Maersk and MSC ships at the port of Rotterdam. Photo by Kees Tom/Flickr.
By
John D. McCown
February 14, 2023
This article is part one in a two-part series. Part two can be found here.
The container shipping industry has an information problem. This is not referring to digital information initiatives and opportunities that can improve processes. There are many examples of digital applications across the entire maritime supply chain that can and will increase efficiency. Today the focus however is on more basic analog information, specifically the fundamental, actual numbers that depict the real position, direction, and effect of the container shipping industry. In each of those three areas, there is misinformation that distorts what is actually occurring. Taken together, the absence of more credible figures has contributed to recent disruptions in container shipping supply chains.
Over the last two years, almost everyone has become more keenly aware of just how linked they are to a maritime supply chain that moves goods across the oceans. The port congestion and resulting gridlock in various container shipping systems turned cargo movements that were previously smooth and predictable into ones that were erratic and uncertain. When 110 container ships are waiting off the Southern California coast for berths as they were at the peak a year ago, it was clear there were multiple physical issues. While the port congestion situation has now gone away, many of its after effects are still present. Unfortunately the metrics for gauging those effects aren’t as readily available as they should be. This has great importance going forward, as better measures are needed to give the real time information that could play a role in precluding a repeat or minimizing the duration of similar future situations.
The container supply chain is a key component of the American economy and adverse financial consequences result when that system gets jammed. If that occurs, it also places the U.S. in a vulnerable position if significant seaport capacity is needed to handle large movements of military assets during a national emergency or surge deployment. Seventeen ports in the U.S. are presently designated as strategic commercial ports, including a majority of the largest container ports. It is important that actions be taken to ensure that the port congestion issues experienced recently do not reoccur for both economic and national security reasons. Those actions will need to involve looking at new investments and new processes. The constructive role of better numbers in the three areas that will be reviewed should not be under estimated.
In each of these areas, analysis points to figures being inaccurate, in some cases materially so. The areas are linked with an error in one expanding an error in another and creating a vicious circle of bad numbers and the less optimum decisions that result. This misinformation contributed to the recent problems, as decision-makers did not have better fundamental data on what had actually already occurred. Like the coordinates of a map, the first step in getting to where you want to go is to know where you are. Without such basic data, neither the market nor policymakers have all the correct facts.
The misleading information connected to position, direction, and effect are: 1) the position issue related to the actual carrier earnings, 2) the direction issue related to the actual pricing levels and trends and 3) the effect issue related to the actual inflation impact of higher rates. Each issue and the errors in generally accepted numbers will be addressed in order.
A widely quoted container shipping industry profit figure for 2021 was $190 billion, in part as it was referenced in a February 28, 2022 White House press release. That number originated from Drewry, a well-known maritime consultancy based in London. President Biden was quoted talking about the same $190 billion in his June 16, 2022 speech that accompanied the signing of the Ocean Shipping Reform Act. From a compilation of the quarterly net income figures of carriers reporting actual results that represented 64.5% of total capacity, and assuming the other had proportionate actual results, analysis shows total net income for 2021 was $148 billion.
Further research led to a February 23, 2022 article in Offshore Energy that included a graph detailing Drewry’s quarterly numbers for industry results for 2020 and 2021. The total for 2021 was $193 billion and apparently was an updated amount. The $148 billion figure was based on net income while Drewry’s were based on earnings before interest and taxes (EBIT). A comparison of the variances in the 2020 quarters had the former averaging a reasonable $2 billion less than the latter and with that the numbers were in synch. That was not, however, the case with 2021 as after that adjustment the Drewry figure was 24% higher. The second and third quarters had major differences and the Drewry amounts showed a decline from the third quarter to the fourth quarter that in fact did not occur.
Following President Biden’s speech last June, I sent an email to the Drewry container shipping person with a worksheet comparing all the quarterly numbers. The goal was that an explanation could be provided on what if anything was missing in the comparison. A response to that email was never received. A June 16, 2022 article in Bloomberg was one of several now using $214 billion as Drewry’s estimate of container shipping industry profit for 2021. That estimate is 45% above the $148 billion net income estimate and 37% above if an adjustment is made for items below the EBIT line. The overstatement by at least $58 billion in 2021 has now been compounded with Drewry’s 2022 estimate of $290 billion reported in a January 6, 2023 article in Splash. The data shows that net income for the first nine months of 2022 is $181 billion and a 2022 estimate will not be finalized until fourth quarter results come in. Analysis suggests that Drewry’s 2022 estimate overstate comparable results by as much as $79 billion.
Misinformation related to actual pricing levels and trends has had an array of bad consequences. The problem centers on a spot rate focus despite the fact that only a relatively small percent of loads actually move under spot rates. In a detailed July 8, 2022 article in Medium, the data indicated that spot rates move less than 20% of loads. In addition to an overstated prevalence, the credibility of spot rates and the processes by which they are obtained is questionable. A review of the actual data shows that spot rates in the container sector do not have the expected linkage to contract rates with differences going beyond just timing.
Spot rate indices are down significantly from their peak last January. The widely followed Shanghai Containerized Freight Index (SCFI) at 2/03/23 was down 80% from that peak. However, it is still up 22% compared to 4Q19, the last quarter that was unaffected by the pandemic. Another index is a more relevant measure of actual overall sector pricing. Container Trades Statistics (CTS) is an entity owned by the carriers that aggregates data provided by them and issues volume and pricing reports. The data in CTS reports represent the universe of all actual movements. The CTS global pricing index is an overall measure of both spot and the more prevalent contract rates. The latest such index for December is 85% higher compared to 4Q19. That difference is more than three times higher than the 22% difference in the SCFI. The graph below compares actual monthly levels of the SCFI spot index and the CTS global pricing index over the last three and one-quarter years with both benchmarked against 4Q19.
Contract rates are typically for one-year terms and renew throughout the year. During the ramp up in spot rates, the data shows contract rates were not consistently being reset at the then current spot rate. That disassociation is borne out by the graph above and should continue. The focus on spot rate indices is misplaced and instead aggregate indices like the CTS depicting actual overall pricing levels and trends should be utilized. Unfortunately, the misunderstanding that spot rates define sector pricing is pervasive. Recently Treasury Secretary Janet Yellen said, “some of the supply chain issues that pushed up the prices of goods and commodities, those have really turned around,” as reported in January 13, 2023 article in Bloomberg headlined “Yellen Sees Turnaround of Supply Chains.” In a major WSJ January 12, 2023 article on inflation the senior economist at Piper Sandler said more specifically, “Logistics pricing have slowed materially, shipping costs are back to where they were pre-Covid.” Those comments from economic experts imply a full reversal in sector pricing that the data shows has yet to occur. Numerous articles have repeated a theme that container shipping rates are back to where they were before the pandemic that is just objectively false and misleading.
John D. McCown is a Non-Resident Senior Fellow at the Center for Maritime Strategy. Mr. McCown co-founded a U.S. flag shipping company he led as CEO, and he also formerly managed transport investments at a large hedge fund. He holds an MBA from Harvard Business School and his analysis centers on merchant shipping and maritime commerce.
The views expressed in this piece are the sole opinions of the author and do not necessarily reflect those of the Center for Maritime Strategy or other institutions listed.
Center for Maritime Strategy
By John D. McCown
This article is part one in a two-part series. Part two can be found here.
The container shipping industry has an information problem. This is not referring to digital information initiatives and opportunities that can improve processes. There are many examples of digital applications across the entire maritime supply chain that can and will increase efficiency. Today the focus however is on more basic analog information, specifically the fundamental, actual numbers that depict the real position, direction, and effect of the container shipping industry. In each of those three areas, there is misinformation that distorts what is actually occurring. Taken together, the absence of more credible figures has contributed to recent disruptions in container shipping supply chains.
Over the last two years, almost everyone has become more keenly aware of just how linked they are to a maritime supply chain that moves goods across the oceans. The port congestion and resulting gridlock in various container shipping systems turned cargo movements that were previously smooth and predictable into ones that were erratic and uncertain. When 110 container ships are waiting off the Southern California coast for berths as they were at the peak a year ago, it was clear there were multiple physical issues. While the port congestion situation has now gone away, many of its after effects are still present. Unfortunately the metrics for gauging those effects aren’t as readily available as they should be. This has great importance going forward, as better measures are needed to give the real time information that could play a role in precluding a repeat or minimizing the duration of similar future situations.
The container supply chain is a key component of the American economy and adverse financial consequences result when that system gets jammed. If that occurs, it also places the U.S. in a vulnerable position if significant seaport capacity is needed to handle large movements of military assets during a national emergency or surge deployment. Seventeen ports in the U.S. are presently designated as strategic commercial ports, including a majority of the largest container ports. It is important that actions be taken to ensure that the port congestion issues experienced recently do not reoccur for both economic and national security reasons. Those actions will need to involve looking at new investments and new processes. The constructive role of better numbers in the three areas that will be reviewed should not be under estimated.
In each of these areas, analysis points to figures being inaccurate, in some cases materially so. The areas are linked with an error in one expanding an error in another and creating a vicious circle of bad numbers and the less optimum decisions that result. This misinformation contributed to the recent problems, as decision-makers did not have better fundamental data on what had actually already occurred. Like the coordinates of a map, the first step in getting to where you want to go is to know where you are. Without such basic data, neither the market nor policymakers have all the correct facts.
The misleading information connected to position, direction, and effect are: 1) the position issue related to the actual carrier earnings, 2) the direction issue related to the actual pricing levels and trends and 3) the effect issue related to the actual inflation impact of higher rates. Each issue and the errors in generally accepted numbers will be addressed in order.
A widely quoted container shipping industry profit figure for 2021 was $190 billion, in part as it was referenced in a February 28, 2022 White House press release. That number originated from Drewry, a well-known maritime consultancy based in London. President Biden was quoted talking about the same $190 billion in his June 16, 2022 speech that accompanied the signing of the Ocean Shipping Reform Act. From a compilation of the quarterly net income figures of carriers reporting actual results that represented 64.5% of total capacity, and assuming the other had proportionate actual results, analysis shows total net income for 2021 was $148 billion.
Further research led to a February 23, 2022 article in Offshore Energy that included a graph detailing Drewry’s quarterly numbers for industry results for 2020 and 2021. The total for 2021 was $193 billion and apparently was an updated amount. The $148 billion figure was based on net income while Drewry’s were based on earnings before interest and taxes (EBIT). A comparison of the variances in the 2020 quarters had the former averaging a reasonable $2 billion less than the latter and with that the numbers were in synch. That was not, however, the case with 2021 as after that adjustment the Drewry figure was 24% higher. The second and third quarters had major differences and the Drewry amounts showed a decline from the third quarter to the fourth quarter that in fact did not occur.
Following President Biden’s speech last June, I sent an email to the Drewry container shipping person with a worksheet comparing all the quarterly numbers. The goal was that an explanation could be provided on what if anything was missing in the comparison. A response to that email was never received. A June 16, 2022 article in Bloomberg was one of several now using $214 billion as Drewry’s estimate of container shipping industry profit for 2021. That estimate is 45% above the $148 billion net income estimate and 37% above if an adjustment is made for items below the EBIT line. The overstatement by at least $58 billion in 2021 has now been compounded with Drewry’s 2022 estimate of $290 billion reported in a January 6, 2023 article in Splash. The data shows that net income for the first nine months of 2022 is $181 billion and a 2022 estimate will not be finalized until fourth quarter results come in. Analysis suggests that Drewry’s 2022 estimate overstate comparable results by as much as $79 billion.
Misinformation related to actual pricing levels and trends has had an array of bad consequences. The problem centers on a spot rate focus despite the fact that only a relatively small percent of loads actually move under spot rates. In a detailed July 8, 2022 article in Medium, the data indicated that spot rates move less than 20% of loads. In addition to an overstated prevalence, the credibility of spot rates and the processes by which they are obtained is questionable. A review of the actual data shows that spot rates in the container sector do not have the expected linkage to contract rates with differences going beyond just timing.
Spot rate indices are down significantly from their peak last January. The widely followed Shanghai Containerized Freight Index (SCFI) at 2/03/23 was down 80% from that peak. However, it is still up 22% compared to 4Q19, the last quarter that was unaffected by the pandemic. Another index is a more relevant measure of actual overall sector pricing. Container Trades Statistics (CTS) is an entity owned by the carriers that aggregates data provided by them and issues volume and pricing reports. The data in CTS reports represent the universe of all actual movements. The CTS global pricing index is an overall measure of both spot and the more prevalent contract rates. The latest such index for December is 85% higher compared to 4Q19. That difference is more than three times higher than the 22% difference in the SCFI. The graph below compares actual monthly levels of the SCFI spot index and the CTS global pricing index over the last three and one-quarter years with both benchmarked against 4Q19.
Contract rates are typically for one-year terms and renew throughout the year. During the ramp up in spot rates, the data shows contract rates were not consistently being reset at the then current spot rate. That disassociation is borne out by the graph above and should continue. The focus on spot rate indices is misplaced and instead aggregate indices like the CTS depicting actual overall pricing levels and trends should be utilized. Unfortunately, the misunderstanding that spot rates define sector pricing is pervasive. Recently Treasury Secretary Janet Yellen said, “some of the supply chain issues that pushed up the prices of goods and commodities, those have really turned around,” as reported in January 13, 2023 article in Bloomberg headlined “Yellen Sees Turnaround of Supply Chains.” In a major WSJ January 12, 2023 article on inflation the senior economist at Piper Sandler said more specifically, “Logistics pricing have slowed materially, shipping costs are back to where they were pre-Covid.” Those comments from economic experts imply a full reversal in sector pricing that the data shows has yet to occur. Numerous articles have repeated a theme that container shipping rates are back to where they were before the pandemic that is just objectively false and misleading.
John D. McCown is a Non-Resident Senior Fellow at the Center for Maritime Strategy. Mr. McCown co-founded a U.S. flag shipping company he led as CEO, and he also formerly managed transport investments at a large hedge fund. He holds an MBA from Harvard Business School and his analysis centers on merchant shipping and maritime commerce.
The views expressed in this piece are the sole opinions of the author and do not necessarily reflect those of the Center for Maritime Strategy or other institutions listed.