Odd Lots - How Gigantic Ships Are Creating Global Supply Chain Havoc

Episode Date: March 31, 2021

The Ever Given has been freed from the Suez Canal. But the whole situation was indicative of a broader issue in global supply chains: increasingly large ships are contributing to logistical bottlenecks. This was true long before the latest issue on the Suez. On the latest episode of Odd Lots, we speak with economist and historian Marc Levinson, the author of the book The Box, to discuss the rise of extremely large ships and the stress they place on ports, canals, and other parts of the global trading infrastructure.See omnystudio.com/listener for privacy information.

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That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, I know it's early morning time in Hong Kong where you are right now, but did you hear the big news while you were sleeping? Well, I'm trying to think. I guess I didn't. What was the big news while I was sleeping? Maybe you saw it before you went to bed, just that they freed the ship. Oh, yeah. Maybe that happened before you fell asleep. It did. That happened during the working day in Asia. They got it floating and then they got it, I guess, more floating or more free. Yeah, it's good news for global supply chains.

Global factories, retail outlets, everyone breathing a big side of relief as the ever-given ship that was stuck in the Suez for six days. As of right now, we're recording this March 29th, New York time, 7 p.m. New York Times. has been a it's been freed and it's floating again. The thing that I really loved about, you know, this very special week where we were all focused on this one container ship that was stuck in a canal was that, first of all, everyone suddenly took an interest in global shipping and transport and global trade, which is something that usually people don't necessarily think of that much, or at least they don't think about how stuff actually gets to them. People think about global trade. but not necessarily the infrastructure and the industry that kind of underpins it.

So last week was a really good one for everyone to sort of sit back and consider how globalization actually works and how the flow of all these goods is actually affected. Absolutely. Also, like everyone becomes like a container ship expert like overnight. But the good news is like you and I are like kind of experts because we've actually talked to one before. Hey, I have read two books on shipping, so, you know, I feel like I'm, I'm firmly up there as an expert. I'm joking, obviously, but. Fair enough. But I am, you know, the next best thing, because we did an episode back in January where we talked about container ships. And so that turned out to be very, very auspicious because then I knew like two or three facts that I was able to, like, put in tweets and stuff like that.

Yeah. Which is, you know, more than I would have otherwise been able to. Well, look, it was a great episode, and there are multiple issues affecting shipping at the moment. So we have the gridlock in traffic because of the coronavirus crisis and also the sort of changes in the direction of global trade. So, you know, stuff getting really snarled between China and the U.S. Because lots of people in America are just buying more and more things during the pandemic. But then we also have a separate issue, which is that ships are so freaking big. A, they get stuck in canals, and B, they also contribute to that global snarling of shipping traffic instead of actually alleviating it.

Exactly right. So back in January, we talked about the high cost of shipping these days. We spoke with Mark Levinson, who is the author of The Box, famous book, The Box, how the shipping container made the world smaller and the world economy bigger. and he said something on that episode, which was very auspicious or very, very timely, which was that a big part of the problem was that ships are just massive these days. And that creates its own problems for the logistical system of the globe. And then, of course, one of the biggest ships in the world ended up jamming the Suez. And that was sort of a freak accident. There was a sandstorm, some really great reporting on exactly how it went down. And nonetheless, it was sort of an example of what he was talking about, which is that these gigantic ships are bigger and not, you know, the infrastructure for shipping is not necessarily optimized for ships these large.

Yeah, I think that's exactly right. So I'm very excited. We have Mark back on the podcast. Everyone loved the last one. And this time we're going to focus just on this question, the problem with really big ships. So, Mark, thank you for coming back on. odd lot. Hey, Joe, glad to be with you. Tracy, good to be with you tonight. So the Suez is free again. The Evergiven has been floated. It went down the canal. Nonetheless, as you pointed

out back in January, large ships are problems. So let's just start with the question of when we talk about a large ship, I mean, all shipping containers ships are large, but when we talk about a large ship, what are we really talking about here? Well, shipping guys use the term TEU. TEU means 20 foot equivalent units.

The size container you see on the back of the truck when you're driving down a highway is typically about 40 feet.

So if you take the number of TEUs and divide by two, that tells you how many truck loads are on the ship.

So we're talking here about a vessel that was roughly 20,000 TEUs. In other words, it was capable of holding as much cargo as roughly 10,000 over-the-road trucks.

Wow. This is not the biggest vessel out there on the seas. The biggest that are afloat now in the container ship line can hold 24,000 T-EUs or as much cargo as 12,000 trucks. So that's a lot of freight on a single vessel. So talk to us exactly about the economics driving the shift towards bigger ships. So, you know, it's not like people woke up one day and said they're going to build big ships for the sake of it, or at least maybe some people did, but not everyone. There were supposed to be efficiencies that were targeted, right? The first modern container ship voyage was back in 1956.

And the ship that made that trip, it was called the IDLX, and it carried 58 containers. go from 58 to 12,000, and you can see the sort of growth that's gone on in this industry. Most of that time, ships got bigger small step by small step. Okay, the next generation added a few hundred more containers at best. And so ships were getting steadily, larger, but moderately so. And then in 2003, the shipline Merisk, which is based in Denmark, as I think everyone knows by now, decided, A, that it was in danger of running out of capacity, so it needed some big ships, and B, that it really wanted to get a jump on everybody else by having much bigger ships.

And so it commissioned a series of seven vessels. These ships, it turned out, were 60% larger than any other ships that were on the ocean at that point. That's not what had been advertised, but that's what turned out to be the case. So they were just hugely large compared to anything else that was at sea or in the order books at this point in time. Those Mersk ships, the first was called Emma Mersk, came online starting in 2006. these very large ships, Emma Mersk was capable of carrying about 15,000 TEUs, in other words, 7,500 truck-sized containers. And assuming that she was full, she could do that much, much more cheaply than any of the other ships being used in the industry. And so the competitors looked at this and said, we got to do something to.

we've got to build ships at least as big as the MMRSk or we're going to have higher costs. And yet they were faced with a dilemma, which was if they built higher bigger ships and everybody else built bigger ships, then there was going to be a whole lot of capacity coming on to the market. And that was going to cause a problem too. Most of the ship lines ended up building bigger ships. And you started to see around 2010. You started to see ships of 17, 18,000 T-EUs going on.

And now they've been up into the high teens and then into the 20s, such as the one that was just stranded in the Suez Canal. And now we're talking 24,000 TUs. Do they save money? Well, they save money on the ocean leg of the transport if the ship is. full or close to full. For most of the past decade, the ship lines had this problem that there wasn't all that much cargo. They had really overestimated the growth in international trade. And so they were running these enormous ships around the oceans half empty. And that was a recipe for losing a lot of money. Many ship lines went bust. Others were forced to merge.

And the pandemic kind of bailed out the shipping industry. When Americans couldn't take vacation, and Europeans couldn't take vacations. They couldn't go out to the restaurant. They couldn't go to a concert, couldn't go to the theater. They started spending their money on stuff. And all of a sudden, the ships got full of factories in Asia revved up, and all this cargo was filling these vessels, really, for the first time. Today's show is brought to you by Vanguard.

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All investing is subject to risk vanguard marketing corporation distributor. So going back to the dawn of the really big ships here. I mean, it's interesting, this sort of, I don't know, maybe it's a game theory because everyone wants to have the cheapest shipping. And so, okay, everyone feels they need to compete and larger and larger, more efficient ships. On the other hand, that creates all this inventory and a problem. But I guess like, was it a problem? Was the thinking back at like, say, like, 2005, 2006 that like, well, globalization just keeps getting bigger. World trade keeps growing.

There's this big commodities boom going on. China is buying stuff voraciously. So essentially, yeah, it creates some risks. But ultimately, at least back then, it looked like volume would just sort of keep growing forever. And that would take care of any of the capacity buildup. Yes, absolutely, Joe. The expectation was that international trade would continue to boom from the late 1980s until the 2007, 2008. International trade grew more than twice as fast as the world economy.

And the expectation was that that was going to continue and that there was going to be a need for shipping capacity to handle all of these exports from Asia that were expected to come. And of course, after the financial crisis, trade did not pick up as it always had after a session. So there were a lot of half-empty ships sailing around. So one thing I've wondered is if we assume the counterfactual, like let's say that global trade had boomed, would the mega ships be more efficient or would there still be issues with, for instance, their flexibility and their ability? and their ability to adapt to changing trade routes, changing demand, and things like that? If world trade had continued to boom, there would be a couple of things that would be different now. One would be that there would not have been a ton of container shipping companies going out of business. So there would be a lot more competition in the industry.

Given the number of firms that have gone out of business and alliances between the surviving shipwines, there are really only three groups that dominate this industry now. So it's somewhat of an oligopoly. And that would have been less likely to happen had world trade remained robust. The other thing would be that ship lines would have made some money and they might have behaved quite differently from the way that they ended up behaving. But the land side problems would not have gone away. What you're pointing to is the fact that the ship lines really ordered these huge vessels because they thought they were good for themselves. They didn't really pay much attention at all to the whole goods transport system. They were not asking the question, well, what happens when these show up at the container terminal?

Is the terminal able to handle them? Will the railroads be able to get enough trains in and out? Will truckers be able to handle all these boxes? will the harbors be deep enough that we can sail these ships in in the first place? Those sorts of questions really didn't get enough consideration. And I think that even had trade remained more robust than it proved to be, these problems with the freight transport system would have developed because the container ship line said, here, we've got this thing which is good for us, you guys, you ports, you railroads, you truckers, you guys deal with us.

So this was what you brought up in our last conversation, the sort of bottlenecks that have emerged because of the size of the ships. So let's go into that a little bit further. A, walk through specifically how the size of the ships are, I don't know if incompatible is the right word, but problematic for the ports and the sort of land-based shipping movement. And why didn't the shipping companies foresee this sort of like seemingly obvious? thing. Like, if you have a plug, you want to make sure it fits in the outlet. Why was this sort of not on their radar? Well, I'll answer the second half of that first. Okay, sure. The shipping lines pretty much took the attitude that ports, it's your problem to deal with this. Railroads, we're bringing you the cargo. You figure out how to get it out of the port. It was their attitude that they're in the shipping business, and everybody else who's part of the logistics system ought to just deal with what's best for them. So that's where, where that went. I think in terms of the challenges posed by these very large ships, let me just

give you a couple of examples. Sure. These mega ships, these ones that hold 20,000, 22,000, 24,000 TUs, they are not longer than the ships that preceded them. To handle all this cargo, they're wider. Ships have grown wider. Well, things. Think about how the cargo is typically moved on and off a container ship. The container ship pulls up to a wharf. There are cranes alongside the vessel, and each of these cranes lifts containers off the vessel, puts them onto a little carrier that's on the ground. The carrier takes the container away, and another carrier brings an outbound container that goes onto the ship.

Well, since the ships are not longer than their predecessors, there's no room for additional cranes alongside the ship. But since the ships are wider, it takes longer each time a crane reaches out with a container and takes the container over to the far side of the ship. So it takes an additional few seconds to lift the average container off the ship, and it takes an additional few seconds to put the average container onto the ship. That may not sound like much, but you're multiplying these few seconds times thousands upon thousands of containers, and all of a sudden, you're delaying the vessel. It's stuck in port for longer than it wants to be stuck in port because they can't get the ship discharged and reloaded in time. So the cargo is delayed. There have been a numerous

us examples where ships left China late, late, late. At some points, 30 or 35 percent of the vessels leaving China have been behind schedule. There have been sailings canceled because a ship couldn't complete its sailing in time to do the next sailing. And these are a result of the difficulty of loading the ships and also of the fact that these vessels were built to steam slowly. In previous iterations, container ships were able to travel somewhat faster. It was decided by the folks who designed these mega ships that they should steam slowly, in part because that saves money. They burn less fuel, certainly less fuel per container. And second, they produce less greenhouse gas emissions because the greenhouse gas emissions come from burning fuel.

So these slow vessels are environmentally better and they don't waste energy. That's all well and good. But what it means is that once they fall behind schedule, they can't catch up again. They can't go faster to make up the time that perhaps was lost in port. So there are a couple of examples of how these very large ships really have exacerbated the problems in supply chains. They have a lot of trouble just delivering the goods on time. So you mentioned this idea of the ship's sketch.

getting wider, and I suppose that's our cue to talk about the canal. But, I mean, talk to us about how going down the Suez Canal usually works and whether or not that process has become more difficult as ships got larger. I don't want to pretend that I'm an expert on the hydrology of the Suez Canal because I'm most definitely not here. The Suez Canal was dredged to make it deeper for these very large ships and for other very large ships, just as many harbors have been dredged to enable these very large ships to go through. The vessel that was grounded in the Suez Canal they ever given required 17.5 meters of water, just about 52 feet between the water line and the bottom of the vessel. So that's a lot of water. The ship needs a very deep channel

to steam in. And if the ship gets forced out of that channel for whatever reason, there's a lot of potential for bad things to happen. That's true in a harbor. That's also true in a canal. The channel is not that wide, and sometimes events occur. You do have winds that can blow up against the vessel. remember a ship like this is a quarter mile long. It has nine or ten layers of containers stacked on its deck in addition to the containers below deck. So 10 layers of containers, each container say it's eight feet high, that's 80 feet above the deck and a quarter mile long and it's like a wall. So if there's a really strong gust of wind, it's one more source of pressure on the ship, it can push the ship. And container ships have had problems with this

in the past. I think the size makes the situation a little bit worse. This particular container ship was actually involved in an accident in Hamburg, Germany a few years ago. The ship's only three years old, so a few years ago means two, I believe, in 2019, when again the ship was blown a little bit and it ran up against a ferry boat. and accidents happen sometimes, but the large size of a vessel of this magnitude, and the large amount of containers stacked on the deck, I think, makes perhaps for a smaller margin of error. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, cleanup,

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Visit xyz storage.ca. People who needs space. Zooming back out to the sort of global situation that we have right now, and it's ongoing, and there's all these delays in every retailer last quarter talked about that. How does, you know, this phenomenon of super large ships creating tension at the ports, obviously, it's been going on for a while. But how in this current environment are they, you know, this sort of mismatch between the capabilities of the ports, the transportation system, and the size of the ships? How is that exacerbating the current issues that we're seeing with trade all over the place? Well, the problems in the ports, I think, tend to slow down.

Once the ship gets there, it has to unload, right? Has to discharge its cargo. We've certainly had some complaints in the United States that these ships were not waiting to be fully loaded. They wanted to get back to China and they wanted to take empty containers with them back to China, just so there could be more Chinese exports. There have been complaints from the U.S. farm sector that farm goods that normally move in containers, haven't been accommodated. Typically, the westbound freight on the Pacific moves at a much lower rate because most of the cargo is coming east from Asia to the United States. And so these guys are looking to send containers of soybeans or of meat products or other things to Asia.

And they're complaining they can't get enough containers because as a result of the mess in the ports, the ships just want to get out of there. and won't wait for the outbound containers. So that is one example of the sorts of problems that people are seeing. When you have an event-like happened in the Suez Canal, well, some vessels decided to go around Africa to get between Asia and Europe. Well, that's a longer trip. Okay, that adds two to three weeks to the chip trip between Asia and northern Europe. if each trip is going to take a longer period of time, that means the vessel can't make as many trips over the course of a year, which means it can't carry as much cargo over the course of a year.

And so you can see that there's going to be even more pressure for a while at least on the supply chain. So we talked a little bit about this in the intro, but one of the great things about this whole shipping drama has been that people are talking about these transport issues in a way. that they don't usually talk about. And you make the point in your book that the whole field of economics kind of persistently underestimates or ignores the costs embedded in transport, like the idea that there might actually be frictions. When people talk about competitive advantage, they usually talk about frictionless transactions. And I think you even cite the old example of, you know, England versus Portugal, the economist who came up with. with that never actually took into account transport costs when they said that, you know,

it might be cheaper for England to do this and for Portugal to do this, then they can just trade with each other. Do you think the situation in global shipping, the fact that we were all absolutely fascinated by the ever given for the past week, do you think that's going to change that at all? Are people going to be more focused on the frictions caused by global transport or involved in global transport because of these issues? Absolutely. And that's a wonderful opportunity to give a shout out to my latest book, which is called Outside the Box. It talks about these problems with supply chains. And it explains why businesses that built these long supply chains systematically underestimated the risk. They made decisions about where to produce things, typically in Asia, by looking at production costs and transport costs. And they did pencil in the cost if, say, the goods don't arrive on time. Well, that can be a very significant cost. And when that happens, then all of the money that you saved on production may not turn out to be

such a great deal. So I think we've seen a lot of companies now begin to reassess whether these supply chains make sense constructed as the way they have been. You've seen in the United States, which is the place where we've got the best data on this, you've seen a lot of companies keep more inventory than they used to, right? It used to be that companies didn't want inventory. Everything was going to be just in time. Inventory is wasteful. Well, inventory is insurance, right?

Inventory gives you something to sell in case your next delivery doesn't make it on time. So even though there's a cost, firms have been keeping more inventory. Firms have been looking at multiple production locations rather than having everything, made in some big factory. Yes, the big factory might give you great economies of scale, but if there happens to be a fire at the factory or an earthquake or if there's a transport disruption en route, all those economies of scale aren't going to help. And so you really need an alternative source of production. And firms have been looking at these things. They've been going for redundancy. You know, there's a lot of interest now in resilience. It's actually a hard thing

for a manufacturer to do. But we've been seeing a lot of attention to it, and that was even before the Evergiven was grounded in the Suez Canal. Mark, that was great. That was exactly, you filled in a bunch of gaps for us and sort of our understanding of this and really appreciate you coming back on Adlau. Well, it's been delightful to be with you.

Thank you very much for having me. Thanks so much, Mark. Thanks, Mark. That was great. I found that very helpful, Tracy. I mean, I sort of had some sense that the size of the ships was creating specific problems at the port. But here's a good example about like the cranes. You can't put more cranes because it's not any longer, but that they have to reach further into the ship.

But that takes a few more seconds and that adds up. Like that really started to help like crystallize the issue for me. Yeah. The great thing about talking to Mark is he brings this fantastic economics perspective to global shipping, which I think, you know, not everyone does. But also the point about how building these massive ships maybe could have resulted in more efficiencies at sea had global trade actually picked up.

But the bottleneck was always going to be on the port side when you're loading and unloading stuff. And the irony there, of course, is that the whole reason container shipping was invented was to try to minimize costs on the port side. So you used to have, you know, hundreds of laborers who would be unloading and loading these boxes by hand and they'd all be sort of individually wrapped or everything would be kind of packaged differently and it was really labor

intensive, very, very expensive. So they moved to the standardized container shipping and that was supposed to lead to more efficiencies, which it did. But then of course, the shipping companies kind of got ahead of themselves, stacked as many containers as possible and eventually the economy of scale just kind of goes away because the ports aren't set up to handle it. Absolutely. It's super interesting to think about like the sort of the different legs of the system and how economies of scale in one part create dis-economies of scale elsewhere in the system. And it also, again, this really helped me understand the situation. So like, there is so much inbound demand for U.S. for Chinese goods coming to the U.S. Like we know.

this. It's voracious. There is some export activity. Obviously, as he mentioned, there's soybeans and a few other agricultural goods, so it's not entirely one-directional. But in this situation, in which there is a pretty big opportunity cost of not racing back to China and getting more goods. And you have the delays already at the ports because there's a bunch of ships and because of the logistical issues, this idea, like, nobody wants to sit around and wait for all the soybeans to, like, fill up maybe a quarter. or a third full vessel. So everyone just races back. A very clear example of how messed up the whole situation is right now. Yeah, absolutely. And I guess it gets back to this idea that no one expected a global pandemic in this way. And people hadn't really been building supply chains that would be robust enough to take it into account, which is kind of understandable. But again, you wonder how much that's going to change. Absolutely. We'll see. We'll get them back on in a couple of years. Yes. Okay, let's leave it there. Let's leave it there.

This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at The Stallword. And check out our guest, Mark Levinson's book, The Box, and the sequel, Outside the Box. And be sure to follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Prun. Francesca today, and check out all of our podcasts at Bloomberg, onto the handle, add podcasts. Thank you for listening. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra.

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