Chinese factories won’t build enough boxes to save US shippers
February 18, 2021
(America Shipper) There are still not enough containers in the right places to carry the world’s cargoes. The hope was that Chinese container factories would shift into ultra-high gear — that the industry would build its way out of the equipment crisis.
It hasn’t happened.
In fact, Chinese factories are intentionally not going into their highest gear, according to Tim Page, interim president and CEO of container-equipment lessor CAI International (NYSE: CAI). Instead, they are managing output to keep prices high.
The ‘building spree’ solution
“What’s happening now [with equipment shortages] is exactly the same scenario we saw in 2010 after the financial crisis,” explained Lars Jensen of SeaIntelligence Consulting during a webinar in late January.
“If you look at 2010, they went on a building spree,” recalled Jensen. “It took about three months from when the problem arose to when it was resolved. If we put that in the context we have now, this should be resolved by Chinese New Year.”
It is now Chinese New Year. During the quarterly calls of container-equipment lessors CAI and Triton International (NYSE: TRTN) on Tuesday and Textainer (NYSE: TGH) on Wednesday, executives confirmed that demand for new containers is as high as ever.
“The shipping lines are scrambling to grow the size of their container fleets because they’re being limited on volumes right now because of lack of equipment,” said Triton CEO Brian Sondey. “And we’ve been scrambling to place orders [with Chinese factories]. It has been a race between our ability to order and the demand from our customers.”
In January, Jensen emphasized that port congestion was the wild card that would “delay things somewhat.”
Congestion is definitely still delaying things. As of Wednesday, there were still 35 container ships at anchor off the shores of Los Angeles and Long Beach — near record highs.
But it’s not just congestion. Chinese factories are yet another wild card.
Factories ‘managing capacity’
Three Chinese companies — CIMC, DFIC and CXIC — produce about 80% of the world’s containers. Drewry Container Maritime Research estimates that global production will increase 6.5% this year.
Meanwhile, the price of a new container has risen from $1,800 per cost equivalent unit (CEU, a measure of the value of a container as a multiple of a 20-foot dry cargo unit) in early 2020 to $2,500 per CEU in late 2020 to $3,500 per CEU or higher today. Factories are sold out until July.
John O’Callaghan, head of global operations at Triton, called the current rate “the highest I can remember.”
According to CAI’s Page, “The manufacturers seem to have little or no interest in accelerating container production. They’re more focused on maintaining high container prices. So, I think you are not going to see a flooding of the market with containers. You’re going to see a very measured response by the manufacturers to control the tight supply-demand balance that exists today.
“The factories are behaving differently than they have in the past,” Page maintained. “They don’t have any interest in increasing production at the expense of price. I think it’s a new dynamic in our industry. And I think it’s going to stick.”
He implied that container factories could increase production further, but aren’t. “I wouldn’t say that they can’t increase production. I would say that they are managing their capacity to maximize revenue and profitability.”
According to Textainer CEO Olivier Ghesquiere, “Although manufacturers have increased production, additional capacity has been added very progressively and has been further constrained by shortages of certain components.”
Asked whether container prices could go higher still, Page replied, “The Chinese manufacturers are controlling what production levels are and what container prices are. And ultimately, if a shipping company has freight to move from China or someplace in Asia to Europe or the United States and they need containers to do it and they don’t have those containers, that’s a recipe for rising container costs.”
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