Morning Jolt: Turns Out Ocean Carriers Aren’t Evil Monopolists after All

PRESENTED BY

WALMART

WITH JIM GERAGHTY

Nov 10, 2023

Turns Out Ocean Carriers Aren't Evil Monopolists after All

This is Dominic Pino filling in for Jim Geraghty today.

On the menu today: Ocean carriers, the great price-gouging villains of politicians' imaginations, are now forecasting layoffs and service cuts.

From Boom to Bust

Remember when we were all supposed to believe that ocean carriers were villains? They were supposedly the cause of inflation, by raising prices during the pandemic. They were evil monopolists who could raise their prices at will, and they needed to be broken up with antitrust enforcement. Their windfall profits needed to be taxed, with the proceeds given to the needy consumers they had gouged.

None of that was true. The cause of the higher freight prices during the pandemic was the surge in demand for imports. The market for ocean freight is competitive, and the number of firms involved in trans-Pacific trade increased in response to higher demand. And carriers rolled their high profits into buying new vessels, with nearly 700 new ships expected to be delivered this year and next year.

Now, the boom is over, and carriers are going back to being what they used to be: unprofitable.

The depiction of ocean carriers as mega-profitable was strange to anyone who had paid attention to supply chains before 2020. Ocean carriers are famously unprofitable, oftentimes just barely scraping by with the assistance of government subsidies.

Maersk, the Danish firm that is one of the largest shipping companies in the world, announced earlier this month that it will be cutting over 10,000 jobs in response to plummeting freight rates. "Freight rates fell 58% on year in the third quarter and are down 90% from their peak during the pandemic. Revenue in Maersk's main shipping business fell 56% on year to $7.9 billion," the Wall Street Journal reports.

The CEO of Hapag-Lloyd, another major carrier, says he also expects the next few years to be tough for the industry. The CEO of CMA CGM, another carrier, agrees. Both of them say that they don't expect volumes to decline significantly overall, but that lower rates will hurt their bottom lines. Hapag-Lloyd has announced service cuts, though has not planned layoffs like Maersk. The company's profits are down 77 percent in the past year, despite volumes being about the same.

The collapse in ocean-freight prices has been about as dramatic as the pandemic-era increase. The Freightos Baltic Index, a global index of freight rates, put the price of a container at around $1,200-$1,500 in the years before the pandemic. Prices began to rise in the second half of 2020, then accelerated and peaked at $11,109 in September 2021. The price remained between $9,000 and $11,000 until April 2022. Since then, prices have collapsed. By February of this year, the price was back below $2,000. The index for this week is only $1,167.

That price collapse comes despite higher costs for ocean carriers as well. They've had to deal with the same inflation everyone else has, with higher labor costs, fuel costs, and materials costs compared to before the pandemic. That means returning to the same container rate as before the pandemic isn't financially viable like it was then.

Ocean carriers have a variety of options to adjust capacity to meet market demand. One is to simply cancel, or "blank," a sailing altogether. Another is to have ships sail more slowly. That saves fuel and reduces capacity by having ships spend more time at sea rather than being loaded or unloaded at port.

Plowing all those extra profits into new ships turns out not to have been a great decision for many ocean carriers. They're now looking at a situation where demand is down, and they have more ships than they know what to do with.

As shipping expert Greg Miller has pointed out at FreightWaves, there was a previous recession in the ocean-freight industry in 2015–2016 due to an oversupply of new ships. The oversupply spurred a price war between carriers and culminated in the bankruptcy of Hanjin, the South Korean carrier that was one of the largest in the world.

Hanjin's bankruptcy created all sorts of problems because individual ships were seized by creditors. Crews were effectively detained on their ships for weeks as they waited for the bankruptcy process to play out in South Korean courts. Ports wouldn't allow ships to be unloaded because they weren't confident they'd get paid. Container ships are so large that unloading one is a massive financial proposition, and not one to be undertaken if the money might not be forthcoming.

Another bankruptcy like that probably isn't coming, but it's hard to say for sure. It's also difficult to say what the declining freight markets mean for the global economy. There's little doubt the freight industry overall is currently in recession.

Trucking in the U.S. is also being hit hard, with about 35,000 trucking operators going out of business in the past year. In a normal year, about 16,000 go out of business. The trucking industry is extremely competitive, with owner-operators making up the bulk of the market, which means there are 363,000 trucking operators in the U.S. A bunch of the operators currently going out of business only got into the market within the past few years, in response to high prices.

Airfreight is no different. Cargo airlines are looking for ways to get out of aircraft leases they agreed to in the past, or at least postpone them until demand recovers. They too are dealing with higher labor costs with freight rates at roughly the same level as pre-pandemic, similar to ocean carriers.

Freight recessions occur much more frequently than overall recessions, though. There was a major trucking recession in 2019, for example, when the overall economy was still booming. Since 1972, there have been twelve trucking recessions but only six economy-wide recessions.

The reason: The freight industry is very competitive and subject to frequent boom-bust cycles, contrary to what politicians would have you believe. If ocean carriers truly had monopolistic power, they wouldn't have let prices collapse like they have in the past year, hurting their own bottom lines and upending plans they made when prices were high. The calls for windfall taxes on supposedly price-gouging ocean carriers have been exposed for the demagoguery that they always were.