- Allen Czermak
Container Ship Economics 101
To put things into perspective about how the global shipping market fared in 2021, let’s just say it was quite challenging with huge cargo ships getting stuck by the Suez Canal, vessels waiting to be docked at the Port of Long Beach, and a pandemic that has brought with it one of the biggest worker shortages of all time. All of this has compromised the global supply chain and exposed faulty logistics systems in countries like the United States of America who are very dependent on Asian imports. Unfortunately the ones that got hurt the most were the small companies that have to charter containers in the most economical fashion, leaving them subservient to major marine shipping companies. If these ships are not docking, these businesses will be left with empty warehouses shelves with no products for their customers to buy. The consumers will look elsewhere or most likely find it on Amazon for a higher price.
But it’s no surprise that major companies like Walmart and Amazon have been able to pivot around the supply chain crisis. On January 14, 2016, The Wall Street Journal published an article titled, “By Land, Air and Now Sea: Amazon Looks to Arrange Ocean Freight”. It was back in November of 2015 that Amazon had registered as Beijing Century Joyo Courier Service Co. with the Federal Maritime Commission. This would be the building blocks for being in control of their own marine shipping affairs and non-reliant on third party container shipping companies like Hyundai Merchant Marine Co. Ltd and Mediterranean Shipping Company (MSC). These two companies host some of the biggest cargo ships that circulate many shipping containers throughout the world.
It’s uncertain if Jeff Bezos had the foresight to know that being dependent on third party marine shipping companies would hamper the growth of Amazon or maybe it was just the luck of the Irish. Today, at the end of the 2021 fiscal year, Amazon is totally independent in regard to shipping containers from overseas and is currently delivering 73% of packages via Prime trucks and vans. It’s no wonder as to why Amazon is one of the world's top five companies but at the same time there is a lot to learn from them in regard to the economics of shipping containers from overseas. Perhaps we can gain some insight that can help small businesses pivot around the supply chain crisis one container at a time.
Big Cargo Ships = Lower Shipping Costs
One can no longer say that shipping a container from China is cheap. As a matter of fact, shipping twenty-foot equivalent unit containers (or better known as TEU containers) on a behemoth marine vessel has skyrocketed to well over $20K! But surprisingly, it is still the most economical way to ship your cargo from Asia. The only problem is that it can take up to three months to receive your container, as the super sized ship will need to come into a port that it could fit through which is none other than the Port of Los Angeles. Other reasons why these behemoth marine vessels choose that route via the Pacific Ocean, is because it is the most cost effective by being the shortest distance between The United States and China. This means less fuel being burned and no expensive canal passages. (According to YouTube Channel, Chief MAKOi, the cost of passing through the Suez Canal cost $101,386 USD in November 2020).
It’s quite clear what’s happening here. The marine shipping companies are controlling the container routes in order for them to be most profitable. Just to give a bit of insight of how successful these shipping companies have become, MAERSK-B.CO was selling at $10.40 USD per a share on December 10, 2020. Just a year later, the stock is selling for $16.15 USD per share (more than a 50% lift in stock value). That’s very nice for the shipping companies like Maesrk, but small businesses still have their containers stuck outside the Port of Los Angeles.
How Are Companies Like Amazon, Walmart, & Home Depot Importing Containers From Asia?
Big box companies such as Amazon, Walmart, Target, & Home Depot are chartering their own ships with their own cargo containers. The cost for chartering a cargo ship is astronomical and starts at $40,000 per a day. Such ships can host around 3,000- twenty foot containers. However, these brands can easily foot the bill and at this point in time they are more concerned with their brands' integrity of product availability then choosing the long-haul option of being subservient to big marine shipping companies. Try and imagine a CEO getting questions from investors as to why the store shelves are empty? He or she will do whatever it takes to have those shelves filled at any expense. Therefore it is no surprise that these box companies are chartering their own cargo ships with their own containers.
Not always is it the classical container ship that’s being leased by brands like Amazon. There is a new phenomenon that’s happening in the high seas which is called repurposing ships. Until now, repurposing a ship was thought of in regard to taking an old cruise ship and setting it on land for a neat restaurant or pub. But in today’s supply chain crisis it means converting a large marine vessel into a ship which can hold as many shipping containers as possible. This allows major brands to control the route of where these containers should go. At the same time, these ships are significantly smaller and can easily fit through smaller water ports like The Port of Elizabeth in New Jersey and The Port of Oakland in California.
Once the ships are leased for an exuberant price, other brands like Target are piggybacking to get their containers into the United States at a quicker pace. This will help offset the cost as they can sub-lease container space to brands that are desperate to get their products around the shipping bottleneck. Leasing this space will be very costly and can only work for high-end products to which their margins can absorb the cost with a slight price increase. Such products will include medical equipment, computer chips, car parts, appliances, and other high ticket items. It needs to make profitable sense before leasing out space on a private chartered container ship.
There is one more way to get your products on to a private chartered container ship which is by sharing the space with multiple brands. For example, a twenty foot shipping container can share space with at least 4 other brands. Since these containers are eight feet high, each cargo share will receive forty square feet of cargo space. That might be enough to get important products from overseas until your original shipping containers get through the Port of Los Angeles and transported to the final destination via intermodal transport.
Even Higher Margin Products Go By Plane
According to Plane Spotters, Amazon has a total of 81 planes in service and six more on order. Each of their Boeing 777 can carry 220,000 pounds of cargo that's equivalent to five and a half TEU shipping containers. This gives them another major advantage which is predicting via data that a high ticket item is in demand and simply ship it via air. For example, during this holiday season hot tubs are a trending item that are priced at around $4,750. (Blowup hot tubs are significantly cheaper due to the fact that they can be packed quite tightly and easily shipped.) Such items are getting shipped via plane and it’s pretty easy to understand that people are willing to pay for these items so Amazon could absorb the cost by shipping via air.
Shipping via plane is not an option for smaller brands as it will likely triple the price of any product. Apparel brands that sell sports hats for around $50 cannot raise their price to $200 per a cap. It’s simply ridiculous. They will either have to find other products to sell or wait until their shipment arrives in the United States which may take at least three months. It’s a real hard challenge for the smaller retailers and shipping by air will be reserved for brands like Amazon that have air logistics already in place (there are other services that ship by air but are very expensive).
Currently we have a huge problem in the United States that businesses cannot get products they need from overseas to stock their store shelves. Big brand names like Amazon and Walmart have been able to navigate around the shipping bottleneck by hiring private chartered ships or by flying high end products via air. This is not a feasible option for most brands located here in the United States and they are in desperate need of help otherwise they will simply have to close their doors to customers. Perhaps, the United States Government could trim some of the fat in the latest spending bill and use it to charter private ships in order for small businesses to get their products faster from China. It would be nice to see a ship pulling into the Port of Elizabeth that has huge twenty or even forty foot containers that are labeled with SBA’s logo, subsidizing the cost for small businesses to get their products from overseas. It is a nice idea but it’s a far shot.