Mercado | Insights - The current ocean situation can be solved

Insight: The current ocean situation can be solved

Article | What I learned in Supply Chain

The current ocean situation can be solved

June 22nd, 2021
11 minute read

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Every week, Mercado CEO Rob Garrison pens his latest learnings from the supply chain industry as part of an on-going series. Each article aims to share a little insight into what's going on that week, and to help foster discussion amongst industry professionals across levels, geographies, and companies.
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I have been asked often lately if the current ocean situation can be solved.
The ocean industry has a lot of “situations” going on right now — including lack of technology, port congestion, capacity shortage, container shortages, vessel size (which leads to longer load/unload times), and vessel sharing (which restricts capacity and competition)...just to name a few.

The carriers are addressing their technology issues through a group called Digital Container Shipping Association (DCSA). Port congestion is largely out of their control as it’s a complicated mix of landlords, port owners, labor, and carriers; however it does play a big role in this “situation.”

As far as over capacity and container shortages, they are related. Both were byproducts of the pandemic. It is called the bullwhip effect.

  1. January to March: Suppliers can’t supply
  2. March to June: Buyers can’t buy
  3. Carriers respond to lack of demand by pulling capacity
  4. Pulling capacity creates a container imbalance
  5. The imbalance creates a container shortage, just as demand picks back up due to the “normal” holiday surge
  6. The container shortage causes “panic” (as you saw last summer with lack of toilet paper)
  7. Panic drives up demand as buyers worry they won’t have enough
  8. Increased demand and container shortages drive up pricing
  9. Increased pricing creates a market frenzy as buyers and their logistics providers scramble to adjust
  10. Delays begin to ensue across the board as suppliers wait for containers, ports slow down, and upstream suppliers run out of raw materials
  11. The increased demand, pricing, and frenzy continue through the normally slow first half
  12. Demand continues due to “the normal” holiday surge which begins in May, so the cycle continues
Shipping is a complex and interconnected global network, and when you pull capacity, it upsets the intricate balance of trade. In Asia to North America trade, for example, there are four inbound containers for every one outbound container. In order to correct this imbalance, carriers load empty containers from North America to supply the demand from Asia.

When you pull capacity, you break the balance, which leads to a massive shortage of containers. When containers are unavailable, it impacts the whole supply network. Factories have nowhere to put the product they manufacture, importers can’t get the goods they scheduled months in advance — and it still takes 90 day to make products.

This leads to panic, including paying premiums to get whatever containers are available.

It also leads to panic buying as importers worry that they won’t be able to get the products they rely on for sales – very similar to what we saw with toilet paper for example. Americans weren’t going to the bathroom more often, they were “buying up” toilet paper to ensure they didn’t run out and ultimately be left high and dry. So now you have an even bigger problem as the increased demand is on top of the container shortage. This in turn causes even bigger price spikes and the cycle continues.
Mercado | Insights - The current ocean situation can be solved

So what is the solution?


The solution is the carriers adding additional capacity, and deploying “ghost vessels” loaded with empty containers to the places where they are needed. It would be very expensive for them to do this, however right now they are making record profits. Q4 2020 set a record for ocean shipping profit at $9 billion USD. In Q1 of this year alone, Costco generated $2.4 billion in profit versus $44 million in Q1 2020.

Of course they aren’t incentivized to do this as the scarcity is what is leading to their record profits.

The other solution is the market itself. In addition to 500% ocean inflation, importers are facing rising raw material costs, production costs, labor costs, and domestic transportation costs.

Unless they can pass on those increases to consumers, they will start to cancel orders. When demand decreases, it’s easier for the carriers to get things back into balance and prices will naturally fall. Some speculate carriers will “never let that happen,” however they are not immune to the natural laws of supply and demand or the so-called invisible hand.

The third possibility is that the market will “naturally cool” beginning in November, around when holiday demand subsides.

The other possibility is importers will find alternatives including near or onshoring. Some customers may even charter their own vessels. For example, Home Depot is the third largest importer in the US. They import 250,000 containers per year. They have decided to charter their own vessels since the carriers can no longer effectively serve their customers.

So many solutions, so little time...

About the author(s)
Image
Rob Garrison
CEO, Mercado Labs
LinkedIn

About the Series

Each week, Mercado CEO Rob Garrison pens his latest learnings from the supply chain industry as part of a series run for his LinkedIn followers. Each article aims to share a little insight into what's going on that week and to help foster discussion amongst industry professionals across levels, geographies, and companies.

You can connect with Rob on LinkedIn by following this link.
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Mercado | Bring Order to your Imports
                                               
© Mercado Labs Inc.
From us to you...

Thank you for using Mercado. Our goal is to empower businesses to better navigate the complex world of importing. We know data security is of paramount importance, so we place high standards on ensuring it is safely and respectfully secured. We are committed to following and continuously evolving best practices to support this principle. Your data is yours, and we guard it closely. We do not sell any of your information, and we will always be fully transparent on how we collect and use your data. That's a promise.