Observations Of COVID Impact On World Container Volume
The pandemic effected container volume throughout the world, but to varying degrees as well as differences in timing. The most pronounced changes were in container trade lanes involving the U.S. The impact of that, both with the short-lived initial decreases and the longer later increases, was driven by the actions of U.S. consumers. The effects on U.S. container volume tended to be slightly earlier but similar less pronounced changes flowed into almost all container lanes. Container shipping is after all one big integrated worldwide network.
The table below is a breakdown of total imported container volume by major area during three separate twelve-month periods. The first period (LTM Jun-19) is a base case before any impact of the pandemic. The second period (LTM Jun-20) is a year later and the peak of the initial negative effect worldwide. The third period (LTM Oct-21) is the latest period for which global volume figures are available and is near the peak of the later positive effect worldwide. This is my compilation of data originating from Container Trades Statistics (CTS), an entity controlled by all the carriers that provide it with actual volume and pricing index data. Twelve-month data is used for ready annualized comparisons and to discern core changes. Our focus will be on the largest CTS area, which is by continent except for the Middle East/Indian subcontinent area that is shown separate from Asia. The data in the table is largely self-explanatory and is presented below.
As the data shows, the initial COVID impact can be pegged at a 2.6% decrease in worldwide container volume. The table includes a further breakdown of North America volume between the largest U.S. ports and other ports. The largest U.S. ports saw imported volume contracting more than twice the worldwide figure. The rebound as consumer spending patterns changed then resulted in a 9.5% gain in worldwide container volume. Here the largest U.S. ports had even more pronounced growth at almost three times the overall worldwide increase. The table also includes my estimate of actual TEU nautical miles for each period. There is some variance by major area compared to the overall average voyage distance, which I estimate at 6,017 nautical miles (15.1% longer than statute miles) for the most recent twelve-month period. That refinement results in marginally higher overall percent changes owing primarily to longer voyages related to North America volume. As the table shows, in the most recent twelve-month period, the container shipping industry moved over 1.1 trillion TEU nautical miles worth of cargo. I continue to be amazed at the sheer mass of that service. To put it into perspective, those annual TEU miles are equivalent to moving a 20’ x 8’ x 8’ steel box with 1,280 cubic feet of cargo space from Earth to the moon and back 2.6 million times, or from Earth to the sun and back 6,900 times.
The table below is a breakdown of total exported container volume by major area in the same format as the earlier table. The overall changes between periods are obviously the same but how they breakdown by major area can be seen from reviewing the table.
Key takeaways from the export data are the under performance of the large U.S. ports in the most recent twelve-month period and the over performance of Asia during the same period. Compared to the overall 9.5% gain worldwide in exports during the period, the largest U.S. ports declined 4.1% while Asia increased 14.0%. The strength in Asia is of course almost entirely driven by China and their volume figures alone would show more pronounced recent gains. The overall TEU mile change was slightly below the volume change as a result of shorter voyages related to Asia volume. Keep in mind that the intra-Asia market, comprised of dozens of individual lanes, accounts for almost one-quarter of total container volume worldwide. Because they are relatively short voyages, however, it only accounts for some 5% of overall TEU miles. The two largest lanes in terms of TEU miles are Asia-North America and Asia-Europe, which are similar in size and collectively represent some 50% of overall TEU miles. Based on container volume only, those major east-west lanes represent approximately 16% and 15%, respectively.
The relative mix of import compared to export volume by major area is highlighted in the table below showing total imports divided by total exports across all periods. The table includes percent changes in the same format as the earlier tables.
Except for Asia, every major area of the world imports more containers than it exports. China is of course the majority of container volume related to Asia, but almost all of the other countries in Asia export more containers than they import. The most striking item in the table is the 34.3% deterioration in the import/export ratio at the largest U.S. ports in the latest period. At a 2.44 ratio of imports to exports, the U.S. eclipsed Africa to become the most unbalanced major area. The major area with the most balance is Europe where the import/export ratio was 1.12 in the most recent twelve-month period.
The data on the largest U.S. ports comes from my monthly reports on U.S. container volume, the latest of which can be accessed via the following link https://conta.cc/33AZIKw.
One broader takeaway from the overall data in the tables comes from the far right column that shows the percent change in the last period compared to the initial base period. That is combining the initial decline with the subsequent rebound to get a net growth figure. Over that two and a third year period, annual worldwide container volume grew 6.6%. That equates to a CAGR of 2.8%. The CAGR related to TEU miles circles in on the same figure as imports are marginally above while exports are marginally below. What’s particularly interesting about that 2.8% is that it is almost the same as both recent history and credible forecasts through 2030. Looked at that way, worldwide there is little on the demand side that has happened over the entire two and a third year period that was out of the norm or not reasonably predictable.
The leaves the supply side as the primary culprit in the rare recent situation where demand has exceeded supply worldwide in container shipping. In an August 2021 report, McKinsey pointed to a metric they created based on movements of all container ships. This has the effect of incorporating all unexpected delays including congestion at various ports resulting in ships at anchor. That same metric showed that container shipping capacity worldwide peaked in September 2020 as ships that had been taken out of service at the onset of the pandemic returned. From September 2020 to July 2021, the McKinsey metric showed a consistent drop in effective container shipping capacity worldwide, which declined 11% over the period. I’m confident that this measure of effective container shipping capacity has continued to decline since July 2021. Not surprisingly, the CTS global pricing index first began rising in September 2020. From the index averaging 70 in August 2020, it rose 130% to 161 in July 2021. For the most recent month released by CTS of October 2021, the global pricing index had risen to 184. Note that the index is a comparison to the base year of 2008 that is set at 100 (as an aside, if the October 2021 index is compared to the base year, that works out to a relatively moderate CAGR of 4.8%).
The CTS global pricing index is in my view the most reliable indicator on the level and trend of container shipping prices worldwide. It comes from actual data provided directly by the carriers and represents what actually moves on the vessels. I’m aware of the various spot rates and spot rate indices but suspect how many are obtained result in figures that aren’t particularly reliable. Spot rates move a relatively small portion of total loads and the role they play in leading to contract renewals at higher rates is important for carriers. It's certainly not unheard of for a carrier to reference the biggest change they can find in a given spot rate in order to lock down on a much more modest increase in a contract rate. There is also increased evidence of carriers seeking to have contracts that are longer than the typical one-year term. This interplay between nosebleed high spot rates and the contracts that move most loads is telegraphing further increases in the CTS global pricing index.
Getting back to the worldwide supply/demand dynamic, it's reasonable to assume the McKinsey metric has continued to decline. Let’s say it's down to a 15% reduction since September 2020. Earlier it was noted that worldwide demand over the entire pandemic period has been fairly similar to broader trends, but if the focus is on the rebound period, a 5% factor for above the norm demand could be added to get a 20% swing in the supply/demand dynamic. That’s certainly a meaningful change in that key factor, but what’s more surprising is the geometric affect that has had on actual pricing. For the 3Q20, the CTS global pricing index came in at an average of 71. One year later for the 3Q21, it was 141% higher at 171. In October 2021, it was 159% higher at 184. In other words, worldwide container shipping pricing has increased 7 and 8 times more than a generous representation of the change in the supply/demand factor that was the fundamental catalyst for the pricing change.
There are of course trade lanes and regions where there were wider changes in supply and demand, with Asia-U.S. being the prime example, but it is interesting to look at these macro factors worldwide. After all, container shipping is really one large, interconnected network. To the extent that larger issues developed in one part of the network, they have a way of eventually flowing to and resulting in similar disruptions to other parts of the network. Another factor that in my view played an underappreciated role in what developed was the initial actions by the carriers in reducing capacity at the onset of the pandemic. This action was reasonable at the time but turned out to be an over correction. That tightened up the supply/demand dynamic and it and vessel utilization has remained high ever since. Indeed, I suspect there were some loads being rolled even before the rebound in volume began. It is not unlike a highway traffic jam, where one car stopping affects the whole chain behind it and there is even lagging delays when the initial problem is cleared.
These pricing increases have resulted in record profits for the container shipping industry. In the 3Q21, my estimate is that the industry had net income of $48.1 billion and a ratio of net income to revenue of 42.7%. The actual results of the reporting companies and what that translates into for the entire industry is reviewed in my latest quarterly analysis, which can be accessed via the following link https://conta.cc/3EbzWt2.
One final observation about the actual volume and pricing data is that it is hard to see so far where the former has been constrained by increases in the latter. It could be that it's too early to see any impact from pandemic related increases in shipping costs as there were purchase commitments that had to be fulfilled. However, right now it looks like container volume is more inelastic to shipping costs than many would have thought. This comes on top of tariffs that more pronouncedly impacted trade costs, but whose impact seems to have largely dissipated with imports to the U.S. (but less so with exports from U.S.). If a 10–25% trade cost increase from tariffs isn’t going to put a recognizable dent in container volume, why would a shipping cost increase that is a much smaller percent of cargo value have an impact? My view is that the extraordinary cost efficiency of container shipping has made transport costs as a percent of cargo value so low that even with triple digit percent increases in container rates, the shipping cost is often still just a small single digit percent of typical cargo value. I could go into detail on that, but there is already enough macroeconomic discourse in this article. Besides, that is one of many analytical subjects covered in detail in my book referenced below.
As this remarkable year in container shipping closes out, one thing that is for sure is that 2022 will be interesting.
John D. McCown has four decades of experience in the maritime sector including serving as CEO of a U.S. flag container shipping company he co-founded and leading transportation investments at a multi-billion dollar hedge fund. Mentored by Malcom McLean, the inventor of containerization who he worked with for twenty years, Mr. McCown is the holder of two maritime related patents as well as a MBA from Harvard Business School. His recently published book “Giants Of The Sea: Ships & Men Who Changed The World” covers the history and development of the modern cargo shipping industry in 330 pages spread over 30 discrete chapters. Packed with data on each major shipping segment today, this 8½” x 11” hardcover book has boatloads of interesting facts about an industry in the news and looks impressive on your coffee table. Available on Amazon.