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7 Reasons for the Capacity Crunch

Updated: Aug 9



According to some experts, the container shipping industry is “maxed out.” In the latest Container Shipping Market Quarterly Review, that’s how James Hookham, Secretary General of Global Shippers Forum, described the current shipping capacity crunch that’s affecting global economies.


In the report, issued by the Global Shippers Forum and MDS Transmodal, Hookham said, “Shippers around the world are in a state of shock at the collapse of service performance and the remorseless rise in shipping rates. The latest data confirms the anecdotal experiences of shippers struggling to book container slots on a fleet that has hardly grown and needing to absorb the relentless rise in rates that is eroding their own profit margins. What the data don’t show is the cargo left behind on the dock. The fact that industrial output continued to rise over the first three months of the year, but the number of containers carried actually fell slightly shows this is an industry that has ‘maxed out’.”


The following CNBC video describes some of the dynamics contributing to the current capacity crunch.


https://youtu.be/E7t5yj1rScI



As noted in the video, there are numerous factors contributing to the current state of capacity woes. Since there are so many variables involved, we’ll take a high-level view by examining major cause-and-effect trends that are creating a capacity-crunching ripple effect.


Within them, specific factors include:

  • Globalization

  • COVID-19

  • Container Shortages

  • Port Congestion

  • Rising Costs

  • Industry Consolidation

  • Growth of Mega Ships



Globalization, COVID-19


The interconnected nature of the global supply chain creates the potential for multiple disruption points that are difficult to address, compounding their impact. And there’s no better example of this dynamic than the crippling effect of the COVID-19 pandemic.

This particular scenario was unique in that it didn’t affect just one country or region, but the entire world all at the same time. As a result, there was an initial massive slowdown in purchasing, then a glut of spending that overwhelmed ports.


Consumers who were in lockdown and receiving stimulus checks created an unexpected jump in seaborne trade, as the United Nations Conference on Trade and Development (UNCTAD) notes: “…changes in consumption and shopping patterns triggered by the pandemic, including a surge in electronic commerce, as well as lockdown measures, have in fact led to increased import demand for manufactured consumer goods, a large part of which is moved in shipping containers.”

In light of those dynamics, it was particularly damaging when a resurgence of the virus partially shut down the critical port of Yantian, China and the Ever Given blocked the Suez Canal for six whole days.



Container Shortages, Port Congestion, and Rising Costs


When it comes to the containers themselves, historic shortages are creating all kinds of problems and contributing to two more historic trends: port congestion and the rising cost to transport containerized goods.


COVID-19 again played a role in the shortages and congestion, as Brendan Murray described in a Bloomberg post: “…the varying speeds of recovery across the world created a container shortage between China and the U.S., clogging one of the main thoroughfares. That led to backlogs at U.S. ports, truck yards and railroad hubs that handle intermodal freight, which were compounded by dockworkers calling in sick and shortages of truckers.”



Historic rate increases were cited by Drewry in its latest Container Forecaster report, which noted “huge upgrades for freight rates and carrier profits as [the] market faces [an] extended period of under supply.”


According to Drewry findings, 2021 “will be the first year in the history of container shipping when carrier profits approach $100 billion and average freight rates jump by 50%, against a background of huge operational disruptions to the port and ship systems.”


Drewry noted that ongoing challenges with port congestion and equipment availability are continuing to drive the climbing market prices, which are highlighted in its World Container Index released on July 8th. The report reflected a surge of “4.7% or $397 to reach $8,795.77 per 40ft container, which is 333% higher than the same week in 2020.”


Additional costs affecting shippers are rising detention and demurrage (D&D) charges. Reporting for Supply Chain Dive on a recently released survey by the Harbor Trucking Association (HTA) and Tradelanes, editor S. L. Fuller described how record port volumes, container shortages, and increased truck dwell and turnaround times are contributing to port congestion and affecting the D&D cost dynamic. According to the survey, “no available appointments” and “gate congestion” were the top two reasons cited by respondents regarding 2020 disputes over D&D charges.



Industry Consolidation, Growth of Mega Ships


Referring to commentary by Weston LaBar, Chief Executive Officer of HTA,Fuller noted that industry consolidation is another factor contributing to the rise in D&D charges—since efficiencies created to benefit ocean carriers created new inefficiencies for the land-based supply chain.


Murray also described the impact of consolidation trends on the shipping industry—but within the context of reduced agility to adapt to changing dynamics. He noted that consolidation has “left it less nimble to respond to demand swings but swifter and more unified in cutting capacity, to keep rates elevated.”


As noted in the CNBC video included previously, the rise of mega ships is also having an impact in various ways. These may include lost containers from extremely high stacks, specific docking requirements to accommodate their size, and slower speeds that can impact shipping times.



Symptom vs. Cause


While the pandemic has certainly played a role in the capacity crunch the world is now facing, it’s more a symptom of what can happen when a fragile supply chain is permitted to grow—rather than the specific cause that broke it.


The intricate nuances of these dynamics are described in this Wendover Productions video, Why There are Now So Many Shortages (It's Not COVID).


With so many complexities involved in the capacity crunch, you need a supply chain expert who can help you navigate the uncertain waters ahead.


CLN Worldwide is such a partner.

Contact us today. We look forward to working with you.


CLN Worldwide www.clnusa.com

customerservice@clnusa.com

704-756-6425

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