viewpoint: grains

TIME TO THINK OUTSIDE THE BOX

ˆ BY BASIL KARATZAS

The pandemic has played havoc with containerised shipping, with shippers used to exporting on cheap, ‘back-leg’ lines facing unprecedented – and expensive – circumstances

Supply chain disruption is the buzzword de jour as container ships have to wait for weeks before being able to dock and unload the boxes onboard. While most of the concern is focused on empty grocery shelves or delayed deliveries of non-perishables, one aspect of the containerised shipping has taken the back stage: unlike the “front leg” disruptions (delivering containers from China to North America and Europe) that are the visible part of the trade, there is also the less visible “back leg” – when empty containers accumulate in North America with no cargo to ship – which also has been impacted by the current state of the container line trade.

There have been imbalances of trade – and then there is that between China and the US (an estimated $340bn in 2021) and, accordingly, a permanent excess of containers in the US that have to be shipped back to China and Asia for re-loading. In normal times, container liner companies were more or less obligated to take empty containers back to China to be re-loaded and this back leg was a complete deadweight as the containers were empty and container liner companies did not have any pricing power.

By some estimates, even in normal times, shipping empty containers from the US West Coast to China accounts for approximately 45% of the trade – that is one in every two containers gets shipped empty, not only forfeiting revenue, but actually costing money for the liner company. In general, empty containers from the West Coast of the US to China were shipped for a few hundred

dollars, if that, while laden containers could bring more than a thousand dollars in revenue. It is estimated that it costs more than $16bn annually for container liner companies to reposition empty containers back to China for loading.

Many an entrepreneur looked into finding cargoes to load in these empty containers and have them shipped back full, a way to (highly) reduced freight cost and to the benefit of all. Containerised cargo was a new concept, moving fast – literally and metaphorically – and there have been containers filled with used cars and scrap metal to be shipped to China.

Among the containerised cargoes were grains from the US to China, which could be exported quickly and efficiently, especially from the West Coast of the US, instead of being shipping on conventional dry bulk vessels. Containerised cargoes, especially on the westbound lanes of the Pacific, were a win-win situation for all as shippers could get a reduced freight rate while the container liner companies would earn revenue at an otherwise lossgenerating voyage leg. A few days, or even weeks, of delay to have the empty containers filled with cargo was not a concern as the risk-reward was favouring the delay for the revenue generated.

Among the industries that have actively looked into containerised cargo is the US agriculture industry, for grains, corn and wheat. The soyabean market in the US, especially, took a deep interest in the possibility, given that soyabeans are a lesser value grain cargo, less time sensitive, used for animal feedstock primarily and also the US soyabean exporters – relative newcomers to the world stage – had to be extremely cost competitive heading against the market leader, Brazil, when landing cost was counted. Shipping soyabeans from California ports to China in containers that were meant to be shipped empty was a sure way to beat the Brazilians exporting soyabean by drybulk ships and sailing eastbound.

The recent crisis at the US container ports, especially on the US West Coast, has been upending market trends. Given that approximately 5-10% of the world’s containers at any time in the past year were stuck onboard container ships waiting to dock to unload, and given the larger turnaround times to unload containers in the age of covid-19 (when port terminals, trucking and rail seem to be stretched to capacity), container lines companies have swiftly changed attitude toward the empty containers in the US heading back to China.

When the cost to ship a container from Shanghai to Los Angeles has increased from approximately $800 to $20,000 per container in the past two years, it makes no sense for the container liner company to delay the return of a container by a week or so for the container to be loaded and thus for the company to increase the freight on the back leg from $400 of an empty container to $1,500 for a fully laden container. There has been much more money to be made in the front leg and time has been of essence.

Shippers that hinged their export strategy on a cheap leg back were found facing unprecedented circumstances. It is estimated that approximately 6-7% of US soyabeans exports occur as containerised cargo from the US West Coast ports and the exports are seasonal. In October and November 2021, container liner companies rejected an estimated 177,938 six-metre containers, costing approximately $640m in agricultural exports. From July to November 2021, a total of 297,997 TEUs were denied out of the biggest US, costing in total $1.1bn in lost agriculture exports.

The Federal Maritime Commission has opened an investigation into the matter, and it has warned the World Shipping Council, saying the refusal of US exports by major ocean carriers could be a violation of the US Shipping Act. Container line companies, of course, defend their position, claiming that they are acting for the benefit of all by trying to expedite the supply chains and repositioning containers as quickly as possible.

While the container line disruptions seemingly brought havoc to the obvious candidate importers from China, the small, unsung exporters – such as those agricultural exporters who were vital in normal times to subsidise the back leg of the voyage – are now left alone to sort shipping solutions. The agricultural export season is not over yet in the US and drybulk freight rates are at least twice as high from the past year. Expect this matter to get more front page coverage in 2022.

Basil M Karatzas is founder and CEO of Karatzas Marine Advisors & Co in New York. For more information, please visit: karatzas.auction