By Arthur Chen        Photo by Dominik Lückmann 

Will the supply end shutdown caused by Chinese industrial power rationing cause "stagflation" in Europe and the United States?

Here are a few collections of current phenomena about the trans-Pacific route for your reference. People in trading and supply chain management can make a rational analysis of the short-term future direction.

1. As of September 25, the number of container ships waiting to berth near Shanghai and Ningbo is more than twice that of the Los Angeles/Long Beach Port (67 ships), reaching 154! Among them, there are 74 ships waiting for berths outside Ningbo Zhoushan Port, a total of 306,538 teu, an increase of 48% in just one week. Whether because of massive export volume, typhoon weather or the covid padenmic, increasing port congestion is another uncertain factor in trans-Pacific trade. Congestion at Chinese ports has slowed down export traffic, which is a bad news for US importers, but it may temporarily relieve pressure on the ports of Los Angeles and Long Beach. In June of this year, the operation of Yantian Port was severely restricted due to the covid cased found, and made the number of ships anchored in San Pedro Bay, California, decreased. The problem facing California ports is that after this temporary relief, a large number of delayed cargo will arrive soon. International transportation industry volatility will become more intense. When the supply chain is already so tight, all unexpected events may become the cause of congestion.

2. One of the main reasons for the congestion of the transportation on both sides on the Pacific is the limited land transportation capacity (terminals, truck transportation, rail transportation, warehousing), but the transportation capacity of a single shipping route is very flexible. Although the number of ships worldwide is limited, operators can move ships to where they make the most money. The trans-Pacific route is particularly profitable, with a spot price of more than US$20,000/FEU. In order to pursue high freight rates, shipping lines have transferred a large amount of capacity to the U.S. trade. As ship operators increase capacity in the Trans-Pacific region, congestion increases and delays increase, shippers are more willing to pay high freight rates, which keep freight rates at record highs. According to data, the number of services on the Far East-West Coast route has surged from 48 in January to 67 this month. In contrast, last year the number of services on this route remained fairly stable at 42-46. We will definitely see shipping companies transfer ships from Asia-Middle East routes and Asia-Africa routes and put them on trans-Pacific routes. Whether it is a one-time round-trip transportation or a semi-permanent transportation, even carriers don't understand the next step. They are just adjusting their short-term strategies with the market. This is why no one knows what international shipping will look like in six months.

3. Another reason for the increased congestion in trans-Pacific transportation is not only more and more ships, but also smaller and smaller ships, which means that more ships are needed to load the same number of containers. One of the possible reasons is that other small ship owners from non-three major maritime alliances have joined the operation. According to data, the average capacity of ships on the Asia-US West Coast route in January was 8,601 teu, while the current capacity is 7,125 teu, a decrease of 17%. At present, the average capacity of ships drifting at anchorages in Southern California or nearby waters has seen a similar decline compared with the peak berthing period in the first quarter on February 1st: from 8060 teu to 6,184 teu, a drop of 24%. The smaller the average capacity of a ship, it will definitely slow down further. Operators of non-three major maritime alliances increase trans-Pacific capacity by buying ships in the second-hand market or chartering ships in the chartering market. Most of the ships available for purchase or lease in 2021 are small ships. 

4. Ship operators can put as many ships as possible on trans-Pacific routes to chase record-breaking spot freight rates, thereby leaving other routes in a state of capacity shortage. But in the end, this imbalance should correct itself. This is a way of self-balancing. If the ships of other routes are removed, the freight rates of these routes will rise to the level that attracts the ships to come back. In the first quarter, when the anchorage near the Port of Long Beach in Los Angeles was "full of ships", carriers could not call enough ships back to Asia to load cargo in time, so they had to cancel a large number of sailings (blank sailing), thereby alleviating the problem in the second quarter. Taking into account the current extreme situation of ships waiting to berth in China and Southern California ports, there may be another blank sailing scenario in the fourth quarter, which is a worrying prospect for importers.

5. The future shipping lines’ service lacks predictability. Customers hate being forced to accept that the ship is always 10 days late and they don’t know when the ship will arrive and when the container will arrive at the warehouse? The resulting uncertain future has dragged down the economic recovery. It also caused high prices in the retail market and push up inflation. Inflation rates in the United States and the European Union have remained above 4-5% or higher since May, which is much higher than the ideal 2%. No wonder the US FED has to reveal in advance that the contraction of bonds purchases and the possible start of interest rate increases will be completed by the end of this year to the middle of next year. This greatly exceeded the expectations of investment institutions which thought -- "the end of this year began to contract bonds purchases, and interest rates began to accrue at the end of next year." Fed chairman Powell testified in the Congress, frankly that he was frustrated and powerless to change the chaos of supply chain disconnection caused by international shipping and inland transportation in the United States. The world has just discovered that the transportation industry has been in congested and high prices, and global inflation kickoff. What we worry about is that another storm is taking shape. Starting from September 25th, Chinese industrial power rationing began, causing the factories in China to be shut down all of sudden. The decrease in the supply side will be affecting to the demand side in the Europe and America, which have already stepped into inflation period, may have retail price raise up further. By theory of economics , the counter part in the demand side may finally be hit by this "perfect storm -- Inflation plus supply cutoff”. The result in market prices in highest level, people reluctant to spend money, sticky slow economic running , and unemployment rising. Of course this is the worst scenario. All countries will prevent the stagflation come out by all means. Believe this time is the same. 

After reading these news, the chaos in the ocean shipping market and inland transportation has directly threatened the global economy. The transportation industry has never been examined in such a magnified manner, and most people are insensitive. This industry is like water and air as if it already exists and people take it for granted they provide smooth services under no circumstance. It was until the outbreak of this covid pandemic that people seemed to realize that the existence and operation of transportation industry were so vital to the daily economic running. It really makes everyone re-understand the value of the transportation industry in the commercial supply chain.

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