Fosco Building
02-06 Phung Khac Khoan Street, Da Kao Ward, District 01, Hochiminh City, Vietnam

Tel: +84 28 352 104 88    Fax: +84 28 352 104 89

Container market wrestles with ‘very different’ operational, contractual woes    14/01/2021
Even with perfect hindsight, it is unlikely that the bottleneck problems seen now in container shipping due to operational decisions taken over the past 12 months could be avoided

The container shipping market is facing two very different problems — let us not confuse them with each other. Let us start with an insultingly simple example.

John receives one bucket of water every day from his supplier to water his potted plants on an annual contract. Suddenly, one day his plants are infested with a fungus and some wither. John tells his supplier to only deliver half a bucket of water as of tomorrow. John only wants to pay for half a bucket because that is all the volume he needs. The supplier instead starts delivering a full bucket of water every second day to reduce the cost of travel to John’s house while keeping the empty bucket in the shed otherwise.

John complains about the poor service level as he is not receiving a daily supply of water as agreed and this is not good for his plants.

John’s plants suddenly not only recover, but start growing rapidly. John now tells his supplier to start delivering one and a half buckets of water as of tomorrow. Unfortunately, everyone needing a water supply is asking for the same. In this — admittedly strained — example, it takes months and years to effectively build more buckets. Someone’s plants are not going to get the water they need.

The supplier decides to provide John only three-quarters of a bucket of water — after all, other people are suddenly willing to pay quadruple the price for delivery. If John wants a full bucket, he needs to pay a bucket surcharge despite the initial annual contract.

Let us depart from the silly example and instead look at the current environment.

In spring 2020, demand dropped sharply. A few quotes from’s own news articles at the time:

“Cargo owners are increasingly reducing and postponing ocean shipments from China to North America.”

“The decline was driven in large part by a nearly 40 percent drop in shipments from China, which had already been under pressure due to the two-year-old US–China trade war.”

“[Full] containers will not be emptied and returned to service any time soon, worsening a container imbalance that has existed on the Asia-Europe trade.”

These actions were well justified by shippers — their demand had suddenly come to a crashing halt, faster than ever seen before. As we know very well, this was met with a raft of canceled sailings, curbing capacity in an environment where demand was in freefall. That, in turn, upended the normal flow of empty containers.

But then demand came surging back, especially for US imports. Demand growth was hitting close to the 30 percent mark and canceled sailings were replaced by extra-loaders. All vessels which can be put to sea are now at sea — but some capacity is not functional either because the vessels are stuck waiting outside a congested port which cannot handle the surge in cargo, or because the crew is inflicted with the coronavirus disease 2019 (COVID-19) and the vessel therefore quarantined. On top of that, a shortage of empty containers materialized. As per the example, there are simply not enough buckets to go around, and it is not possible to acquire more buckets in a hurry.

Current bottlenecks unlikely could be avoided

The current issues in container shipping can be separated into two very different problems: operational and contractual.

The bottleneck problems we see now are the result of operational decisions taken over the past 12 months as both shippers and carriers were reacting to the impact of the pandemic. Even in the presence of perfect hindsight, it is unlikely that these problems could be avoided. Whereas it is relatively easy to reduce capacity rapidly, it is not physically possible to increase capacity rapidly above a certain limit.

The problem is not the average volume over the year, the problem is the volatility. In 2019, we saw 25.4 percent of North American imports shipped in Q2 and 24.7 percent shipped in Q4. Then in 2020, we saw this change to 20.8 percent in Q2 and an estimated 29.4 percent in Q4 on the assumption that December continued the trend from November.

Operationally, this would always create problems unless we have an industry which deliberately maintains a very large degree of overcapacity in vessels, containers, terminals, chassis, trucks, rail, etc. In other words, it is unrealistic to assume that the industry can absorb an arbitrarily large surge in demand.

The other issue is contractual and is of a very different nature. And there are quite simply two sides to the coin.

Carriers are obliged to have capacity available. The vessels alone have a value of some $50 billion to $100 billion. Suddenly not delivering volume as per contract leaves the carriers completely exposed to the cost risk with the shipper taking none of the cost associated with the downturn — irrespective of the reasons the shippers have for the shortfall.

The other side is that when demand exceeds capacity, it appears carriers are quick not to provide the full capacity promised under the contract, but instead leveraging the capacity shortage into surcharges and higher spot rates.

This is the contractual problem, and it is certainly not new. We have seen the dynamic every time the market turned up or down, and it is long overdue to be solved. There are multiple elements involved, and not just the enforceability of contracts. A critical element is the volume volatility — how much volumes can fluctuate before this goes out of reasonable range. As 2020 has shown, we can suddenly have a situation where a large part of the Q2 volume is “shifted” to Q4, but most contracts merely have an annual number. This is a core problem the industry should seek a solution to.

But in the current heated environment, one should be careful not to confuse the operational problem with the contractual problem.


Other News