Rob Shepard, director of transportation at Reebok, isn't worried about whether he'll be able to secure enough containers to handle his company's peak-season cargo. When he negotiated his service contracts with trans-Pacific carriers, he insisted on a clause guaranteeing equipment availability.
Shippers whose contracts lack such a clause could be in trouble this year. Rising steel prices, resulting mainly from increased demand in China, have caused a cutback in container production, which also is centered in China. Shippers without equipment guarantees may soon feel the pinch. "Something has to give. Some people will suffer," Shepard said.
Here's how tight the market for new boxes is: Container manufacturers in China told Maersk Sealand, the world's largest shipping line, that they can fill only half of the carrier's orders, said Anne Kappel, the carrier's director of corporate communications. Maersk Sealand has thousands of containers scattered throughout its global network, so it will be able to reposition enough empties to Asia to satisfy customer requirements, but "it's going to cost more money," Kappel said.
Carriers report difficulty in obtaining enough new containers to replace the boxes they retire, and the containers they purchase will cost about 40 percent more than they did last year. There are countless empty boxes scattered around the globe, but most of them are far from where they're needed.
Importers can expect to share the higher costs. Some carriers appear to be trying to leverage the container shortage into rate increases, but it appears to be a response to a logistical problem and not an attempt to artificially boost rates. "I think the container shortage is real. It's not just contract talk," said Dave Akers, managing director of the Toy Shippers Association. "Everyone is saying they're concerned."
Shippers and carriers have been wrapping up negotiations for contracts for the May-to-April contracting cycle. Before this year's negotiations began, trans-Pacific carriers announced plans to seek general rate increases of $450 per FEU for port-to-port cargo and $600 for intermodal shipments.
Shipping lines are struggling to overcome the equipment shortage by repositioning empty containers from areas with surpluses, such as the U.S. and Europe, to areas with shortages, primarily in Asia. There are probably enough containers to satisfy demand during the summer-fall peak season, but carriers will spend heavily to reposition containers.
Carriers' repositioning options are limited. On westbound backhaul voyages to Asia, empties compete for space on the ships with U.S. export loads. Chartering of vessels to carry empties to Asia is an option, but a costly one. Charter rates for ships are approaching record levels, and the market is extremely tight.
The container shortage is further aggravated by persistent problems on the North American intermodal rail network. The Union Pacific and Canadian Pacific systems have developed bottlenecks that have slowed trains and added to the time needed to deliver empty containers from interior points to seaports for repositioning to Asia.
Unlike the intermodal rail crunch, which is a perennial problem, the container shortage caught the shipping industry by surprise. Industry veterans say this is the first time they can remember that container manufacturers in Asia have not been able to fill the orders placed by ocean carriers.
Until this year, excess manufacturing capacity during the last decade had enabled shipping lines and container lessors to buy new containers at bargain rates. Carriers have grown accustomed to replenishing their fleets with new boxes and retiring containers after depreciating them for seven to 10 years.
Today's container shortage is directly related to China's insatiable appetite for steel to feed its manufacturing industries. Global manufacturing has shifted to China so rapidly that steel producers have been unable to meet the country's huge demand. "Manufacturers of containers receive an allotment for steel. You may not get all of the containers you have ordered, or the delivery date may be pushed back," said M.K. Wong, director of marketing at Orient Overseas Container Line.
The impact of the container-manufacturing squeeze varies from carrier to carrier. Maersk Sealand owns a container-manufacturing plant in China, so it is doing better than many carriers. OOCL, which last year began adding 8,000-TEU vessels to its fleet, also ordered thousands of new containers, most of which were delivered before the steel crunch hit.
For large container carriers, purchasing of containers is a continual process. Carriers order containers throughout the year to supply new shipping services or to replace old containers. MOL generally retires containers when they become 10 years old, said Ray Keene, chief operating officer at MOL (America).
The price of new containers has risen dramatically with the price of steel. Twenty-foot containers command a price of $1,950, up from $1,400 last year. Prices of 40-foot containers, the dominant size in the trans-Pacific, are up 40 percent to about $3,000.
Most carriers maintain a mix of owned and leased containers. Costs of leased containers also are up about 40 percent, and lessors are demanding longer lease terms. Lessors, of course, are experiencing the same problems getting enough new containers from the factories as are shipping lines.
The container shortage is disrupting a common practice in the trade in which lessors give shipping lines free use of a new container for a single voyage. A carrier will pick up the container at the factory in Asia, fill it with an export load and deliver it to the U.S., where the lessor takes possession. Because most container manufacturers are in China, carriers supplement their fleet with thousands of container moves from China each year, and lessors don't have to pay for transporting the boxes to the U.S., said Henry F. White, president of the Institute of International Container Lessors in Briarcliff, N.Y.
Importers, naturally, are resisting rate increases. Some of them say carriers are suggesting, subtly, that equipment could be made available if the price is right. "The carrier representatives are saying, 'I have to be careful that the rate I quote you will get you the equipment you need,' " said Hayden Swofford, independent administrator of the Pacific Northwest Shippers Association.
Shippers can help themselves by communicating regularly with carriers, said Scott Dailey, an APL Ltd. spokesman. Shippers who provide carriers with early word of the number and sizes of containers they need, and the origins and destinations needed, will have a better chance of securing equipment, Dailey said.
While ocean carriers have some control over the availability of containers, they have much less control over the performance of the railroads that carry intermodal shipments. More than half of the containers that arrive at West Coast ports in North America move by rail to the East, either as full container loads or transloaded from ocean containers to domestic containers or trailers.
Railroads are struggling with higher-than-expected intermodal volumes. The worst delays have been at Vancouver, British Columbia, where shipments have been backed up 10 days to two weeks by congestion on the Canadian Pacific Railway.
Fred Green, CP's executive vice president, said shipping lines must do a better job of forecasting demand. CP has accommodated growth of 6 to 7 percent in intermodal volume the past five years, but the double-digit growth of the first quarter this year exceeded the shipping lines' projections, Green said.
Robert Ritchie, CP's president, said intermodal volume is growing so rapidly that rail administrators and government transportation officials in North America should convene a summit to address long-term infrastructure requirements. Continued growth at today's pace will require a doubling of surface transportation capacity by 2020, Ritchie said.
In the U.S., Union Pacific's operations have been slowed by a shortage of train crews. UP hired 2,000 employees last year and is hiring 4,000 this year. The railroad plans to add 430 locomotives, and is double-tracking segments of its key corridors leading from Southern California.
Shipping lines are caught in the middle of the intermodal rail problems. They are responsible for customers' shipments that are booked to eastern destinations on through bills of lading. If railroads commit to a certain number of slots each week but can't supply that capacity, shipping lines must decide which shipments make the cut and which ones are held back.
APL uses its leverage as one of UP's largest customers to demand performance, Dailey said, but the ocean carriers' influence extends only so far. The railroads own the double-stack cars and locomotives.
About 78 percent of U.S. imports from Asia move through the West Coast. Akers is advising Toy Shippers Association members to use all-water services to the East Coast whenever possible, but with capacity limited on Panama Canal routes, shippers are reportedly having to book space as much as six weeks in advance.