The Urethane Blog
Everchem Updates
VOLUME XXI
September 14, 2023
Everchem’s exclusive Closers Only Club is reserved for only the highest caliber brass-baller salesmen in the chemical industry. Watch the hype video and be introduced to the top of the league: — read more
May 31, 2022
Arsenal’s APPLIED Adhesives
Acquires Alliance Adhesives
MINNETONKA, Minn., May 25, 2022 – APPLIED Adhesives, a premier custom adhesive solutions provider in North America, today announced that it has completed its acquisition of Alliance Adhesives, a regional supplier of adhesives and dispensing equipment solutions located in Oldsmar, FL. This acquisition strengthens the Company’s commitment to providing industry-leading products, technical expertise, and superior service to its customers.
“Alliance’s dedication to providing an exceptional customer experience is in direct alignment with Applied’s commitment to relentless customer focus, demonstrating an ideal cultural fit,” said John Feriancek, President and CEO of APPLIED Adhesives. “We are pleased to welcome Alliance Adhesives to APPLIED Adhesives and look forward to providing their customers with the outstanding service and innovative solutions they have come to expect.”
“Alliance always has the mindset that we are an extension of our customers’ business by supporting their needs to drive their success. Our relationship with our customers is our number one priority. We have them to thank for who we are today,” said David Rittenhouse, President of Alliance Adhesives. “Applied shares those same values and mindset. We feel the support that Applied brings to the table and their passion for relentless customer focus makes this a win for everyone.”
About APPLIED Adhesives
APPLIED Adhesives, founded in 1971, is a premier custom adhesive solutions provider in North America. The company is a value-added distributor of hot melt, water-based, and reactive adhesives as well as dispensing equipment. APPLIED Adhesives serves as a critical supply chain partner to leading adhesive manufacturers and formulators by offering reach and high service levels to an expansive customer base. For more information, please visit appliedadhesives.com or follow us on LinkedIn.
About Alliance Adhesives
Located in Oldsmar, FL, Alliance Adhesives is a regional, family-owned manufacturer and distributor of industrial adhesives. For 20 years, customers have depended on Alliance for cost-effective solutions for their adhesives needs. Alliance serves customers of all types including small- and medium-sized businesses, large enterprises, agricultural, educational institutions, government agencies, and consumers. For more information, please visit Allianceadhesives.com
About Arsenal Capital Partners
Arsenal is a leading private equity firm that specializes in investments in middle-market industrial growth and healthcare companies. Since its inception in 2000, Arsenal has raised institutional equity investment funds of more than $10 billion, has completed more than 250 platform and add-on investments, and achieved more than 30 realizations. Arsenal invests in industry sectors in which the firm has significant prior knowledge and experience. The firm works with management teams to build strategically important companies with leading market positions, high growth, and high value-add. Visit www.arsenalcapital.com for more information.
May 23, 2022
Bloated inventories hit Walmart, Target and other retailers’ profits, trucking demand
Too much stock means lower truckload volumes, more intermodal business
Mark SolomonFriday, May 20, 2022 4 minutes read
Listen to this article 0:00 / 6:18 BeyondWords
There’s little in retailing that Walmart Inc. and Target Corp. aren’t prepared to handle. So it was jarring that over a 24-hour period the two scions of the trade posted weak first-quarter profits that appeared to blindside their management teams.
Part of the bottom-line blowup was due to fuel, which soared to record highs following Russia’s Feb. 24 invasion of Ukraine. Part of it was due to margin pressures caused by an unfavorable sales mix as consumers shifted their buying from higher-margin goods like electronics to less profitable items like groceries. An extension of that was an overshoot of inventory-stocking activity, which came back to bite the retailers after waning concerns over the COVID-19 pandemic pushed more consumer buying toward services and “experiences” and away from goods.
There’s little that retailers can do about fuel prices. It can be argued they should have expected the pandemic-driven buying spree from March 2020 until the end of 2021 to peter out and that they should have planned their inventory strategies accordingly. Yet demand forecasting has always been a tough nut to crack, and the market is where it is. Inventory build may also have been the result of supply chain delays at the start of the year that resulted in some late deliveries of impaired freight.
Inventory levels as of March, when compared to activity in March 2019 after inventories stabilized following a major pull-forward in 2018 ahead of the Trump administration’s China tariffs, produce a mixed bag of results. Unsurprisingly given the current dearth of motor vehicles, the ratio of vehicle and parts inventories to sales has fallen considerably, according to federal government data analyzed by Michigan State University. Apparel inventories to sales also declined over those periods, as did e-commerce.
However, furniture, home furnishings and appliances, building materials and garden equipment, and a category known as “other general merchandise,” which includes Walmart and Target, among others, reported higher inventory-to-sales ratios, according to government data analyzed by Michigan State.
For the latter sectors, the change has happened fast, according to Jason Miller, logistics professor at MSU’s Eli Broad College of Business. As of November, inventory-to-sales ratios were at pre-COVID levels, Miller said. They have since exploded upward.
Miller said he expects a “cooldown” in retailer order volumes, even if inflation-adjusted sales stay constant, as retailers look to reduce their existing stock. He also expects retailers to launch major discounting programs to expedite the inventory burn. Fewer orders within certain categories bodes ill for carriers whose networks are strongly tied to inbound lanes to retailers’ distribution centers, Miller said.
In a Friday note, Bascome Majors, analyst for Susquehanna Investment Group, said that the spread between year-over-year sales and inventories — a rough barometer of the impact of higher sales on restocking activity — turned positive in spring 2020 and accelerated in favorable territory for four consecutive quarters. Gradually, however, the spread has turned negative, according to Majors. In this year’s first quarter, inventory growth exceeded sales growth by 200 basis points. The recent surge in inflation, Majors wrote, has severely distorted inventory and sales trends.
Freight recession priced in?
For some, high inventory levels are an expected occurrence and should be welcomed. In a Tuesday note, Amit Mehrotra, transport analyst at Deutsche Bank, said rising buffer stock is part of retailers’ desire to have goods available when consumers scan the shelves. Mehrotra added, however, that the data points translate into a likely slowdown in freight flows in the coming months and quarters.
He said that a recession is already priced into most transportation equities, noting that the shares of most trucking companies are higher over the past 30 days while the broader market is about 7% lower.
In an unusual world, Walmart, Target and other retailers are likely to turn to the one area where they’ve traditionally found leverage: their shipping bill. During the quarter, Target (NYSE: TGT) faced freight and transportation costs that were hundreds of millions of dollars above already-elevated expectations, COO John Mulligan said on the company’s Wednesday analyst call. It was essentially the same story at Walmart (NYSE: WMT).
Retailers’ efforts to rein in transportation costs will translate into an unprecedented third and even fourth round of truckload contract negotiations, with users getting more aggressive in their bids to extract greater cost savings, according to industry experts.
The discussions could get contentious. In a LinkedIn post on Friday, Jason Ickert, president of trucking firm Sonwil Logistics, said a large shipper that Ickert wouldn’t identify suggested on a conference call this week with truckload carriers that they were “artificially propping up their rates” above accepted market levels. The shipper “stated clearly” that the carriers were expected to adjust their rates during what would be an “unprecedented and unplanned” third round of request for proposals, Ickert wrote.
A potential shift to intermodal
Pressures to drive down transport expenses will also trigger increased interest in intermodal, whose all-in costs are cheaper relative to contract truckload than at any time since 2018. Intermodal rates have risen at a slower pace than truckload contract rates, a turnabout from the 2019 freight recession when higher intermodal rates allowed over-the-road transport to gain market share.
The shift to intermodal, if it happens, would benefit the railroads and intermodal marketers like J.B. Hunt Transport Services Inc. (NASDAQ: JBHT), Hub Group Inc. (NASDAQ: HUBG) and Schneider Inc. (NASDAQ: SNDR). However, experts caution that intermodal capacity remains constrained, as does warehouse space needed to store the stuff.
“Walmart, Target and other retailers will soak up every drop of intermodal capacity that Hunt, Hub, Schneider and the rails deliver in 2022 and probably in 2023,” said Majors of Susquehanna Investment Group. The elevated level of activity, he said, should occur even if retailers are working through a multiquarter process of de-stocking.
May 23, 2022
Bloated inventories hit Walmart, Target and other retailers’ profits, trucking demand
Too much stock means lower truckload volumes, more intermodal business
Mark SolomonFriday, May 20, 2022 4 minutes read
Listen to this article 0:00 / 6:18 BeyondWords
There’s little in retailing that Walmart Inc. and Target Corp. aren’t prepared to handle. So it was jarring that over a 24-hour period the two scions of the trade posted weak first-quarter profits that appeared to blindside their management teams.
Part of the bottom-line blowup was due to fuel, which soared to record highs following Russia’s Feb. 24 invasion of Ukraine. Part of it was due to margin pressures caused by an unfavorable sales mix as consumers shifted their buying from higher-margin goods like electronics to less profitable items like groceries. An extension of that was an overshoot of inventory-stocking activity, which came back to bite the retailers after waning concerns over the COVID-19 pandemic pushed more consumer buying toward services and “experiences” and away from goods.
There’s little that retailers can do about fuel prices. It can be argued they should have expected the pandemic-driven buying spree from March 2020 until the end of 2021 to peter out and that they should have planned their inventory strategies accordingly. Yet demand forecasting has always been a tough nut to crack, and the market is where it is. Inventory build may also have been the result of supply chain delays at the start of the year that resulted in some late deliveries of impaired freight.
Inventory levels as of March, when compared to activity in March 2019 after inventories stabilized following a major pull-forward in 2018 ahead of the Trump administration’s China tariffs, produce a mixed bag of results. Unsurprisingly given the current dearth of motor vehicles, the ratio of vehicle and parts inventories to sales has fallen considerably, according to federal government data analyzed by Michigan State University. Apparel inventories to sales also declined over those periods, as did e-commerce.
However, furniture, home furnishings and appliances, building materials and garden equipment, and a category known as “other general merchandise,” which includes Walmart and Target, among others, reported higher inventory-to-sales ratios, according to government data analyzed by Michigan State.
For the latter sectors, the change has happened fast, according to Jason Miller, logistics professor at MSU’s Eli Broad College of Business. As of November, inventory-to-sales ratios were at pre-COVID levels, Miller said. They have since exploded upward.
Miller said he expects a “cooldown” in retailer order volumes, even if inflation-adjusted sales stay constant, as retailers look to reduce their existing stock. He also expects retailers to launch major discounting programs to expedite the inventory burn. Fewer orders within certain categories bodes ill for carriers whose networks are strongly tied to inbound lanes to retailers’ distribution centers, Miller said.
In a Friday note, Bascome Majors, analyst for Susquehanna Investment Group, said that the spread between year-over-year sales and inventories — a rough barometer of the impact of higher sales on restocking activity — turned positive in spring 2020 and accelerated in favorable territory for four consecutive quarters. Gradually, however, the spread has turned negative, according to Majors. In this year’s first quarter, inventory growth exceeded sales growth by 200 basis points. The recent surge in inflation, Majors wrote, has severely distorted inventory and sales trends.
Freight recession priced in?
For some, high inventory levels are an expected occurrence and should be welcomed. In a Tuesday note, Amit Mehrotra, transport analyst at Deutsche Bank, said rising buffer stock is part of retailers’ desire to have goods available when consumers scan the shelves. Mehrotra added, however, that the data points translate into a likely slowdown in freight flows in the coming months and quarters.
He said that a recession is already priced into most transportation equities, noting that the shares of most trucking companies are higher over the past 30 days while the broader market is about 7% lower.
In an unusual world, Walmart, Target and other retailers are likely to turn to the one area where they’ve traditionally found leverage: their shipping bill. During the quarter, Target (NYSE: TGT) faced freight and transportation costs that were hundreds of millions of dollars above already-elevated expectations, COO John Mulligan said on the company’s Wednesday analyst call. It was essentially the same story at Walmart (NYSE: WMT).
Retailers’ efforts to rein in transportation costs will translate into an unprecedented third and even fourth round of truckload contract negotiations, with users getting more aggressive in their bids to extract greater cost savings, according to industry experts.
The discussions could get contentious. In a LinkedIn post on Friday, Jason Ickert, president of trucking firm Sonwil Logistics, said a large shipper that Ickert wouldn’t identify suggested on a conference call this week with truckload carriers that they were “artificially propping up their rates” above accepted market levels. The shipper “stated clearly” that the carriers were expected to adjust their rates during what would be an “unprecedented and unplanned” third round of request for proposals, Ickert wrote.
A potential shift to intermodal
Pressures to drive down transport expenses will also trigger increased interest in intermodal, whose all-in costs are cheaper relative to contract truckload than at any time since 2018. Intermodal rates have risen at a slower pace than truckload contract rates, a turnabout from the 2019 freight recession when higher intermodal rates allowed over-the-road transport to gain market share.
The shift to intermodal, if it happens, would benefit the railroads and intermodal marketers like J.B. Hunt Transport Services Inc. (NASDAQ: JBHT), Hub Group Inc. (NASDAQ: HUBG) and Schneider Inc. (NASDAQ: SNDR). However, experts caution that intermodal capacity remains constrained, as does warehouse space needed to store the stuff.
“Walmart, Target and other retailers will soak up every drop of intermodal capacity that Hunt, Hub, Schneider and the rails deliver in 2022 and probably in 2023,” said Majors of Susquehanna Investment Group. The elevated level of activity, he said, should occur even if retailers are working through a multiquarter process of de-stocking.
May 20, 2022
Giant container ships are ruining everything
We can blame the Big Boat Era for many of our supply chain headaches
Rachel PremackThursday, May 19, 2022 7 minutes read
Listen to this article 0:00 / 10:53 BeyondWords
I hate big boats, and so should you.
In 2006, Maersk stunned the global shipping community with the introduction of Emma Maersk, a container ship that could carry nearly 15,000 twenty-foot equivalent units. (TEUs translate to about half of a standard forty-foot shipping container.)
Emma Maersk set off an “arms race” with its introduction. Ocean carriers ordered bigger and bigger ships, believing that they could reach economies of scale if they could jam all their shipments into one big boat instead of a few small ones.
Today, we’ve appeared to reach peak Big Boat Era. The Emma Maersk is now wimpy next to 2022’s true megaships. The largest container ships to be delivered this year have a maximum capacity of 24,000 TEUs. (This class of ship is named — I am not making this up — the “Ever Alot.” The Evergreen shipping company, the very same that blocked the Suez Canal last year, ordered the record-breaking ship.)
Each year brings a new, larger-than-ever megaship. The largest ship class of a given year has increased by 50% from 2012 to today, or nearly sixfold from 1981 to today.
Massive container ships have helped wreak serious chaos on global trade. I spoke with four experts this week to learn how megaships are the sneaky reason for much of our ongoing shipping crisis.
Here are the three reasons I hate big boats:
1. They underpin the global shipping oligopoly.
Global shipping is dominated by a few giant firms. But it wasn’t always this way.
In the 1970s, there were so many ocean carriers that no single company controlled the industry. Since then, the market has consolidated into just a few large firms.
Up to 60 of the 100 largest ocean carriers have vanished from the 2000s to today, thanks to a wave of bankruptcies and acquisitions. The top 10 largest ocean carriers in 2000 commanded 51% of the market; today, they dominate 80% of it, according to a White House fact sheet. All of these companies are based outside the U.S.
Smaller ocean carriers began forming alliances with each other in order to compete with larger carriers, said Campbell University professor Sal Mercogliano. Megashippers decided to copy the strategy. Today, the largest ocean carriers are organized into three major container shipping alliances: 2M, The Alliance and Ocean Alliance.
To ship something from, say, China to Los Angeles, you book space on a container ship operated by one of these alliances. Each company shares space on the container ship with other members of the alliance. But these alliances may cancel — or have “blank sailings” — if demand has slumped.
This system has been great for the carriers’ own financial performance. Some claim this consolidation and the alliance system lead to inflated rates.
The Loadstar, a global logistics publication, reported on April 22 that the 2M alliance was blanking at least three Asia-North Europe sailings. New Chinese COVID lockdowns were one reason for the cancellation, but Loadstar also pointed to 2M’s desire to “halt the slide in rates” amid a slump in volume from China. More canceled sailings mean less capacity for cargo, and likely higher rates.
Container ships have been steadily increasing in size since they were created in 1956. But it wasn’t until the 2000s that the Big Boat Era truly began, Mercogliano said. Ocean carriers believed they could reach economies of scale if they built giant ships. The idea was to put all of your cargo on one massive ship instead of two or three smaller ones.
Such megaships were expensive. Emma Maersk, for example, cost an estimated $145 million. But banks were happy to provide the cash, said Capt. John Konrad, CEO of maritime website gCaptain.
Konrad told FreightWaves that ocean carriers are ideal lending targets. If an ocean carrier defaults on its loan, you can simply repossess any of its ships. And, conveniently, many receive hefty subsidies or other support from the governments of the countries they’re based in. Before the financial crisis, banks were happy to provide massive loans to ocean liners to build the megaships of their dreams.
Then 2008 happened. As Mercogliano said, “The freight dried up.”
Big ocean liners were stuck with massive ships and not much to put on them. Many went bankrupt, and the ones that remained formed alliances.
“Firms started to say, ‘Well, these ships are tremendous investments and there’s too much money on the line,’” said University of Vermont professor Richard Sicotte. “‘Let’s share the capacity among different companies, who would ostensibly be our rivals.’”
Through the 2010s, consolidation accelerated. Eight large carriers, including No. 6 largest ocean carrier Hanjin, either went bankrupt or were acquired by other large firms.
The ‘cartel’ no one noticed?
Crucially, this lack of competition didn’t bother anyone through the 2010s, when ocean rates were absurdly low and carriers were barely turning a profit (if at all). Alliances and consolidation were the only way to make the economics work. Bizarrely, companies continued to build even larger megaships, still chasing those economies of scale while sinking them further into debt.
“Because so few of them were left, they formed these alliances to stop underbidding each other,” Mercogliano said. “The U.S., EU, China, everyone signed off on the idea that these are not cartels. They are not trusts. The reason we did it is because we all benefited from it: We love cheap freight. It cost nothing to move goods across the Pacific.”
That all changed in 2021, when carriers were raking in cash.
The Biden administration called these shipping companies a “cartel.” Some importers have recently claimed that ocean carriers have price gouged them and failed to fill their contracts amid sky-high ocean rates. On the other hand, FreightWaves’ own Greg Miller recently argued that competition among ocean liners increased as rates spiked.
Whether or not these carriers are price fixing is hardly something we can settle in today’s newsletter, but what we can agree on is that this consolidation — driven by the inability of individual companies to fill their own megaships — probably wouldn’t be so stark without those big darn ships.
2. They cause port congestion.
The more obvious reason that big ships are helping cause our ongoing supply chain chaos is that they’re literally too big to fit into most ports. Even the Suez Canal struggled to accommodate one of these megaships, causing the crucial global conduit to be clogged for days last year.
Matt Stoller, who is the director of research at the American Economic Liberties Project, told FreightWaves these megaships are great for moving lots of cargo across oceans. The problem is once you get to your destination. Ocean carriers (and the financial institutions that bankroll them) aren’t paying for updated ports, increased dredging, new warehouses, highways and so on to accommodate these ships. That cost is getting off-loaded to the public, Stoller said.
Indeed, as Mercogliano pointed out, the Port Authority of New York and New Jersey spent a whopping $1.7 billion to raise its Bayonne Bridge to accommodate the shipping scions’ new megaships — a cost that was paid by taxpayers, not ocean carriers or shippers.
One complex is remarkably adept at accommodating those ships: the ports of Long Beach and Los Angeles. As a result, it claims 40% of all U.S. seaborne imports. Before the U.S. saw historic imports in 2020 and onward, this system worked well enough. But over the past year, it’s been remarkably backed up, causing unprecedented supply chain crunches as importers struggled to offload their containers and load empty ones back on to make the trip back to Asia.
If these ships were not so giant, we likely wouldn’t see this kind of congestion. Ocean carriers could bring their normal-sized ships to other ports around the U.S. Stoller pushed for more competition among ocean carriers, which would perhaps mean more diverse types of ships.
“We have a lot of ports in this country but we don’t have enough ocean carrier firms,” Stoller said. “The ocean carrier firms’ boats are too big for most ports.”
3. They’re quietly the reason for the ocean carriers’ financial struggles.
By engaging in the megaships “arms race,” ocean carriers really just played themselves.
One 2016 study by business advisory firm AlixPartners pointed out “the irony of megaships.” In 2016 and 2017, global ocean carrier capacity increased by 4.5% and 5.6%, respectively. But demand only upticked by 1% to 3% those years. The panic to build bigger and bigger ships resulted in depressed rates:
Ironically, says the study, the resulting overcapacity — and corresponding negative effect on profits — is in part the result of the industry’s drive in recent years to correct its chronic supply-and-demand imbalance by building these more efficient but mammoth ships.
Months after that report, the No. 6 largest container shipping company went bankrupt. Hanjin, which had ordered more and more megaships before its insolvency, was in $10.5 billion of debt.
By continually flooding the market with capacity, ocean carriers drove down their own shipping rates. That left them with crushing debt and no way to pay it back. COVID and the influx of trade helped many carriers pay off their massive liabilities, but the good times will eventually run out for these companies.
Praise be! The megaship’s choke hold on our oceans appears to be loosening.
Brilliantly, ocean carriers seem to be reading my mind and hastening the end of the Big Boat Era. Of the thousands of container ships in the pipeline for these next few years, the biggest category is ships ranging from 3,000 to 7,999 TEUs, according to a recent report from Clarkson Research.
As for deliveries scheduled or already made from this year to 2025, 53 are ships with a capacity of 17,000 TEUs or larger, compared to 230 ships with a capacity of 12,000 to 16,999 TEUs.
Perhaps I shouldn’t speak so soon. One 2016 article in the Financial Times, covering a Drewry Shipping Consultants study, claimed that if ships reached 24,000 TEUs, the costs of running such a ship would overtake the profit made from being able to hold so many containers. That would mean losses for the ocean carrier.
And yet, dear reader, shipping magnates have gone ahead with the 24,000-TEU ships: At least a dozen may be sailing as you read this. (Or perhaps, they’re waiting outside of the Port of Long Beach to be unloaded.)
Do you have anything to share about containerized ocean shipping? Email the reporter at rpremack@freightwaves.com, and be sure to subscribe to MODES for your weekly supply chain updates.
May 20, 2022
Giant container ships are ruining everything
We can blame the Big Boat Era for many of our supply chain headaches
Rachel PremackThursday, May 19, 2022 7 minutes read
Listen to this article 0:00 / 10:53 BeyondWords
I hate big boats, and so should you.
In 2006, Maersk stunned the global shipping community with the introduction of Emma Maersk, a container ship that could carry nearly 15,000 twenty-foot equivalent units. (TEUs translate to about half of a standard forty-foot shipping container.)
Emma Maersk set off an “arms race” with its introduction. Ocean carriers ordered bigger and bigger ships, believing that they could reach economies of scale if they could jam all their shipments into one big boat instead of a few small ones.
Today, we’ve appeared to reach peak Big Boat Era. The Emma Maersk is now wimpy next to 2022’s true megaships. The largest container ships to be delivered this year have a maximum capacity of 24,000 TEUs. (This class of ship is named — I am not making this up — the “Ever Alot.” The Evergreen shipping company, the very same that blocked the Suez Canal last year, ordered the record-breaking ship.)
Each year brings a new, larger-than-ever megaship. The largest ship class of a given year has increased by 50% from 2012 to today, or nearly sixfold from 1981 to today.
Massive container ships have helped wreak serious chaos on global trade. I spoke with four experts this week to learn how megaships are the sneaky reason for much of our ongoing shipping crisis.
Here are the three reasons I hate big boats:
1. They underpin the global shipping oligopoly.
Global shipping is dominated by a few giant firms. But it wasn’t always this way.
In the 1970s, there were so many ocean carriers that no single company controlled the industry. Since then, the market has consolidated into just a few large firms.
Up to 60 of the 100 largest ocean carriers have vanished from the 2000s to today, thanks to a wave of bankruptcies and acquisitions. The top 10 largest ocean carriers in 2000 commanded 51% of the market; today, they dominate 80% of it, according to a White House fact sheet. All of these companies are based outside the U.S.
Smaller ocean carriers began forming alliances with each other in order to compete with larger carriers, said Campbell University professor Sal Mercogliano. Megashippers decided to copy the strategy. Today, the largest ocean carriers are organized into three major container shipping alliances: 2M, The Alliance and Ocean Alliance.
To ship something from, say, China to Los Angeles, you book space on a container ship operated by one of these alliances. Each company shares space on the container ship with other members of the alliance. But these alliances may cancel — or have “blank sailings” — if demand has slumped.
This system has been great for the carriers’ own financial performance. Some claim this consolidation and the alliance system lead to inflated rates.
The Loadstar, a global logistics publication, reported on April 22 that the 2M alliance was blanking at least three Asia-North Europe sailings. New Chinese COVID lockdowns were one reason for the cancellation, but Loadstar also pointed to 2M’s desire to “halt the slide in rates” amid a slump in volume from China. More canceled sailings mean less capacity for cargo, and likely higher rates.
Container ships have been steadily increasing in size since they were created in 1956. But it wasn’t until the 2000s that the Big Boat Era truly began, Mercogliano said. Ocean carriers believed they could reach economies of scale if they built giant ships. The idea was to put all of your cargo on one massive ship instead of two or three smaller ones.
Such megaships were expensive. Emma Maersk, for example, cost an estimated $145 million. But banks were happy to provide the cash, said Capt. John Konrad, CEO of maritime website gCaptain.
Konrad told FreightWaves that ocean carriers are ideal lending targets. If an ocean carrier defaults on its loan, you can simply repossess any of its ships. And, conveniently, many receive hefty subsidies or other support from the governments of the countries they’re based in. Before the financial crisis, banks were happy to provide massive loans to ocean liners to build the megaships of their dreams.
Then 2008 happened. As Mercogliano said, “The freight dried up.”
Big ocean liners were stuck with massive ships and not much to put on them. Many went bankrupt, and the ones that remained formed alliances.
“Firms started to say, ‘Well, these ships are tremendous investments and there’s too much money on the line,’” said University of Vermont professor Richard Sicotte. “‘Let’s share the capacity among different companies, who would ostensibly be our rivals.’”
Through the 2010s, consolidation accelerated. Eight large carriers, including No. 6 largest ocean carrier Hanjin, either went bankrupt or were acquired by other large firms.
The ‘cartel’ no one noticed?
Crucially, this lack of competition didn’t bother anyone through the 2010s, when ocean rates were absurdly low and carriers were barely turning a profit (if at all). Alliances and consolidation were the only way to make the economics work. Bizarrely, companies continued to build even larger megaships, still chasing those economies of scale while sinking them further into debt.
“Because so few of them were left, they formed these alliances to stop underbidding each other,” Mercogliano said. “The U.S., EU, China, everyone signed off on the idea that these are not cartels. They are not trusts. The reason we did it is because we all benefited from it: We love cheap freight. It cost nothing to move goods across the Pacific.”
That all changed in 2021, when carriers were raking in cash.
The Biden administration called these shipping companies a “cartel.” Some importers have recently claimed that ocean carriers have price gouged them and failed to fill their contracts amid sky-high ocean rates. On the other hand, FreightWaves’ own Greg Miller recently argued that competition among ocean liners increased as rates spiked.
Whether or not these carriers are price fixing is hardly something we can settle in today’s newsletter, but what we can agree on is that this consolidation — driven by the inability of individual companies to fill their own megaships — probably wouldn’t be so stark without those big darn ships.
2. They cause port congestion.
The more obvious reason that big ships are helping cause our ongoing supply chain chaos is that they’re literally too big to fit into most ports. Even the Suez Canal struggled to accommodate one of these megaships, causing the crucial global conduit to be clogged for days last year.
Matt Stoller, who is the director of research at the American Economic Liberties Project, told FreightWaves these megaships are great for moving lots of cargo across oceans. The problem is once you get to your destination. Ocean carriers (and the financial institutions that bankroll them) aren’t paying for updated ports, increased dredging, new warehouses, highways and so on to accommodate these ships. That cost is getting off-loaded to the public, Stoller said.
Indeed, as Mercogliano pointed out, the Port Authority of New York and New Jersey spent a whopping $1.7 billion to raise its Bayonne Bridge to accommodate the shipping scions’ new megaships — a cost that was paid by taxpayers, not ocean carriers or shippers.
One complex is remarkably adept at accommodating those ships: the ports of Long Beach and Los Angeles. As a result, it claims 40% of all U.S. seaborne imports. Before the U.S. saw historic imports in 2020 and onward, this system worked well enough. But over the past year, it’s been remarkably backed up, causing unprecedented supply chain crunches as importers struggled to offload their containers and load empty ones back on to make the trip back to Asia.
If these ships were not so giant, we likely wouldn’t see this kind of congestion. Ocean carriers could bring their normal-sized ships to other ports around the U.S. Stoller pushed for more competition among ocean carriers, which would perhaps mean more diverse types of ships.
“We have a lot of ports in this country but we don’t have enough ocean carrier firms,” Stoller said. “The ocean carrier firms’ boats are too big for most ports.”
3. They’re quietly the reason for the ocean carriers’ financial struggles.
By engaging in the megaships “arms race,” ocean carriers really just played themselves.
One 2016 study by business advisory firm AlixPartners pointed out “the irony of megaships.” In 2016 and 2017, global ocean carrier capacity increased by 4.5% and 5.6%, respectively. But demand only upticked by 1% to 3% those years. The panic to build bigger and bigger ships resulted in depressed rates:
Ironically, says the study, the resulting overcapacity — and corresponding negative effect on profits — is in part the result of the industry’s drive in recent years to correct its chronic supply-and-demand imbalance by building these more efficient but mammoth ships.
Months after that report, the No. 6 largest container shipping company went bankrupt. Hanjin, which had ordered more and more megaships before its insolvency, was in $10.5 billion of debt.
By continually flooding the market with capacity, ocean carriers drove down their own shipping rates. That left them with crushing debt and no way to pay it back. COVID and the influx of trade helped many carriers pay off their massive liabilities, but the good times will eventually run out for these companies.
Praise be! The megaship’s choke hold on our oceans appears to be loosening.
Brilliantly, ocean carriers seem to be reading my mind and hastening the end of the Big Boat Era. Of the thousands of container ships in the pipeline for these next few years, the biggest category is ships ranging from 3,000 to 7,999 TEUs, according to a recent report from Clarkson Research.
As for deliveries scheduled or already made from this year to 2025, 53 are ships with a capacity of 17,000 TEUs or larger, compared to 230 ships with a capacity of 12,000 to 16,999 TEUs.
Perhaps I shouldn’t speak so soon. One 2016 article in the Financial Times, covering a Drewry Shipping Consultants study, claimed that if ships reached 24,000 TEUs, the costs of running such a ship would overtake the profit made from being able to hold so many containers. That would mean losses for the ocean carrier.
And yet, dear reader, shipping magnates have gone ahead with the 24,000-TEU ships: At least a dozen may be sailing as you read this. (Or perhaps, they’re waiting outside of the Port of Long Beach to be unloaded.)
Do you have anything to share about containerized ocean shipping? Email the reporter at rpremack@freightwaves.com, and be sure to subscribe to MODES for your weekly supply chain updates.
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