notable without a dramatic effect on pricing. Now, ironically, even US export rates are up, which is counter-intuitive. But the reason for this is the Chinese are being so aggressive about trying to get empty containers back. three out of four export containers out of the US to Asia are going back empty, they are being so aggressive about this that it’s hard to get a container for US exporters. So even those rates that have gone up somewhat, though not nearly as dramatically. And when you think about those numbers, they’re huge.”
“There’s even greater multiples being paid for spot rate because it’s very hard to get orders covered expeditiously right now. Part of the reason is this availability of containers, part of the reason for the container shortages also for high-value items, such as iPhones that would normally go airfreight. There just isn’t as much air freight capacity because there aren’t nearly as many transcontinental passenger flights. And air freight companies typically use that extra capacity at the belly of a passenger plane. Well, there’s just not very many passenger flights, so not as much air service. So then you say – okay, if I can’t use the airplane, I’m going to use expedited steamship containers in the spot, and but the pricing is way up, around $6,000 instead of $1,200. The lack of options, combined with this crazy amount of demand, has produced this crisis.”
Has this affected e-commerce firms in particular, and would it also affect consumers in terms of shipping costs and delays?
“Absolutely. It’s affected everyone, but it’s probably been particularly challenging for e-commerce providers. E-commerce is largely consumer goods and a very large percentage of consumer goods are produced in China. So it’s perfectly natural that e-commerce would be greatly affected simply because they’re trying to get more things from China, and it also tends to be more time-critical. A lot of these goods that people are buying, they’re expecting delivery and relatively short windows. Structured with lean inventory philosophies, that means you have to constantly replenish. So if there’s an uptick in demand, it’s difficult to backfill for that quickly, especially if you can’t procure the necessary capacity to do so.”
“To the extent e-commerce has embraced lean inventory concepts, it becomes that much more vulnerable to this kind of supply chain disruption. The alternative for these folks, of course, is to try to get airfreight capacity, which is going at a super premium, or try to get a spot capacity, which is 3 to 4 times higher than it would be under normal conditions. The e-commerce retailer is faced with a decision: ‘Do I pay a significant premium, or do I push back delivery substantially and have disappointed customers?’ It’s a bit of a fine line that they’re trying to walk right now. I think, though, that the reality is that the composition of goods that move in the e-commerce space and the delivery expectations are placing a heavier burden on the e-retailers. Some of that additional cost burden is obviously being pushed on to the consumer, or it’s being eaten by these e-commerce retailers. But you can’t do that for very long, as there are significant increases in underlying cost.”
Redwood Logistics is one of the fastest-growing supply chain and logistics companies in North America and is a privately held top-100 provider of a wide range of strategically integrated transportation and logistics services.