The current state of commercial shipping : The Indicator from Planet Money Prices for shipping carriers have gone back down to 2019 price levels after record highs during the pandemic. So what does this mean for consumers and businesses who rely on international trade?

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The great turnaround in shipping

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

WAILIN WONG, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Wailin Wong.

PADDY HIRSCH, HOST:

And I'm Paddy Hirsch. The global economic downturn is wreaking havoc in almost every industrial sector. Now, that might sound bad, but in business, turmoil and volatility can mean opportunity. And when someone loses, someone else usually ends up winning.

WONG: And perhaps no other industry is showcasing this dynamic right now more than shipping. Over the last six months, the cost to fill and transport a shipping container has dropped roughly 80%.

HIRSCH: Eighty percent, that's a big price drop. That's killing container shipping companies. But it is great news for companies who need to get those goods shipped because they're looking at an 80% discount.

WONG: And because we, the consumer, are the ones buying those goods, that discount should be great for us, too, right?

HIRSCH: Yeah, maybe.

(SOUNDBITE OF MAX GILKES AND MIKE PELANCONI'S "PARTY SKA")

WONG: On today's show, we're going to look at the great turnaround in shipping - why it's happening, what it means for the container ship industry and how the American consumer might, just might, benefit. That's coming up after the break.

(SOUNDBITE OF MAX GILKES AND MIKE PELANCONI'S "PARTY SKA")

HIRSCH: We are a globally interconnected economy, and so much of the stuff that we buy is made in other countries, often oceans away. Now you might think that because of this, the container ship companies that transport all that stuff would be extraordinarily profitable. Well, Emily Stausboll says that hasn't always been the case. She's an analyst at Xeneta, where she covers ocean shipping carriers.

EMILY STAUSBOLL: For many years and, you know, the decades up to 2019, 2020, they were earning very little money. They were really struggling to get freight rates up above their break-even levels.

WONG: It was a real contrast to the shipping boom of the early 2000s. This is when carriers were big beneficiaries of the increase in global trade due to China's expansion.

HIRSCH: Yeah. And that boom was followed by the financial crisis of 2008, of course, and a downturn so severe that many carriers went bust and either folded or were bought out by competitors.

WONG: But then came the pandemic, which Emily says really turned things around for carriers.

STAUSBOLL: We had a huge increase in demand for containerized goods, typically from Asia into the U.S. because of these stimulus packages, certainly, and because people were at home, right? And I think we were all buying more goods at home to make our home offices or gyms or whatever.

WONG: Demand for containers and the ships to put them on skyrocketed, as did the amount that carriers were able to charge. Some people wonder whether all that consolidation during the Great Recession allowed carriers to collude and push prices higher.

HIRSCH: Because higher they did go. At the end of 2019, it cost less than $2,000 to rent a large-size container to get from China to Los Angeles. Eighteen months later, carriers were billing 10 times that amount...

WONG: Whoo (ph).

HIRSCH: ...Ten times. Emily says the industry had never seen anything like it.

STAUSBOLL: Last year and in 2021, the shipping companies made more than some of those really big tech companies, and it was just completely unheard of.

WONG: All of this good news for the carriers was, of course, terrible news for everyone else, like the retailers who were renting these containers, also known in the industry as shippers. And these shippers had a number of options. They could eat the increased costs themselves, or they could find a way around them.

HIRSCH: Yeah. Amazon, for example, even pre-pandemic, began making its own containers and chartering its own ships to cut shipping costs. That turned out to be a really smart call after their costs doubled during COVID. But of course, most retailers don't have the kind of money or muscle that Amazon has, so they resorted to option three. They passed the costs on to the consumer.

WONG: And boy, did we feel it, right?

(LAUGHTER)

HIRSCH: Yes, we did.

WONG: Today, however, everything has changed. And retailers who want to ship goods have the upper hand over the carriers.

HIRSCH: Yeah. Today, we're importing a lot less of the things that we bought during the pandemic. Throw in the knock-on effects of the war in Ukraine and the resulting economic slowdown, and suddenly, there's a lot less demand for containers and the ships that carry them.

STAUSBOLL: Shippers have gone from being unable to get their carriers on the end of the phone and say, hey, I need to talk to you, to suddenly all the carriers are calling them and saying, hey, do you have any containers for me that I can move?

WONG: If you're a shipper who wants to rent a large-size container and you called the carrier today, you'd only have to pay about two grand. That's back to 2019 prices, a tenth of what a carrier would have charged a year and a half ago.

HIRSCH: Yeah. And carriers aren't just under pricing pressure right now. There's huge overcapacity in the system as demand has dropped away, and it's about to get worse. That's because when times were good, carriers made a rash call. They appeared to believe that the good times were never going to end, and they commissioned a whole bunch of new vessels.

STAUSBOLL: They started ordering big time in Q4 2020, which was when rates started to move up. And those ships take two or three years to deliver. So they're coming now, and they're coming next year. And that's just totally going to ruin those market fundamentals and really make it hard for carriers to earn money. And that's, again, where...

WONG: Aha - the bullwhip effect. This is when a small error in assessing consumer demand is amplified through the supply chain.

HIRSCH: Was that a small error, ordering all those ships?

WONG: It's like a container ship-sized error.

(LAUGHTER)

HIRSCH: Indeed. Either way, it's great news for retailers, who could see transportation prices fall even further as all of that capacity comes online.

WONG: It's presumably great news for consumers who will no doubt see the benefits of these cost cuts and lower prices of goods very soon. Right? Right?

HIRSCH: (Laughter) From your mouth to God's ears, Wailin.

WONG: (Laughter) Someone's ears, someone with more power than God, a corporation.

HIRSCH: Yeah, a corporation. Yeah. Well, we'd be well advised not to hold our breath for lower prices, not least because the carriers are doing everything that they can to keep freight rates up. Emily says they're canceling sailings, and they're scrapping older ships, all in a bid to reduce the overcapacity in the market.

STAUSBOLL: We have a market with few carriers that really have the control of the market and have these alliances set up. Are they going to fight for market share by really going into a full price war, or are they going to take it a little bit softer and match capacity reductions across the board, so they kind of all agree...

WONG: Carriers need to do everything they can to even out the supply-demand imbalance in the market before the spring. That's when many of the longer-term shipper-carrier contracts are struck.

HIRSCH: Yeah, if there's still too much supply, some shippers might decide not to write contracts or agree to shorter-term deals. Factor in higher fuel costs, and you can see that it's going to be a tense time for container ship carriers. But, Emily says, we shouldn't be too concerned about them.

STAUSBOLL: I don't think we should underestimate how much money they've made in the past two years, and that can see them through a lot.

HIRSCH: Yes. Emily said earlier that carriers did as well or better than some big tech firms during the pandemic. Well, maybe not as well as Apple or Microsoft, but the biggest carrier, Maersk, racked up $61 billion in revenue in 2021, a 55% increase compared to the previous year. That's more revenue than either Cisco or Oracle.

WONG: And these carriers are kind of used to dealing with rough economic seas. Shipping has always been a boom-and-bust business, but it was the sheer scale of the pandemic boom and the bust that we're in now that took everyone by surprise.

HIRSCH: And that, of course, includes regulators who allowed all of that consolidation in the industry after the financial crisis, figuring that it benefited the consumer. Emily says that now that the seafoam is settling, those regulators are going to be looking afresh at the shipping industry to ask how it was the prices went so high so quickly during the pandemic, and maybe to see how we can try to stop that happening the next time.

(SOUNDBITE OF MAX GILKES AND MIKE PELANCONI'S "PARTY SKA")

WONG: This episode was produced by Corey Bridges with engineering by Josh Newell. Sierra Juarez and Dylan Sloan checked the facts. Viet Le's our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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