Shipping a container of hazardous chemicals from Shanghai to Chicago used to cost John Logue about $6,600. Now, the Royale Group chief executive pays as much as $29,000 — and that’s if he is lucky enough to find space on one of the much-sought-after cargo vessels plying the Pacific trade routes.
Logue’s oceangoing headaches are mirrored on land, where Royale Group shipping containers routinely get stuck in rail yard logjams that lead to costly and unpredictable storage charges. Earlier this month, BNSF, one of the nation’s largest railroads, increased its fees in Los Angeles and Chicago, adding to Logue’s woes.
The Royale Group’s double-barreled freight troubles, which hamper both existing operations and Logue’s efforts to return manufacturing to the United States, illustrate the market power of the handful of shipping companies and railroads that bring goods from distant factories to American homes.
“We’re at their mercy,” Logue said. “Sometimes, we just throw up our hands. … It’s lunacy.”
On Friday, President Biden called on regulators to crack down on consolidation in the shipping and rail industries, as part of a broad executive order promoting competition throughout the U.S. economy. Freight may seem a prosaic topic for presidential attention. But the smooth movement of goods has perhaps never been more essential, amid the explosion of e-commerce that accompanied the pandemic. Transport bottlenecks in June helped fuel the highest inflation in 13 years, rattling Americans with sticker shock on goods such as used cars, airfare and bacon.
Indeed, some regulators and executives warn that abnormally high shipping costs and related supply chain disruptions could lead to scattered shortages this year as the U.S. economy heals. Imports of products including tires, food and water purification chemicals could be affected, according to Carl Bentzel, a commissioner of the Federal Maritime Commission.
“I am extremely concerned now about the economic impact caused by the current situation. This could be the first time the public sees the impact of maritime shipping disruption since World War II,” he said.
But global cargo carriers and U.S. railroads insist that the administration has misdiagnosed the supply ills. The nation’s ports, terminals, trucking fleets and rail lines are being overwhelmed by a pandemic-related import surge, not strangled by monopolies, they said.
Either way, with industry groups opposing new regulations, an early untangling of snarled U.S. supply chains is unlikely.
The White House officials who drafted Biden’s order say high freight costs, resulting from a lack of competition, are an economywide drag. Nine cargo carriers, organized in three shipping alliances, control more than 80 percent of the global market for oceangoing vessels. Likewise, there are just seven major railroads, down from 33 four decades ago, according to the White House.
“It’s like interest rates or oil,” said Tim Wu, special assistant to the president for technology and competition policy. “It gets less attention, but for consumers and American exporters, the price of moving goods is very important.”
Distinguishing between the effects of industry consolidation and the pandemic, however, is difficult. Importers and exporters have complained for more than a year about soaring freight charges, amid a shortage of shipping containers, truck chassis, drivers and dockworkers.
Biden’s aides acknowledge that the pandemic is responsible for much of the disruption. But they say the lack of competition enabled cargo carriers and railroads to exploit the pandemic by driving prices to historic highs.
Industry officials and some independent analysts disagree. Drafting regulations to address the current situation risks unintended consequences once the economy regains its footing, according to Lars Jensen, CEO of Vespucci Maritime, in Copenhagen.
“The current state of affairs is extreme and is entirely driven by the ripple effects of the pandemic. It tells us absolutely nothing about the general structure of the industry at all,” he said.
Over the past four years, eight of the top 20 shipping lines disappeared; nine survivors sought to escape a history of meager profits by organizing themselves into three rival alliances.
The shipping consortia operate akin to airline industry pacts, with carriers alternately cooperating and competing. Members of an alliance share space among their vessels, even while operating from some of the same ports.
The arrangement has paid off for the major carriers. Maersk reported a record $2.7 billion profit for the first three months of this year, up from $185 million in the same period last year.
As demand cratered in the pandemic’s early months, the alliances quickly canceled more than 400 sailings, according to S&P Global. That avoided ruinous losses from a price collapse but led to exporters’ complaints of price gouging.
Then demand for cargo space unexpectedly surged, as Americans bought laptops, furniture and electronics for the work-from-home era.
Over the past year, the cost of shipping a container from China to a U.S. West Coast port has risen by more than 156 percent, reaching historic highs, according to the Freightos index.
Yet over the long term, there is little sign of soaring prices. During the first three years of the alliance era, that cost increased by just 14 percent. Prices from China to Europe over the same period actually declined slightly, according to Freightos.
“Freight costs didn’t matter,” Jensen said.
They do now.
At Royale Group, based in Bear, Del., Logue said he spends twice as much time managing his supply chain as he did only a few years ago. On Monday, a carrier abruptly canceled a shipment, leaving him scrambling.
Many of Royale’s cargoes involve hazardous chemicals for the pharmaceutical, automotive and electronics industries, which require special handling. So carriers often opt to avoid the hassle if they can transport a routine product instead, Logue said.
“The three major alliances have a lot more bargaining power and control than they ever have before,” said Matt Godden, CEO of Seattle-based Centerline Logistics, which provides refueling services.
After years of moving production offshore, Logue has been trying to bring work back to the United States. Congested ports, crowded rail yards and a shortage of truck drivers have him improvising.
But he blames a host of factors for the current freight difficulties, including outdated port infrastructure and technology, tariffs, tensions between the United States and China, and the pandemic. Lack of competition “is maybe part of the problem,” Logue said.
American consumers could feel the impact of stressed supply lines.
La-Z-Boy this month blamed “shipping container issues” for delivery delays and shortages of electrical components for some of its more expensive and profitable power recliners. Likewise, KushCo Holdings, which produces packaging for cannabis products, told investors that rising freight costs were a “drag on” profits, and Constellation Brands said it was having trouble keeping retailers stocked with its Ruffino and Kim Crawford wines.
Clothing manufacturer Levi Strauss is circumventing the worst backlogs, including at the ports of Los Angeles and Long Beach, by shipping more goods by air and rerouting ocean cargoes to the East Coast, Harmit Singh, Levi Strauss’s chief financial officer, told analysts on a recent earnings call.
“A lot of people are talking about not being able to get containers, not being able to get onto a ship,” Singh said. “[Our] team has done an extraordinary job, on getting us guaranteed space — guaranteed pricing, as well, which is helping us to control our costs. So this is a big challenge for the industry.”
In calling for independent regulators to act, the president may be pushing on an open door.
Martin Oberman, chairman of the Surface Transportation Board, which governs the rail industry, said the president’s call for pro-competition regulation dovetailed with his long-standing concerns.
“While consolidation may be beneficial under certain circumstances, it has also created the potential for monopolistic pricing and reductions in service to captive rail customers,” Oberman said.
Freight rail rates have risen by about one-third since 2003, though the industry notes that they are down by 44 percent since deregulation in 1981.
At the Federal Maritime Commission, which oversees ocean shipping, officials have the authority to challenge carrier actions that “unreasonably” raise prices or reduce service. Even before the president’s order, the agency had begun investigating industry practices regarding extra charges for shipping containers that are not promptly removed from their facilities, known as detention and demurrage fees.
The White House last week labeled those charges “exorbitant” and invited regulators to respond.
The charges are controversial because customers like Logue often are billed thousands of dollars by shipping companies or railroads for not claiming their shipments quickly enough, even when they are unable to do so because of congestion or a lack of trucking services.
“You’ve got to be a real Houdini to get stuff out of one of these rail yards,” he said.
The charges can add up. Norfolk Southern Corp. billed customers for more than $93 million in demurrage fees in the first quarter, up from $61 million in the same period last year, according to the STB, which has required railroads to report such data since 2018.
At Royale Group, Logue said he hopes Biden’s initiative will help. But the ongoing import tsunami coupled with constricted freight channels has him pessimistic.
“When you’ve limited the supply of something, the natural tendency is that the price is going to go up,” he said. “I don’t think it’s going to come back down.”