An explanation of why the
supply chain is getting choked off.
January 6, 2021 by Ervin Zubic
As the new year begins, the cost to ship containers has never been higher, and price increases are showing no sign of slowing down. The cause of the drastic surge in shipping prices is a perfect storm of high demand, low supply, and supply chain challenges—all amidst surging consumer goods demand during a global pandemic. Even those that require a shipment to ship immediately—and are willing to pay extra to make it happen—are being told to wait their turn in line.
The available inventory of empty containers steadily decreased throughout the first half of 2020 before declining at a steeper rate as the year continued. Increased demand for essential healthcare items such as personal protective equipment (PPE) and surgical supplies escalated the situation swiftly.
As demand has continued to rise while supply has dwindled, uncertainty in the shipping industry's near-term outlook grows stronger by the day.
Why Is There a Shortage of Shipping Containers?
The shortage began around the same time that the COVID-19 virus was spreading throughout the world. In January 2020, there was a swift spike in demand for the popular 40-foot HC (high-cube) containers, with many depots showing them as unavailable. The run on high-cubes led to increased demand for 40-foot standard boxes, and some depots even showed zero available inventory for 20-foot containers.
The initial cause of the shortage may have been virus related. But the recent collapse in Asian inventory is due to unreturned containers. As peak numbers of shipments continue to be sent to the US, congestion has overwhelmed ports, which have been slow to return empty containers.
Leading Indicators Provide Insight on Shipping Container Rates and Shortages
According to the Freightos Baltic Index (FBX), international shipping rates for a 40-foot container were $1,400 in March 2020. By May, that number had increased to $1855 in July and was $2250 at the start of October. As of January 1, 2021, the FBX global container index has continued to hit new highs, reaching $3,448—a 121-percent increase from January 2020.
Another key indicating metric in the shipping industry is the Container Exchange, which tracks whether there is an excess or deficit of containers. For the first five weeks of 2020, the CAx hovered around 0.5 in Shanghai. A CAx higher than 0.5 indicates a surplus of containers, and below 0.5 indicates a shortage.
The CAx rose to as high as 0.66 in the middle of February before starting its swift and steady decline. The current shortage has lasted since March, bottoming out at 0.01 at the end of November before rebounding slightly to 0.19 to close out the year.
What Does the Shortage of Shipping Containers Mean?
The shortage of shipping containers causes issues on multiple fronts for the industry. With a lack of available inventory of empty boxes, cargo vessels become less efficient as some must make their journeys without as much freight. With less cargo, the trip is worth less to the transporter, which causes an increase in prices for the shipment that does make the journey.
Shipping Delays in Delivery of PPE and Surgical Supplies
As the world suffered in uncertainty, healthcare equipment manufacturers scrambled to meet the surging demand. A vicious cycle ensued, as significant shipping delays and a lack of shipping containers ensured that the demand could not be met.
While delivery of much needed personal protective equipment was able to slowly catch up to demand during Q3 of 2020, a new mutation of COVID-19 and rising rates of cases has resulted in more uncertainty for the first half of 2021.
When Will Shipping Rates Come Down?
While shipping rates continued to surge globally in the second half of 2020, prices remained relatively static from China to the United States from October through December, before seeing an increase in the new year.
The FBX from China to the North American West Coast had already hit $3,884 by September 25, whereas globally, that number was reached at the end of December. From China to the North American East Coast, the FBX touched a temporary peak on September 25 at $4,716 and rose to $4,952 by the end of December.
- FBX to North American West Coast as of Jan 1, 2021: $4,195
- FBX to North American East Coast as of Jan 1, 2021: $5,402
Typically, the peak shipping season lasts up until the Chinese New Year in early February. However, as long as there is a shortage of space and equipment, rates could continue to stay higher than their seasonal norms further into the year.
At XS Supply we have made supplier evaluations a normal course of business. We continuously evaluate our suppliers compliance records, quality control standards, and the risk associated with their geographical locations. Our response to this challenge has led us to collaborate and form alliances with many international vendors from Australia and Canada. That means that from time to time and in addition to our usual brands, our customers will have the option to purchase a product of equal or better quality, from a manufacturer they may not be familiar with. While the name on the box may be different, the quality of the product is very much the same. Our inventory is located in Florida and ready to ship immediately.