Shipping a container of hazardous chemicals from Shanghai to Chicago has cost John Logue about $ 6,600 so far. Now the Royale Group’s CEO pays up to $ 29,000 – and only if he’s lucky enough to find space on one of the coveted cargo ships that ply the Pacific trade routes.
Logue’s mental headache is mirrored on land, where Royale Group containers routinely get stuck in blockades at train stations, resulting in costly and unpredictable storage fees. Earlier this month, BNSF, one of the country’s largest railroad companies, increased its fees in Los Angeles and Chicago, adding to Logue’s suffering.
The Royale Group’s double-barreled freight problems, hampering both existing operations and Logue’s efforts to return production to the United States, illustrate the market power of the handful of shipping companies and railroads bringing goods to American homes from factories far away.
“We are at their mercy,” said Logue. “Sometimes we just throw up our hands … This is insane.”
Recently, President Joe Biden urged regulators to tackle consolidation in the shipping and railroad industries as part of a comprehensive arrangement that encourages competition across the U.S. economy.
Freight may seem like a prosaic subject for the President’s attention. But the smooth movement of goods may never have been more important given the e-commerce explosion that accompanied the pandemic. Transportation bottlenecks in June helped fuel the highest inflation in 13 years and shock Americans with a sticker shock on goods like used cars, plane tickets and bacon.
In fact, some regulators and executives are warning that unusually high shipping costs and associated supply chain disruptions could lead to isolated bottlenecks this year as the US economy recovers. Imports of products like tires, food and water purification chemicals could be affected, said Carl Bentzel, a commissioner for the Federal Maritime Commission.
“I am now very concerned about the economic impact of the current situation. This could be the first time the public has seen the effects of the disruption to maritime traffic since World War II,” he said.
But global carriers and U.S. railways insist the government misdiagnosed the supply problems. The country’s ports, terminals, truck fleets and railway lines are being overwhelmed by a pandemic-induced increase in imports and are not being strangled by monopolies, it is said.
Either way, a quick disentanglement of the confused US supply chains is unlikely as industry groups resist new regulations.
The White House officials who drafted Biden’s order say that high freight costs resulting from a lack of competition are a macroeconomic burden. Nine carriers, organized in three shipping alliances, control more than 80% of the world market for ocean-going vessels. Likewise, according to the White House, there are only seven major railways, up from 33 four decades ago.
“It’s like interest or oil,” said Tim Wu, special assistant to the president for technology and competition policy. “It gets less attention, but for consumers and American exporters, the price of moving goods is very important.”
However, it is difficult to distinguish between the effects of industry consolidation and the pandemic. Importers and exporters have been complaining about rising freight costs for more than a year amid a shortage of shipping containers, truck chassis, drivers and dockers.
Biden’s advisors acknowledge that the pandemic is responsible for much of the disruption. But they say the lack of competition has allowed freight carriers and railways to take advantage of the pandemic by driving prices to historic highs.
Industry officials and some independent analysts disagree. Developing regulations to deal with the current situation has unintended consequences once the economy regains its foothold, said Lars Jensen, CEO of Vespucci Maritime in Copenhagen.
“The current state of affairs is extreme and is being driven solely by the effects of the pandemic. It tells us absolutely nothing about the general structure of the industry, ”he said.
In the past four years, eight of the top 20 shipping companies have disappeared; nine survivors attempted to escape a meager profit story by organizing themselves into three rival alliances.
The shipping consortia operate in a similar way to pacts in the aviation industry, in which airlines take turns to cooperate and compete. Members of an alliance share the space between their ships, even when operating from some of the same ports.
The arrangement has paid off for the big carriers. Maersk reported record earnings of $ 2.7 billion for the first three months of this year, compared to $ 185 million for the same period last year.
When demand soared in the first few months of the pandemic, the alliances quickly canceled more than 400 crossings, according to S&P Global. This prevented ruinous losses from falling prices, but led to complaints from exporters about price gouging.
Then the demand for cargo space surged unexpectedly when Americans bought laptops, furniture, and electronics for the homework era.
In the past year, the cost of shipping a container from China to a port on the US west coast rose more than 156% and has hit historic highs according to the Freightos Index.
In the long term, however, there is little evidence of rising prices. In the first three years of the Allianz era, these costs only increased 14%. According to Freightos, prices from China to Europe even fell slightly over the same period.
“Freight costs didn’t matter,” said Jensen.
You do it now.
At Royale Group, based in Bear, Del., Logue says it spends twice as much time managing its supply chain as it did a few years ago. Last week a freight forwarder abruptly canceled a shipment, which upset him.
Many of Royale’s cargoes contain hazardous chemicals for the pharmaceutical, automotive, and electronics industries that require special handling. Therefore, carriers often choose to avoid the hassle of being able to ship a routine product instead, Logue said.
“The three big alliances have far more bargaining power and control than ever before,” said Matt Godden, CEO of Centerline Logistics, based in Seattle, which provides refueling services.
After years of moving production overseas, Logue has tried to bring the work back to the United States. Congested ports, overcrowded train stations and a lack of truck drivers make him improvise.
However, he blames a number of factors for the current freight difficulties, including outdated port infrastructure and technology, tariffs, US-China tensions, and the pandemic. Lack of competition “may be part of the problem,” said Logue.
American consumers could feel the effects of stressed delivery lines.
La-Z-Boy this month blamed “container shipping problems” for delivery delays and the lack of electrical components for some of its more expensive and more profitable couches. Likewise, KushCo Holdings, which makes packaging for cannabis products, told investors that rising freight costs are “dampening” profits, and Constellation Brands said it is struggling to keep retailers stocking its Ruffino and Kim Crawford wines.
Apparel maker Levi Strauss is bypassing the worst residues, including in the ports of Los Angeles and Long Beach, California, by shipping more goods by air and rerouting ocean freight to the east coast, Harmit Singh, chief financial officer of Levi Strauss, told analysts at one recent phone call.
“A lot of people talk about not being able to get containers, not being able to get on a ship,” said Singh. “[Our] Team did an exceptional job giving us guaranteed space – and guaranteed prices too, which help us control our costs. So that’s a big challenge for the industry. “