Supply chain snags adding up to big bucks for shipping firms

The supply chain, defined as the system of moving goods from factories and farms to consumers, is tied into knots and failing to deliver. But supply chain companies, each a private entity that hopes to make as much money as possible out of the surge in consumer demand, are having their best year ever.

This begins on the boat.

Most imports come to the U.S. in shipping containers, and just nine shipping companies control 80% of all global container shipping. Those companies have further consolidated into three major alliances — 2M, Transport High Efficiency Alliance and the Ocean Alliance — in the past decade, giving them unprecedented power in the market.

“To a certain extent they’ve become a cartel,” said Christopher S. Tang, a distinguished professor at the University of California, Los Angeles Anderson School of Management, who studies supply chains. “There’s not that much competition, so they can jack up the price more.”

A look at San Pedro Bay, where dozens of ships have been idling for weeks, might give the impression that these companies are under duress. How can having $100 million ships tied up at anchor be good for the bottom line?

The shipping companies’ financial reports show that they’re finding a way.

A.P. Moller-Maersk, the Copenhagen-based shipping giant, is on track to make more than $16 billion in profit in 2021 — three times as much money as its previous best year ever in 2014.

Cosco Shipping, the Shanghai-based company that competes with Maersk for the top spot in the industry, made $12.6 billion in profit from container shipping in the first nine months of this year, and reported that its revenue had doubled since 2020.

Wan Hai Lines, which is not in one of the major alliances, booked $2.48 billion in profit in the first nine months of 2021, 19 times what it made in the same period last year.

The main source of this skyrocketing revenue is freight fees. In 2019, shipping a container from China to the West Coast cost less than $2,000, on average. At the height of the logistics crunch this summer, rates soared above $20,000 for that same container, before falling below $15,000 in the latter half of November. Demand went up, supply went down as backlogs grew, and prices surged.

Many customers pay the shipping companies upfront. In previous years, those companies had a financial incentive to unload their ships as quickly as possible to free up capacity for more voyages.

But the eight- to tenfold increase in prices means that a carrier can double its revenue even at 20% capacity. With that amount of money coming in, idle ships at ports such as those in Los Angeles and Long Beach barely scratch the bottom line — and in fact might prove good for business, if they mean that the companies can keep prices high, Tang said.

The ocean carriers also make money from the pileup of containers on the docks. After a container sits at the terminal for a certain number of days, shipping companies begin charging end customers a rental fee for using their box, a charge called demurrage in the industry. On the other side, once a trucker picks up a container and delivers its contents to a customer, the shipping companies also start charging the trucker a late fee, known as detention, if the trucker fails to return the empty container within a certain time frame.

At the ports of Los Angeles and Long Beach, so many empty containers have piled up that the shipping companies often won’t allow truckers to return their empty containers but continue to charge detention fees. Truckers are then stuck with a rising detention tab and an empty container on their trailer, which means they can’t go pick up a new import container and get paid for a new job.

So the pile of import containers grows, and the only players with the power to remove the empty shipping containers to free up space — the shipping companies — have little incentive to do so expediently.

The Biden administration signed an executive order in July encouraging the U.S. Federal Maritime Commission to investigate “exorbitant fees” charged by the ocean carriers.