Shipping containers are a rare commodity these days. Those who need them to shunt goods around the world are paying top dollar for the few they can scrounge up. Normally, this is a good problem, a sign of a searing economy that needs to create a bit more capacity to grow. Shortages in the context of a coronavirus-constrained economy are harder to grasp. What is going on, and how are Canadian exporters affected?
Economic conditions were tight just as COVID-19 hit. Unemployment rates were at cyclical lows, income growth was strong, and it looked as though we were finally experiencing the kind of robust conditions that had eluded us since the global financial and economic crisis of 2008. And with all the economic heat, there was no container crisis. Oh, lease rates did rise, but nothing like what we’re seeing now.
The pandemic saw lease rates plunge close to cyclical lows, but the move was momentary: rates were on the rise almost immediately, and they haven’t stopped. The HARPEX index of contained shipping costs is now more than double the pre-pandemic average rate, and every size-class of container ship is affected. In a world still worried about the true state of final demand, upstream price increases like this are a worry of a different kind, as they’re eating into already-thin margins.
The timing of recovery sheds light on the problem. China was the first to be hit with the pandemic and is arguably the most successful in conquering it. China’s merchandise exports were pummelled in February 2020 and recovered fully in the following two months. Everybody else saw their exports suffer in March and April, and it wasn’t until June that levels were nearly back to the pre-pandemic marker. China’s jumpstart pushed full containers to ports everywhere, but the lack of return business stranded empties all over the place. Initially, it wasn’t an issue.
However, global demand is picking up. Orders for next-season wares are climbing. Indeed, all those new houses in the United States are going to need appliances and all manner of finishings as they near completion. Supply chains are firing up again.
If this is indeed the return to the economy that was, containers could be the spoiler. The market may well come to the rescue. As shipping costs soar, the value of empties rises to the point that there is value in scooting them to where they’re needed. Chinese digital platforms already have a system for locating and shipping empties from ports around the world. At the same time, with trade firing up in more locations, there’s more demand for filled containers as well.
That may be a few months off. The short-run shortage is the critical concern of the moment, and it has some worried about more generalized inflation. That’s not likely, as the world economy still has lots of spare capacity; any price flurry is likely to be temporary, and indeed a good sign that the economy is getting back up on its legs again. In this case, a little inflation might not be such a bad thing.
We really shouldn’t be surprised. Shutting down an economy is one thing; getting it going again is quite another. The capacity may be there, but when it’s idled for a few months—whether that’s labour, buildings or machinery—it’s not always easy to do an instant start. And even if it were possible, it’s not easy to convince business owners that it’s here to stay. Nobody wants to fully fire up capacity if demand is set to continue in stop-start mode.
What the economy seems to be dealing with is a combination of physical and psychological constraints to growth. China is one of the rare places on the planet that appears to have overcome both. In that sense, growth is out of balance, supply chains have been upended, and it’ll take time to bring all economies back into synch. The shipping container issue is perhaps a sign of the short-term constraints we’ll all be facing in the weeks ahead.
The bottom line?
Markets are generally the most efficient mechanism for sorting out the container conundrum, and any other short-term constraints our reviving global economy encounters in the next little while. The container crisis is a sign that the economy is maybe not as bad as some report. It also says that first-movers have a distinct advantage.
