Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe Wisen't thal So, Joe,
Speaker 1: I have something to admit to you. Oh boy, here
Speaker 1: we go. Okay, I'm worried you're going to think less
Speaker 1: of me. There's no chance of that. Just just tell So.
Speaker 1: One of my long held ambitions in life is to
Speaker 1: travel via container ship perfectly, you know, a long journey
Speaker 1: across the Pacific. I think I know someone who did that.
Speaker 1: I think I know someone who went from Japan to
Speaker 1: the US as a traveler on a industrial contender ship. Yeah,
Speaker 1: it's something you can do, or I should say you
Speaker 1: were able to do it before the global pandemic. I'm
Speaker 1: sure it's not allowed right now for many reasons. Obviously,
Speaker 1: you have restrictions on travel, you have border restrictions. But
Speaker 1: the other big reason is that global shipping is kind
Speaker 1: of just a mess at the moment, right and that's
Speaker 1: related to the pandemic and the supply chain disruptions, and
Speaker 1: of course they've been happening for about a year now,
Speaker 1: but they don't seem to be abating like the general
Speaker 1: disruptions that we've seen. I mean, the world seems to
Speaker 1: be getting by, and maybe we haven't had as severe
Speaker 1: shortages of things that we might have feared last spring,
Speaker 1: but there are still all kinds of reports about how
Speaker 1: sort of messed up everything. Yeah, and I think people
Speaker 1: were expecting it to get better. So, as you mentioned,
Speaker 1: when the pandemic first started, we saw a bunch of
Speaker 1: countries suddenly close their borders, and this meant that ships
Speaker 1: that were supposed to head somewhere and then head somewhere else,
Speaker 1: we're all sort of knocked out of place. So it
Speaker 1: takes a lot long time to get them back into
Speaker 1: position and to get them on the routes that they're
Speaker 1: supposed to be going. But now what we're seeing is
Speaker 1: that even you know, almost a year on from the
Speaker 1: start of the pandemic, at least in China, this problem
Speaker 1: seems to be getting worse. And I'm looking at a
Speaker 1: headline on Bloomberg right now saying that surging shipping rates
Speaker 1: are a new headwind for the global economy. So it's
Speaker 1: gotten so bad that we could actually feel an outsized
Speaker 1: economic impact from all of this. Yeah, you know, it's
Speaker 1: funny like when when the crisis first hit, there was
Speaker 1: a lot of talk here in the US about, oh,
Speaker 1: are we gonna start reshoring more of our manufacturing? Are
Speaker 1: we gonna buy less from China over time? And maybe
Speaker 1: that will happen at some point, who knows. But in
Speaker 1: the meantime, people are spending a lot on e commerce.
Speaker 1: They're buying things. They're buying things from Walmart dot com
Speaker 1: and Amazon dot com, and a lot of those things
Speaker 1: come from China. So there is an extraordinary amount of
Speaker 1: demand for imports ship from China. I don't think there's
Speaker 1: as much going in the other direction, and I think
Speaker 1: that's sort of like part of the story is that
Speaker 1: although there has been this revival of economic activity, it's
Speaker 1: not the same patterns as it was before, and so
Speaker 1: this sort of like equilibrium stability of global global supply
Speaker 1: lines has not been established yet. No, that's exactly right.
Speaker 1: I think I saw some anecdote about how it's cheaper
Speaker 1: to send a container from the US to China empty.
Speaker 1: So you ship something over to the US a full container,
Speaker 1: but then when it gets there, you just send it
Speaker 1: back empty because you can make more money by making
Speaker 1: more trips versus actually spending the time to load it
Speaker 1: up in the US. So it's stuff like that. Well, anyway,
Speaker 1: that's a good one. That's a good one. On this podcast,
Speaker 1: we're going to hit all of these big themes. So
Speaker 1: we're going to hit it um, how shipping actually works,
Speaker 1: what's going on now? And you know when we say
Speaker 1: stuff like the rate on a standard container has quadrupled
Speaker 1: versus a year ago, what do we actually mean by
Speaker 1: a standard container? And how did we get into a
Speaker 1: place where shipping and global trade was standardized in this way?
Speaker 1: So we're going to talk to someone who has actually
Speaker 1: fulfilled my ambition in life, someone who has traveled on
Speaker 1: container ship. We're gonna talk to Mark Levinson. He's an
Speaker 1: economist and a historian and the author of a really
Speaker 1: good book that I read quite a few years ago,
Speaker 1: but it's called The Box, How the shipping Container made
Speaker 1: the World smaller and the World economy bigger. He also
Speaker 1: has a new book called Outside the Box, How globalization
Speaker 1: changed from moving stuff to spreading ideas. So the perfect
Speaker 1: person to talk about this, all right, Marca, Welcome to
Speaker 1: odd Bots. Good to be with you, Tracy. So it's
Speaker 1: nice to meet someone who shares my affinity for container shipping.
Speaker 1: Could you maybe explain how you got into this as
Speaker 1: an area of interest because I think, I mean, I'm
Speaker 1: pretty sure that your book is well one of the
Speaker 1: only ones that I know of certainly that deals in
Speaker 1: the history of container shipping. Sure, I'm I'm not a
Speaker 1: shipping person. I'm a trade person. I'm very interested in
Speaker 1: international economics and international trade. And my observation was that
Speaker 1: economists paid a whole lot of attention to things that
Speaker 1: governments did as being responsible for the growth in trade,
Speaker 1: for example, cutting tariffs, and that they really hadn't paid
Speaker 1: much attention to these changes in transport costs and the
Speaker 1: greater reliability that came with container shipping. So I decided
Speaker 1: to take a look at that, and that's really where
Speaker 1: my book The Box came from, was really trying to
Speaker 1: under stand how this technology developed and how it then
Speaker 1: affected the international economy. My argument that globalization as we
Speaker 1: know it today wouldn't have been possible without the container
Speaker 1: originally struck a lot of people as strange, but I
Speaker 1: think many people have come around to understand that that's true.
Speaker 1: What is the core thesis of the book, that this
Speaker 1: standardized container that can guard ships and rail is so
Speaker 1: crucial to globalization as we know it? The core thesis
Speaker 1: is that the shipping container made such a huge difference
Speaker 1: in not only the cost of shipping but in the
Speaker 1: reliability of shipping, that it led businesses to adopt new strategies.
Speaker 1: The containerization made what we think of today as long
Speaker 1: distance value chains possible. The idea that you would ship
Speaker 1: inter idiot goods from here to their products that have
Speaker 1: been partially processed and they're being sent to some place
Speaker 1: else to be incorporated into a component, which will be
Speaker 1: sent someplace else to be incorporated into a finished product.
Speaker 1: That wasn't common before containerization came along, because the transport
Speaker 1: was too expensive and too unreliable. And so this type
Speaker 1: of globalization is really a consequence of containerization. So you
Speaker 1: made the point in the book, or I mean a
Speaker 1: big chunk of the book is actually about this. The
Speaker 1: standardized container didn't just happen. Someone had the idea for it,
Speaker 1: and then actually getting it adopted in the wider roles
Speaker 1: of trade took a lot of investment and and quite
Speaker 1: a bit of time. Could you describe that process? Where
Speaker 1: does the container actually come from? And how was it
Speaker 1: uh spread around the world. The container was actually not
Speaker 1: a new invention by any stretch. There's evidence of the
Speaker 1: use of containers to ship goods more efficiently since the
Speaker 1: eighteenth century, and it makes sense, right. It's more efficient
Speaker 1: to handle things once like a box with a lot
Speaker 1: of little boxes inside, than to handle each of these
Speaker 1: different boxes. So there's been a lot of use of
Speaker 1: containers in different ways, including in the United States, but
Speaker 1: none of these made any money. It proved to be
Speaker 1: not a very efficient way to move goods. And then
Speaker 1: what happened Starting in ninety six, US entrepreneurs, notably a
Speaker 1: trucking industry magnet named Malcolm McClain, began to use containers
Speaker 1: aboard purpose built ships and tied the container into a system,
Speaker 1: so it wasn't simply uh, something that went on a
Speaker 1: ship but could also be put on top of a
Speaker 1: rail car, could be attached to a truck, and you
Speaker 1: then had the development of intermodal freight. Containers were a
Speaker 1: domestic US phenomenon for a dozen years, and then starting
Speaker 1: in n there was international container shipping, first across the
Speaker 1: Atlantic and then across the Pacific, and this led to
Speaker 1: a steep drop. I think readers may not recall, but
Speaker 1: before containers came along, doc work was very, very labor intensive.
Speaker 1: To load a ship, the ship had to spend a
Speaker 1: couple of weeks at the dock, and you had workers
Speaker 1: literally handling two hundred thousand separate items, getting them out
Speaker 1: of the warehouse and into the ship, and then at
Speaker 1: the other end of the trip doing the reverse. So
Speaker 1: shipping things took a long time. Many things got lost, stolen, broken,
Speaker 1: and the cost was extremely high. And what that meant
Speaker 1: was a lot of things just weren't worth shipping. Once
Speaker 1: container shipping developed internationally, then all of a sudden it
Speaker 1: made sense to send things like socks and cheap wine
Speaker 1: and electric fans and other relatively inexpensive goods around the world,
Speaker 1: and so the container really made that possible. Was Season
Speaker 1: two of The Wire a pretty accurate depiction of them,
Speaker 1: sort of the intersection of new shipping technology against or
Speaker 1: sort of with sort of traditional union power and workers strongholds.
Speaker 1: It was different in every country. Typically, the pattern prior
Speaker 1: to containerization was that doc work paid well when there
Speaker 1: was work, but because of the nature of shipping that
Speaker 1: was fairly labor intensive, there was this it was necessary
Speaker 1: to have a surplus of workers. So you have all
Speaker 1: of these guys showing up at the dock every day
Speaker 1: trying to find work. Some days there was work for
Speaker 1: everybody because the ship had just come in. Some days
Speaker 1: there was work for only a handful of guys. And
Speaker 1: so then how do I get a job while you
Speaker 1: get your job for your friend? And and it became
Speaker 1: rather a racket infested in some countries. Uh, that was,
Speaker 1: you know, definitely an issue. Um. In other countries, this
Speaker 1: was simply an important source of work, and there was
Speaker 1: a lot of resistance to these jobs disappearing. So every
Speaker 1: country had to resolve this in its own way. So
Speaker 1: I think you've laid out the importance of standardized shipping
Speaker 1: to global trade beautifully. If we fast forward to today
Speaker 1: and the disruptions that Joe and I were talking about
Speaker 1: in the intro, what's your understanding of what's going on
Speaker 1: right now and how much of a problem is it. Well,
Speaker 1: let me give you just a little very recent history
Speaker 1: of containerization, and this is some of what I deal
Speaker 1: with in my my new book, Outside the Box. Starting
Speaker 1: in the early two thousand's, the container ship lines built
Speaker 1: bigger and bigger and bigger ships. Okay, the first ship
Speaker 1: that carried only containers back in carrying sixty eight containers. Okay,
Speaker 1: now the biggest carry more than twelve thousand containers what
Speaker 1: they call twenty ft units, and it was really in
Speaker 1: the early two thousands, around two thousand, five thousand six
Speaker 1: of these big ships started to come online, and then
Speaker 1: they got bigger and bigger over time. These were built
Speaker 1: on the assumption that international trade would continue to grow
Speaker 1: very quickly, as it had for decades up until that time.
Speaker 1: What happened then was in the financial crisis, trade crashed,
Speaker 1: and after that the growth of trade never recovered. Okay,
Speaker 1: international trade as a share of the world's GDP actually
Speaker 1: peaked back in two thousand eight, and so there was
Speaker 1: all his excess capacity in shipping, and every time a
Speaker 1: new ship came online that had the capacity to carry
Speaker 1: thousands of containers, the excess capacity got worse, to the
Speaker 1: point that you can send a container across the Pacific
Speaker 1: for for under a thousand dollars. At one point when
Speaker 1: this happened, many ship lines went bust or else found
Speaker 1: merger partners, and so what had been a very competitive
Speaker 1: industry was transformed into what's basically an oligopola. To day,
Speaker 1: there are three groups of ship lines, and between them
Speaker 1: they probably can troll five or so percent of the
Speaker 1: trade on the major trade routes, and that means that
Speaker 1: they are able to control over capacity. You don't have
Speaker 1: as many ships being built as you had a few
Speaker 1: years ago because of these three big groups kind of
Speaker 1: keep a handle on things, and so that means that
Speaker 1: when all of a sudden there's a spike in demand,
Speaker 1: as there was towards the middle of that, rates are
Speaker 1: going to go up. That's really what's happened. After years
Speaker 1: and years of extremely low rates, rates really popped starting
Speaker 1: in August or September of last year. Why did this
Speaker 1: happen aside from the demand, Well, in the early days
Speaker 1: of COVID, there were a lot of foul ups. Trade
Speaker 1: dropped off precipitously for a brief period, uh, and then
Speaker 1: that it picked up again. And at the same time,
Speaker 1: you had consumers in the wealthy countries who couldn't spend
Speaker 1: on services. So you actually had in the midst of
Speaker 1: this crisis, people with a lot of money to spend.
Speaker 1: They couldn't go out to dinner, they couldn't go on vacation,
Speaker 1: they couldn't go to the theater, they could buy things,
Speaker 1: and so that actually increased the demand for physical products,
Speaker 1: and that's a lot of what we're seeing now in
Speaker 1: this um sudden surge of exports from China. Let me
Speaker 1: ask you a sort of technical question, because I'm sort
Speaker 1: of fascinated about where prices come from. So you know,
Speaker 1: I have a Bloomberg terminal and I can look up
Speaker 1: the Shanghai Shipping Exchange Containerized Freight Index, and I see
Speaker 1: that now that long ago as a thousand. Anyway, now
Speaker 1: it's significantly higher than that. It's exploded. Where do these
Speaker 1: numbers come from? If I'm trying to think how I
Speaker 1: want to phrase the question, if a manufacturer of a
Speaker 1: good or a buyer of a good, is there a
Speaker 1: transparent price? Did they negotiate directly with the shippers? And
Speaker 1: then how did those get fed into a unified index.
Speaker 1: That's a terrific question, Uh, Joe. If you show up
Speaker 1: at the dock with a container and you say, hey,
Speaker 1: I want to send this off to Hamburg or Long Beach,
Speaker 1: well the ship line will do business with you reluctantly.
Speaker 1: But that's not really how the shipping business works. Okay,
Speaker 1: the shipping business works almost entirely under contract, which is
Speaker 1: to say, a big shipper Walmart for um Caterpillar will
Speaker 1: reach an agreement with either a ship line or with
Speaker 1: a freight forward or which will negotiate with the ship
Speaker 1: line on its behalf. These agreements typically last six months,
Speaker 1: sometimes longer, and they're typically filled with contingencies, which means
Speaker 1: you can't actually know what the cost of the shipment is.
Speaker 1: A typical contract might say something like the shipper, that is,
Speaker 1: the company with the goods export, agrees to have at
Speaker 1: least fifty containers on the dock going from Shanghai to
Speaker 1: Los Angeles every Tuesday, and any week in which it
Speaker 1: has less than fifty containers, the agreed price will be higher.
Speaker 1: And if over the entire six months of the pure
Speaker 1: it uh it has fewer than so and so many containers,
Speaker 1: the price will be this much higher. And if the
Speaker 1: ship line misses a sailing, then it will have to
Speaker 1: pay a penalty of so much per container. And those
Speaker 1: kinds of contingencies, and there are many of them, then
Speaker 1: determine what the total prices. So actually a company can't
Speaker 1: tell you what it would cost to send a container
Speaker 1: from Shanghai to Los Angeles today. It will only know
Speaker 1: at the end of the six months when it adds
Speaker 1: up all of the payments that's made, all of the
Speaker 1: penalty payments that's received from the other party, and and
Speaker 1: then it becomes obvious in retrospect what the actual cost
Speaker 1: per container was. So this is not public information. Just sorry.
Speaker 1: So then like I'm looking at this chart again, so
Speaker 1: is it a thousand and now it's it's not public information.
Speaker 1: How does it then get fed into an observable index?
Speaker 1: What you're looking at is the market forecast of a
Speaker 1: spot rate. Okay, as some of the contracts are pegged
Speaker 1: to that index, some are not. Uh, And and there's
Speaker 1: a question here about what kind of information and index
Speaker 1: like this has. Okay, you may have some players in
Speaker 1: the industry who want this information to get out about
Speaker 1: what they actually are paying for freight. You have some
Speaker 1: players in the index in the industry who don't want
Speaker 1: it to get out. And so this is, as is
Speaker 1: the case with many other traded commodities, many of the
Speaker 1: transactions occur in private and what is known in the
Speaker 1: public sphere is not the full story. You don't really
Speaker 1: know what what the actual prices are or were. So
Speaker 1: we described it the outset this idea that the pandemic
Speaker 1: had caused chaos in shipping in part by putting a
Speaker 1: bunch of the big container ships out of place. So
Speaker 1: you know, they expected to go somewhere, they were turned
Speaker 1: away at the border, or they got stuck somewhere, and
Speaker 1: so you have like all these ships out of position.
Speaker 1: How difficult is it to get them back online and
Speaker 1: sort of going where they need to be going? I guess,
Speaker 1: I guess. My question is how flexible are these giant
Speaker 1: container ships. There are a couple of things that make
Speaker 1: them not very flexible. One is that these big ships
Speaker 1: don't necessarily fit at all ports on some routes, they're
Speaker 1: simply not enough demand to handle a ship that can
Speaker 1: carry ten thousand containers, or perhaps the harbor in some
Speaker 1: places isn't deep enough to handle that ship, and so
Speaker 1: a ship that can serve one route may not be
Speaker 1: able to serve another route profitably. The other factor to
Speaker 1: understand here is that no one in the container shipping
Speaker 1: business sends out a ship. When a ship line is
Speaker 1: offering a route, it's offering a regular service. Okay, So
Speaker 1: every Tuesday, to take an example, there will be a
Speaker 1: ship that leaves ching Dao in China and it will
Speaker 1: stop in this place, and it will stop in that place,
Speaker 1: and it will stop in Singapore so many days later,
Speaker 1: and it will stop in Umhis Sirius in Spain so
Speaker 1: many days later, and eventually, so many days later, it
Speaker 1: will end up in Rotterdam. And it will do that
Speaker 1: on the same day every week, and it will be
Speaker 1: a ship of the same design every week in most cases.
Speaker 1: So this is called a string in the shipping industry.
Speaker 1: And so if you have a ship that sales between
Speaker 1: China and Rotterdam and my example, every Tuesday, you're probably
Speaker 1: going to have seven or eight versions of the same
Speaker 1: ship about the same size ready to go on that date,
Speaker 1: and you're trying to keep on the schedule, which means
Speaker 1: if one or two or three of them are out
Speaker 1: of position, it takes a while to get back on
Speaker 1: that regular rotation. You can't just put any old ship
Speaker 1: on that run, because that's not what the traffic requires.
Speaker 1: Coordinating these is quite a task. Typically these days, ships
Speaker 1: are built with the idea that they will be used
Speaker 1: on a specific route, uh and and so you don't
Speaker 1: want to just plug them in any place. So you know,
Speaker 1: there's sort of I guess a couple of things going
Speaker 1: on here at once. There's the acute disruption that we're
Speaker 1: still working through. I mean, the coronavirus crisis isn't over.
Speaker 1: Basically nobody's economy has really returned to normal, so we're
Speaker 1: dealing with the aftermath of that, and that's obviously snarled
Speaker 1: shipping and uh scrambled the situation. What about I mean,
Speaker 1: is there any prospect long term for there to actually
Speaker 1: be a sustained capacity shortage if the economies around the world,
Speaker 1: you know, you have like lots of governments doing fiscal
Speaker 1: stimulus and they're going to need supplies and so forth,
Speaker 1: that if we have this sort of boom, I mean,
Speaker 1: perhaps could we have a sustained capacity constraint the likes
Speaker 1: we haven't seen since prior to the Great Financial Crisis.
Speaker 1: The capacity shortage such as it is, comes from the
Speaker 1: fact that you've really only got these three alliances, and
Speaker 1: so people are not building so many ships now because
Speaker 1: they don't have to worry about their competitors so much.
Speaker 1: I think though in the longer term the concerns are
Speaker 1: actually in the other direction. We had for many, many
Speaker 1: years international trade growing probably twice as fast as the
Speaker 1: world economy since two thousand eight, international trade has grown
Speaker 1: more slowly than the world economy. And I think that's
Speaker 1: going to continue, and the growth of international trade is
Speaker 1: going to slow down even more. And and that means
Speaker 1: that we have the prospect of overcapacity returning as the
Speaker 1: pandemic receipts. You know, I think that there are a
Speaker 1: couple of reasons for this in the long run. One
Speaker 1: is that you've got demographics right in a world in
Speaker 1: which most countries except in Africa, are filling up with
Speaker 1: older people. There's less demand for physical products. People are
Speaker 1: spending more and more of their money on services, and
Speaker 1: I think that that's really just going to affect the
Speaker 1: amount of trade in physical goods over the long run.
Speaker 1: You're seeing a lot of manufacturers and retailers change their
Speaker 1: sourcing decisions in way that will affect the demand for
Speaker 1: container shipping. One of the things I write about is
Speaker 1: that there was a lot of misjudgment of risk in globalization.
Speaker 1: A lot of companies looked at production costs and transport
Speaker 1: costs and said, we've got to make these things in China.
Speaker 1: People have now taken risk on board, you know, they
Speaker 1: understand that risk has to be factored into their calculations,
Speaker 1: because if the good zone arrive on time, it can
Speaker 1: really be very bad for the bottom line, and it
Speaker 1: can harm their reputation in the long term. You've had
Speaker 1: many companies now starting to diversifying. There's a lot of
Speaker 1: talk in the States about reshoring. It's not exactly re shoring, though.
Speaker 1: What's going on is rather redundancy. Firms are concerned about
Speaker 1: making a product only in one place, being reliant only
Speaker 1: on one supplier, or on one ship line, or on
Speaker 1: one board, and so people are looking for options in
Speaker 1: case something goes wrong somewhere. This raises production costs a
Speaker 1: little bit, but provides better insurance effectively in case there's
Speaker 1: a fire, a hurricane, a strike, ship sinks, whatever the
Speaker 1: issue is. And then the other big thing you've got
Speaker 1: obviously coming along is a concern about climate change, and
Speaker 1: as the costs of making production and transportation more sustainable
Speaker 1: but begin to be felt, that's going to raise the
Speaker 1: cost of international shipping and domestic freight transportation and is
Speaker 1: going to make these long distance value chains more costly
Speaker 1: to operate. I have a dumb question, but what's the
Speaker 1: downside of over capacity of mega ships? So you know,
Speaker 1: I could see it maybe hitting profits of the big
Speaker 1: three shipping companies. But why is that bad for the
Speaker 1: overall global economy? Well, I wouldn't say necessarily that it's
Speaker 1: bad for the overall global economy, but it's really bad
Speaker 1: for a ship lines for sure. But be these mega
Speaker 1: ships have generally fouled up the transportation system. Okay, you
Speaker 1: actually have fewer ships calling at most ports today than
Speaker 1: you used to have. They're much bigger, and so think
Speaker 1: of what this does to the operation of the port.
Speaker 1: You don't have a smooth flow of cargo going through
Speaker 1: the port. Now you've got nothing happening in the port.
Speaker 1: It's dead today, and then tomorrow a ship shows up
Speaker 1: and it wants to unload three thousand containers in your port.
Speaker 1: What do you do with this? How do you get
Speaker 1: it unloaded? Where do you put the containers? One thing
Speaker 1: that's happened is that ships spend more time in port,
Speaker 1: which is very wasteful because it just takes more time
Speaker 1: to get so many containers on and off. The trucks
Speaker 1: are lined up at the gate because there's so many
Speaker 1: containers to bring in to send out on these ships
Speaker 1: are so many containers to deliver the railroads can't handle
Speaker 1: this sudden flood of containers, so you have the cargoes
Speaker 1: sitting around longer before it gets removed from the port.
Speaker 1: All of these things have tended to make transit times
Speaker 1: longer uh and have made it harder for shippers to
Speaker 1: get their freight where it's supposed to be on deadline,
Speaker 1: and that's bad for everybody. Who are the three big
Speaker 1: players right now in shipping and is there hold on
Speaker 1: the industry? Like is it sustainable? Do you expect in
Speaker 1: ten years from now it will probably just be those
Speaker 1: three big players. Still, the big players have formed what
Speaker 1: are called alliances. So these alliances have kind of squeezed
Speaker 1: most of the smaller players out of the business. One
Speaker 1: alliance involves IMMERSK, the Danish company, and Mediterranean Shipping, which
Speaker 1: is based in Switzerland, and between them those two companies
Speaker 1: have a little bit over a third of all of
Speaker 1: the container shipping in the world. There's another alliance that
Speaker 1: has um Costco, the China Ocean Shipping Company, the French
Speaker 1: company m c M a c GM, and Evergreen, a
Speaker 1: Taiwanese company, and it has about of the world's shipping.
Speaker 1: And then there's another alliance that has the German company
Speaker 1: HAPAG Lloyd and the Japanese lines and the Korean line,
Speaker 1: and it has about so if you put those three
Speaker 1: alliances together, their market share and container shipping is close
Speaker 1: to Will those alliances stay together. At the moment, the
Speaker 1: system looks pretty stable. You can imagine that at some
Speaker 1: point a government will step in and say you, guys
Speaker 1: can no longer have this alliance. It's anti competitive. But
Speaker 1: so far that hasn't had them. Is there anything that
Speaker 1: shipping companies could do right now to unsnarl traffic and
Speaker 1: get it going again? A part of the snarling of
Speaker 1: traffic is due to things beyond their control. For example,
Speaker 1: traffic into and out of the UK is totally snarled
Speaker 1: for reasons related more to Brexit than to problems with
Speaker 1: container shipping. I think that in general, ship lines have
Speaker 1: decided that these giant ships were not a brilliant idea,
Speaker 1: and so we're seeing now that the ship lines are
Speaker 1: interested in building vessels that were a bit smaller. You know,
Speaker 1: as I mentioned earlier, the average ship size went from
Speaker 1: carrying the equivalent of containers to the equivalent of twelve
Speaker 1: thousand truck size containers in the in the span of
Speaker 1: a dozen years. But I think the ship lines have
Speaker 1: discovered that these ships that have twenty thousand, two thousand
Speaker 1: t e u s okay divide by two for the
Speaker 1: number of containers, that those ships really don't work very well.
Speaker 1: It takes too long to load them, it takes too
Speaker 1: long to unload them, there are too many places they
Speaker 1: can't go. It's too often the case that they're not needed.
Speaker 1: And so the ship lines are interested in building vessels
Speaker 1: that are somewhat smaller than that. Now, as that happens,
Speaker 1: I think that may resolve a lot of these problems
Speaker 1: that are caused by these ships just being too damn big.
Speaker 1: Is that just the bigness? Was that just unanticipation of
Speaker 1: a sort of never ending in world trade such as
Speaker 1: we saw pre grade financial crisis, Like had that vision materialized,
Speaker 1: had that continued, had the so called bricks got bigger
Speaker 1: and bigger and the commodity boom gone on, would that
Speaker 1: have made sense? And it was just that was a
Speaker 1: different world, and now the equipment build for that world
Speaker 1: and making an increasingly less sense. The slump in the
Speaker 1: growth of trade wasn't really the only factor here. Ship lines,
Speaker 1: like companies in many other industries have relentlessly pursued economies
Speaker 1: of scale. Bigger was better, and it was true. When
Speaker 1: you could build a ship that could carry three thousand
Speaker 1: containers instead of two thousand containers, the costs per container
Speaker 1: dropped a lot. And when you could build a ship
Speaker 1: that could carry ten rather than five, the cost per
Speaker 1: container was much lower. So ship lines were aggressively pursuing
Speaker 1: economies of scale. What they didn't count on was that
Speaker 1: at some point the hstles would get so big that
Speaker 1: diseconomies of scale would set in. And that's what's happened
Speaker 1: in shipping. The point at which ships got built beyond
Speaker 1: perhaps seventeen or eighteen thousand tu s was the point
Speaker 1: at which they just got too big, and that's when
Speaker 1: you started to have this confusion in the ports. That's
Speaker 1: when you started to have these delays in shipping. That's
Speaker 1: when you start to have h the the entire industry
Speaker 1: become less reliable, and the diminished reliability is one of
Speaker 1: the things that is leading manufacturers and retailers to have
Speaker 1: a new sourcing pattern, to make their products in different places,
Speaker 1: and to have redundant value chains. Size isn't everything, and
Speaker 1: many of the ship lines mistakenly thought that it was
Speaker 1: there any other sort of key idea, mark that you
Speaker 1: think we're sort of missing or that would help us
Speaker 1: understand the current situation. There is a lot of concern
Speaker 1: now about shortages of containers and shortages of chassisas and
Speaker 1: that sort of thing. In general. Part of this is
Speaker 1: that the ship lines have gotten out of that business
Speaker 1: and left it to other people to to to deal with. Yeah,
Speaker 1: there is a huge amount of of confusion. And let
Speaker 1: me put this way, international trade after all these years,
Speaker 1: still doesn't work very smoothly. There are still lots and
Speaker 1: lots of manual steps in the process of arranging a shipment.
Speaker 1: There are still lots and lots of unexpected delays, and
Speaker 1: and this situation really hasn't gotten better in recent years.
Speaker 1: You would have thought that we'd be better at it
Speaker 1: by you would think so. What happens in a system
Speaker 1: like we've got in shipping is that the ship lines
Speaker 1: built ships that they thought were best for their own needs.
Speaker 1: They didn't really give much consideration shan to the system.
Speaker 1: And the system includes the container terminals in the ports.
Speaker 1: It concerns the ports themselves, It concerns the railroads that
Speaker 1: pick up and deliver to the ports. It concerns the
Speaker 1: truck lines that pick up and deliver to the ports,
Speaker 1: and various other players in the business, the companies that
Speaker 1: provide containers, the companies that provide the chassis that trucks use.
Speaker 1: All of those folks are players in this ecosystem. And
Speaker 1: what was most efficient for the ship lines alone hasn't
Speaker 1: been most efficient for this whole system. It's really made
Speaker 1: it less efficient over time. Well, Mark, that was a
Speaker 1: fantastic conversation, and I'm always grateful for the opportunity to
Speaker 1: talk about shipping. And I don't know, part of me
Speaker 1: I understand it's still kind of crazy that global shipping
Speaker 1: isn't as smooth as you might think it would be
Speaker 1: given the amount of global trade that we currently do.
Speaker 1: But part of me also likes the romance of having,
Speaker 1: you know, a system that's very physically based where you're
Speaker 1: moving goods, uh, you know, in these big packages and
Speaker 1: you can kind of see the flow of goods, you
Speaker 1: can see them unloaded up ports. I don't know, I
Speaker 1: kind of like that in the modern economy. It's nice
Speaker 1: that there's something still analys Do you recommend everyone at
Speaker 1: least do that one to take a global ship as
Speaker 1: a as a passenger? Is that a fun experience? Are
Speaker 1: you asking me? Yeah, I will tell you the truth.
Speaker 1: I've not done that. Oh oh sorry, I thought I
Speaker 1: thought Tracy said that you did. No, I was not
Speaker 1: going to contradict Tracy on the air. No, I have
Speaker 1: not done that. Uh. And you know most of what happens.
Speaker 1: There have been several people have tried to write books
Speaker 1: about the experience of traveling on a container ship, and
Speaker 1: they're not very good books because nothing happens. Yeah. Well,
Speaker 1: you know what. One of the books turned out to
Speaker 1: be an interesting book because the author wrote about things
Speaker 1: that didn't happen on the container ship that she was
Speaker 1: traveling on, but she had heard happened on other container ships.
Speaker 1: But I mean, what do you do? Look? Was that
Speaker 1: because I think I'm I think I was thinking about
Speaker 1: a different book where it starts out with the author
Speaker 1: taking like this big container ship journey. That Rose George
Speaker 1: wrote a book on container shipping a few years a
Speaker 1: couple of years after I did. Yeah, that must be it.
Speaker 1: I think I've read both of them. And Rose George's
Speaker 1: book was called in the US Everything, it had a
Speaker 1: different name. In the UK and what she found and
Speaker 1: it was it was a fun book to read. But
Speaker 1: her conceit was that she was going to write about
Speaker 1: what went on during this voyage and the book wasn't
Speaker 1: successful in that sense because nothing went on during the voyage,
Speaker 1: which is typical of you know. So she was talking
Speaker 1: about piracy that had occurred on other ships and problems
Speaker 1: with the treatment of workers on other ships. A ship
Speaker 1: from Shanghai to Los Angeles, it takes the days somewhere
Speaker 1: U sixteen seventeen days. It actually takes a couple of
Speaker 1: days longer than it did twenty years ago. The price
Speaker 1: of fuel is one of the most expensive costs in shipping,
Speaker 1: and so initially the ship lines slowed down their vessels
Speaker 1: when the price of fuel went up. This was called
Speaker 1: slow steaming and UH the idea was that they would
Speaker 1: operate more slowly to hold down the total cost of fuel. UH.
Speaker 1: Then newer generations of vessels were built, like these ships
Speaker 1: that carry EU, and they were built to steam slowly,
Speaker 1: so they can't speed up. And one of the reasons
Speaker 1: for these delays is that it's harder now than it
Speaker 1: used to be for a ship to make up time. Okay,
Speaker 1: It used to be that a ship would sail let's say,
Speaker 1: an average of twenty one knots, but if it got behind,
Speaker 1: it could sail it, it could steam it twenty four
Speaker 1: knots for a while to get back on schedule. The
Speaker 1: ships can't do that anymore. They're typically sailing at seventeen
Speaker 1: knots and they can't go much faster than that, so
Speaker 1: once they're behind, there behind. I'm glad we brought this
Speaker 1: up because I it really is painting this picture of
Speaker 1: global trade is a complicated problem and why even after
Speaker 1: all these years, it's not an efficient solved one, Because
Speaker 1: even something like that, it makes total sense the trajectory.
Speaker 1: They concerned about fuel costs, but then you end up
Speaker 1: building these boats that can't accelerate. Super interesting and sort
Speaker 1: of just really sort of drives home how how tough
Speaker 1: this whole thing is, and probably helps explain why these
Speaker 1: prices are so volatile, because I mean, I know, like
Speaker 1: when I pull up these charts, I mean they just
Speaker 1: swing back and forth all the time. Yeah. One thing
Speaker 1: that hasn't come to the four yet because interest rates
Speaker 1: are very low, but it will is that this drives
Speaker 1: up inventory costs. Uh, you think about time you're goods
Speaker 1: spend on the ship, right, that's those are goods in inventory,
Speaker 1: and so if it's taking you three days longer to
Speaker 1: send your stuff, then your cost is effectively higher. Well,
Speaker 1: right now, with money going out for free, that's not
Speaker 1: really a big deal. But if interest rates become significant again,
Speaker 1: this is will be a cost burden. It'll be costly
Speaker 1: to have their their goods sitting on these vessels. All right, Well, Mark,
Speaker 1: I think we're gonna have to leave it there. But
Speaker 1: absolutely a great conversation. Yeah, I really appreciate it, and
Speaker 1: you've laid it out very clear. Well, I've enjoyed it.
Speaker 1: I've enjoyed it. Thank you very much for having me on.
Speaker 1: Thanks Mark. I can't believe if I mixed up the
Speaker 1: intros of these two books on shipping that I've read,
Speaker 1: but yeah, one of them started with someone going on
Speaker 1: an actual container journey and the other one didn't. Both
Speaker 1: are are pretty good, although I mean Mark laid out
Speaker 1: his thesis in a really great, clear and concise way,
Speaker 1: and I think he was very good at illustrating why
Speaker 1: global trade the shipping industry isn't as flexible or as
Speaker 1: efficient as you might think it should be at this
Speaker 1: point in time. Yeah, absolutely, I mean, like I would
Speaker 1: not have guessed that at all. Like I, you know,
Speaker 1: I sort of had some intuition that prices were volatile
Speaker 1: because okay, you you can't just supply that fast relative
Speaker 1: to demand, and so you could have a modest hit
Speaker 1: to demand and then suddenly of a glut and vice versa.
Speaker 1: But then adding in all the different layers of why
Speaker 1: it's so complicated and delays at the ports and all
Speaker 1: that kind of stuff, you really started to see and
Speaker 1: you know, anyone should just sort of look up some
Speaker 1: of these great index charts and you can see they
Speaker 1: really like swing wildly in a way that very few
Speaker 1: things do. And I think he laid it out very well.
Speaker 1: And of course, right now all of these charts are
Speaker 1: basically you know, surgery. I guess the other question is
Speaker 1: whether or not the current experience, the gridlock and the
Speaker 1: snarling that we've described, whether or not that does leave
Speaker 1: lead to a reconsideration for the shipping industry about how
Speaker 1: they do things. So Mark mentioned this idea that everyone's
Speaker 1: been obsessed with mega ships because they were more efficient
Speaker 1: for the shipping companies themselves, but they don't actually work
Speaker 1: that well for a lot of the customers, and he
Speaker 1: made a pretty convincing argument about why they might not
Speaker 1: work well in a sort of post coronavirus, post globalization
Speaker 1: trade environment where things become a lot more localized. People
Speaker 1: need to be more nimble, people are worried about supply
Speaker 1: chain vulnerability. You can see an argument for going smaller. Yeah,
Speaker 1: you know, we didn't get into it, but I once
Speaker 1: watched a reality TV show on like Discover channel about
Speaker 1: ship building that also seems insanely complicated and really, you know,
Speaker 1: really difficult, and not many people like actually know how
Speaker 1: to like engineer the process of a big building a ship.
Speaker 1: So we didn't get into that. But another aspect of
Speaker 1: this that seems very hard. Yeah, Actually, that reminds me
Speaker 1: there's one other really important aspect of this, which is
Speaker 1: that because all these ships are out of position and
Speaker 1: in some cases stuck off the coast of various countries,
Speaker 1: there are people working on the ships who have been
Speaker 1: stuck on them for months at a time, you know,
Speaker 1: in some cases, without medical care, in some cases, without
Speaker 1: being paid, while they have families back at home. That's
Speaker 1: been a humanitarian crisis that we've actually been writing about it. Bloomberg.
Speaker 1: We've done a series on this topic. It also lays
Speaker 1: out some of the problems and issues in getting um
Speaker 1: these ships back into into position. The idea of who
Speaker 1: bears responsibility for the crew and for the vessel itself
Speaker 1: is not as clear cut as you might imagine. But
Speaker 1: if you're interested in this topic, you know, google Seafarers
Speaker 1: and Bloomberg and you'll get some really good stories on this.
Speaker 1: H this issue, all right, uh, and this crisis just
Speaker 1: needs to take Yeah, it's a sad note. Yeah, it's
Speaker 1: a sad note to end on, but you know there
Speaker 1: is a humanitarian cost to global shipping as well. Okay,
Speaker 1: let's leave it there. This has been another episode of
Speaker 1: the All Thoughts Podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway. I'm Joe Wisn'tal. You
Speaker 1: can follow me on Twitter at the Stalwart. You should
Speaker 1: check out our guest Mark Levinson. Check out his UH books,
Speaker 1: particularly At the Box, as well as his new one
Speaker 1: Outside the Box. Follow our producer Laura Carlson. She's at
Speaker 1: Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca
Speaker 1: Levie at frances Good Today and check out all of
Speaker 1: our podcasts at Bloomberg unto the handle at podcasts. Thanks
Speaker 1: for listening.