Container crisis curbs global economic recovery
April 13 2021
It took decades to build efficient supply chains around the world and just a few months to desynchronize the entire transportation and logistics industry with the advent of the infamous container crisis. But what is at the origin of this shortage? What are the effects of this crisis on international trade and the global economic recovery?
The origin of the crisis
With the arrival of Covid-19, governments around the world have had to react to curb the spread of the virus, forcing the shutdown of several sectors causing disruptions to economic and commercial activity. Emergency health measures have been deployed at different times depending on the seriousness of the epidemiological situation in a specific territory, endangering consistency on the world stage of international trade.
Containers are becoming in a way the hostages of this health crisis. Between the restrictions put forward to counter the pandemic and the spread, the workforce is quickly insufficient to meet demand and ensure consistency of port operations on a global scale. Stuck, sometimes immobilized for days, weeks or even months before returning to sea, the containers end up in the wrong quantity, stacked in the wrong place, at the wrong time. Another factor affecting congestion: “Containers that carried millions of masks to countries in Africa and South America early in the pandemic remain there, empty and uncollected, because shipping carriers have concentrated their vessels on their most popular routes — those linking North America and Europe to Asia,” The New York Times reported in an article published in early March 2021. 1
That was enough to trigger a fatal gap between the timeline and the availability of containerized equipment to disrupt maritime traffic, increase the cost of freight transport and create transit delays. For entrepreneurs who depend on imports and exports to keep production afloat, the container crisis comes at a very bad time. While some of them are having difficulty resuming their activities at full capacity, others are struggling to find a measure of stability between production capacity and transportation issues, a reality that is slowing down economic recovery.
The lack of containers forces a decline in production
The container crisis has spread almost as quickly as the virus worldwide. In Canada, it particularly affects our farmers due to the perishable nature of their products. In an interview with the magazine les affaires, Alain Létourneau, CEO of Prograin in Saint-Césaire, Quebec explains how this crisis is hurting his business, which produces and exports agricultural products to Asia and Europe. Its container needs average between 600 and 800 per month to ensure delivery to its customers. “However, at the moment, we only have access to 80% of this capacity, which represents approximately 480 to 640 containers per month,” says Mr. Létourneau. Forced to reduce production, he adds that “the Prograin seed plant is only operating at 85% of its capacity.” 2 Even if there is a demand, producing more would result in a loss for the Prograin company, given its inability to ship orders to its customers located abroad. When a company must downgrade its production objectives due to a lack of transportation options, unfortunately the workforce pays the price. A decrease in production = workforce reduction = fewer jobs available = increase in the unemployment rate. Can you imagine the impact on a region, country, or planetary scale…? This new duality between productivity and export ability is obviously hampering the global economic recovery.
Soaring ocean transportation costs
While the container shortage affects production among exporters, it also affects the supply chain of importers, which must pay more for transporting raw materials needed for producing consumer goods. The cost of shipping a container of goods has risen by 80 percent since early November and has nearly tripled over the past year, according to the Freightos Baltic Index (FBX). Container manufacturers are probably the only ones to rejoice right now, as the bill for a new container has almost doubled since the start of the crisis. If you think container leasing is a viable option, note that rental rates have also increased by around 50% from the norm. 3 With an increase in the transportation price per unit, importers will inevitably have to increase the price of their product on the shelves if they want to maintain a certain measure of stability regarding their profit margin and ensure the viability of their business which is still shaken by the effects of the pandemic.
Empty containers rise in value
As delays occur and containers pile up in major ports around the world, finding a container to secure a shipment becomes a real challenge. The crisis has reached a boiling point so that even empty containers have gained in value. Now, paying to repatriate empty containers has become standard practice.
In an interview with specialized media BNN Bloomberg, Chuck Penner, founder and president of Leftfield Commodity Research, explained that “because the demand for containers to move consumer goods from China has been so strong lately, they [Chinese exporters] do not want to wait for those containers to be loaded with grains and crops to be returned to Asia. Therefore, it makes financial sense for them to return the empty containers and send them on a new distribution route right away.” 4 This situation is worrying, since this practice has already been observed for some time at the Port of Vancouver, thus limiting Canadian export power. The same observation holds true for the United States, where ocean carriers unload in California and then immediately return empty containers to ships, without further ado. China was one of the first economies to resume its activities in its production chains since the arrival of the pandemic, thus relaunching its trade operations on all fronts. But by repatriating empty containers in this way, what will happen with the recovery for other regions around the world? The domino effect continues in North America where the economic recovery is still timid and fragile.
Unfortunately, this container crisis is not about to end within the immediate future. However, Peter G. Hall, Vice-President and Chief Economist at Export Development Canada (EDC), argues that “markets are generally the most effective mechanism to resolve the crisis surrounding the shortage of containers and to smooth over the obstacles that hinder the recovery of the global economy in the short term.” 5 In fact, as long as the ongoing pandemic continues to undermine business activities, economic growth will be unbalanced, and supply chains disrupted. It will therefore take some time for all economies to re-synchronize and for international trade to regain its direction.