Odd Lots - Why the Cost of Shipping Goods From China Is Suddenly Soaring

Episode Date: January 18, 2021

The coronavirus crisis snarled global shipping in early 2020 as borders were closed, but lots of people expected it to improve as vessels returned to position. Instead, more than a year later, the shipping crisis has only gotten worse and standard container rates on some transpacific routes have more than quadrupled, leading to yet another headwind for economies in the midst of fragile recoveries and global trade. On this episode, we speak to economist, historian, and author Marc Levinson. He talks about where all this transport disruption is coming from, what it means for global trade, and whether it will lead to a big rethink of the shipping industry.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask. Alexa, play the Odd Lots podcast on Amazon Music. And welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. So, Joe, I have something to admit to you. Oh, boy. Here we go. Okay. I'm worried you're going to think less of me.

There's no chance of that. Just tell me, Tracy. So one of my long-held ambitions in life is to travel via container ship, preferably, you know, a long journey across the Pacific. Yeah. I think I know someone who did that. I think I know someone who went from Japan to the U.S. as a traveler on a industrial container ship. Yeah. It's something you can do, or I should say you were able to do it before the global past. pandemic. I'm sure it's not allowed right now for many reasons. Obviously, you have restrictions on travel. You have border restrictions. But the other big reason is that global shipping is kind of just a mess at the moment. Right. And that's related to the pandemic and the supply chain disruptions. And of course, they've been happening for about a year now. But they don't seem to be abating,

like the general disruptions that we've seen. I mean, the world seems to be getting by. and maybe we haven't had as severe shortages of things as we might have feared last spring. But there are still all kinds of reports about how sort of messed up everything. Yeah. And I think people were expecting it to get better. So as you mentioned, when the pandemic first started, we saw a bunch of countries suddenly closed their borders. And this meant that ships that were supposed to head somewhere and then head somewhere else were all sort of knocked out of place. So it takes a long time to get them back into position and to get them on the routes that they're supposed to be going.

But now what we're seeing is that even, you know, almost a year on from the start of the pandemic, at least in China, this problem seems to be getting worse. And I'm looking at a headline on Bloomberg right now saying that surging shipping rates are a new headwind for the global economy. So it's gotten so bad that we could actually feel. and outsized economic impact from all of this. Yeah, you know, it's funny, like, when the crisis first hit, there was a lot of talk here in the U.S. about, oh, are we going to start reshoring more of our manufacturing? Are we going to buy less from China over time?

And maybe that'll happen at some point. Who knows? But in the meantime, people are spending a lot on e-commerce. They're buying things. They're buying things from Walmart.com and Amazon.com. and a lot of those things come from China. So there is an extraordinary amount of demand for imports shipped from China. I don't think there's as much going in the other direction.

And I think that's sort of like part of the story is that although there has been this revival of economic activity, it's not the same patterns as it was before. And so this sort of like equilibrium stability of global supply lines has not been established yet. No, that's exactly right. I think I saw some anecdote about how it's cheaper to send a container from the U.S. to China empty. So you ship something over to the U.S., a full container. But then when it gets there, you just send it back empty because you can make more money by making more trips versus actually spending the time to load it up in the U.S. So it's stuff like that. Well, anyway, that's a good one. That's a good one. On this podcast, we're going to hit all. all of these big themes. So we're going to hit how shipping actually works, what's going on now. And, you know, when we say stuff like the rate on a standard container has quadrupled versus a year ago, what do we actually mean by a standard container? And how did we get into a place where shipping and global trade was standardized in this way? So we're going to talk to someone who has actually fulfilled my ambition in life, someone who has traveled on container ship. We're going to talk to

Mark Levinson. He's an economist and a historian and the author of a really good book that I read quite a few years ago, but it's called The Box, How the Shipping Container made the World Smaller and the World Economy Bigger. He also has a new book called Outside the Box, How Globalization changed from moving stuff to spreading ideas. So the perfect person to talk about this. Can't wait. All right. Mark, welcome to OddLops. Good to be with you, Tracy. So it's nice to meet someone who shares my affinity for container shipping.

Could you maybe explain how you got into this as an area of interest? Because I think, I mean, I'm pretty sure that your book is, well, one of the only ones that I know of, certainly, that deals in the history of container shipping. Sure. I'm not a shipping person. I'm a trade person. I'm very interested in international economics and international trade. And my observation was that economists paid a whole lot of attention to things that governments did as being responsible for the growth in trade. For example, cutting tariffs.

And that they really hadn't paid much attention to these changes in transport costs and the greater reliability that came with container shipping. So I decided to take a look at that, and that's really where my book The Box came from, was really trying to understand how this technology developed and how it then affected the international economy. My argument that globalization, as we know it today, wouldn't have been possible without the container, originally struck a lot of people as strange, but I think many people have come around to understand that that's true. What is the core thesis of the book that this standardized container that can go on ships and rail is so crucial to globalization as we know it? Well, the core thesis is that the shipping container made such a huge difference in not only the cost of shipping, but in the reliability of shipping, that it led businesses to adopt new strategies. The containerization made what we think of today as long-distance value chains possible. The idea that you would ship intermediate goods from here to there, products that have been partially processed and they're being sent to someplace else to be incorporated into a component,

which will be sent someplace else to be incorporated into a finished product, that wasn't common before containerization came along because the transport was too expensive. and too unreliable. And so this type of globalization is really a consequence of containerization. So you made the point in the book, or I mean, a big chunk of the book is actually about this. The standardized container didn't just happen. Someone had the idea for it and then actually getting it adopted in the wider worlds of trade took a lot of investment and quite a bit of time. Could you describe that process? Where does the container actually come from and how was it spread around the world? The container was actually not a new invention by any stretch. There's

evidence of the use of containers to ship goods more efficiently since the 18th century. And it makes sense, right? It's more efficient to handle things once, like a box with a lot of little boxes, inside than to handle each of these different boxes. So there'd been a lot of use of containers in different ways, including in the United States. But none of these made any money. It proved to be not a very efficient way to move goods. And then what happened, starting in 1956, U.S. entrepreneurs, notably a trucking industry magnet named Malcolm McLean, began to use containers aboard purpose-built ships and tied the container into a system. So it wasn't simply something that went on a ship,

but could also be put on top of a rail car, could be attached to a truck. and you then had the development of intermodal freight. Containers were a domestic U.S. phenomenon for a dozen years, and then starting in 1966, there was international container shipping, first across the Atlantic and then across the Pacific. And this led to a steep drop. I think readers may not recall, but before containers came along, dockwork was very, very laborer. intensive. To load a ship, the ship had to spend a couple of weeks at the dock, and you had workers literally handling 200,000 separate items, getting them out of the warehouse and into the

ship, and then at the other end of the trip doing the reverse. So shipping things took a long time, many things got lost, stolen, broken, and the cost was extremely high. And what that meant was a lot of things just weren't worth shipping. Once container shipping developed internationally, then all of a sudden it made sense to send things like socks and cheap wine and electric fans and other relatively inexpensive goods around the world. And so the container really made that possible. Was season two of the wire a pretty accurate depiction of the sort of the intersection of new shipping technology against or sort of with sort of traditional union power and worker stronghold? It was different in every country.

Typically the pattern prior to containerization was that dock work paid well when there was work. But because of the nature of shipping that was fairly labor intensive, there was this, it was necessary to have a surplus of workers. So you'd have all of these guys showing up at the dock every day trying to find work. Some days there was work for everybody because a ship had just come in. Some days there was work for only a handful of guys. And so then how do I get a job? Well, you get your job through your friend and became rather a racket infested in some countries.

That was definitely an issue. in other countries, this was simply an important source of work, and there was a lot of resistance to these jobs disappearing. So every country had to resolve this in its own way. So I think you've laid out the importance of standardized shipping to global trade beautifully. If we fast forward to today and the disruptions that Joe and I were talking about in the intro, what's your understanding of what's going on right now and how much of a problem is it? Well, let me give you just a little very recent history of containerization. And this is some of what I deal with in my new book, outside the box.

Starting in the early 2000s, the container ship lines built bigger and bigger and bigger ships. The first ship carried only containers back in 1956 carried 68 containers. Now the biggest carry more than 12,000 containers, what they call 24,000, 20-foot units. And it was really in the early 2000s, around 2005, 2006, of these big ships started to come online, and then they got bigger and bigger over time. These were built on the assumption that international trade would continue to grow very quickly, as it had for decades up until that time. What happened then was in the financial crisis, trade crashed. And after that, the growth of trade never recovered. International trade, as a share of the world's GDP, actually peaked back in 2008.

And so there was all this excess capacity in share. shipping. And every time a new ship came online that had the capacity to carry thousands of containers, the excess capacity got worse to the point that you could send a container across the Pacific for under $1,000 at one point. When this happened, many ship lines went bust or else found merger partners. And so what had been a very competitive industry was transformed into what's basically an oligopoly today. There are three groups of ship lines, and between them they probably control 85 or so percent of the trade on the major trade routes. And that means that they are able to control over capacity. You don't have as many ships being built as you had a few.

years ago because these three big groups kind of keep a handle on things. And so that means that when all of a sudden there's a spike in demand, as there was toward the middle of 2020, that rates are going to go up. That's really what's happened. After years and years of extremely low rates, rates really popped starting in August or September of last year. Why did this happen? Aside from the demand, well, in the early days of COVID, there were a lot of foul-ups, trade dropped off precipitously for a brief period. And then it picked up again. And at the same time, you had consumers in the wealthy countries who couldn't spend on services. So you actually had, in the midst of this crisis, people with a lot of money to spend.

They couldn't go out to dinner. they couldn't go on vacation, they couldn't go to the theater, they could buy things. And so that actually increased the demand for physical products. And that's a lot of what we're seeing now in this sudden surge of exports from China. 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.

Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead.

Join us as soon as you wake up and bring us. with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your

podcasts. Let me ask you a sort of technical question because I'm sort of fascinated about where prices come from. So, you know, I have a Bloomberg terminal. I can look up the Shanghai Shipping Exchange containerized freight index, and I see that not that long ago is a thousand. Anyway, now it's significantly higher than that. It's exploded. Where do these numbers come from? I'm trying to think how I want to phrase the question. If a manufacturer of a good or a buyer of a good, is there a transparent price? Do they negotiate directly with the shippers? And then how do those get fed into?

to a unified index? That's a terrific question. Joe, if you show up at the dock with a container and you say, hey, I want to send this off to Hamburg or Long Beach, well, the ship line will do business with you reluctantly, but that's not really how the shipping business works. Okay. The shipping business works almost entirely under contract, which is. is to say a big shipper, Walmart, Carfour, Caterpillar,

will reach an agreement with either a ship line or with a freight forwarder, which will negotiate with the ship line on its behalf. These agreements typically last six months, sometimes longer, and they're typically filled with contingencies, which means you can't actually know what the cost of the shipment is. A typical contract might say something like the shipper, that is the company with the goods to export, agrees to have at least 50 containers on the dock going from Shanghai to Los Angeles every Tuesday. And any week in which it has less than 50 containers, the agreed price will be 20% higher.

and if over the entire six months of the period, it has fewer than so and so many containers, the price will be this much higher. And if the ship line misses a sailing, then it will have to pay a penalty of so much per container. And those kinds of contingencies, and there are many of them, then determine what the total price is. So actually, a company can't tell you what it would cost to send a container for, from Shanghai to Los Angeles today. It will only know at the end of the six months when it adds up all of the payments it's made,

all of the penalty payments it's received from the other party, and then it becomes obvious in retrospect what the actual cost per container was. So this is not public information. So then, just sorry. So then, like, I'm looking at this chart again. So is it at 1,000, and now it's at 2870. It's not public information.

how does it then get fed into an observable index? What you're looking at is the market forecast of a spot rate. Right. Some of the contracts are pegged to that index. Some are not. And there's a question here about what kind of information an index like this has. You may have some players in the industry who want this information to get out about what they actually are paying for freight. You have some players in the industry who don't want it to get out. And so this is,

as is the case with many other traded commodities, many of the transactions occur in private. And what is known in the public sphere is not the full story. You don't really know what the actual prices are or were. So we described at the outset this idea that the pandemic had caused chaos in shipping in part by putting a bunch of the big container ships out of place. So, you know, they expected to go somewhere, they were turned away at the border or they got stuck somewhere. And so you have like all these ships out of position. How difficult is it to get them back online and sort of going where they need to be going? I guess, I guess my question is how flexible are these giant container ships?

There are a couple of things that make them not very flexible. One is that these big ships don't necessarily fit at all ports. On some routes, there's simply not enough demand to handle a ship that can carry 10,000 containers. Or perhaps the harbor in some places isn't deep enough to handle that ship. and so a ship that can serve one route may not be able to serve another route profitably. The other factor to understand here is that no one in the container shipping business sends out a ship. When a ship line is offering a route, it's offering a regular service. So every Tuesday, to take an example, there will be a ship that leaves a ship that leaves,

Qingdao in China, and it will stop in this place, and it will stop in that place, and it will stop in Singapore so many days later, and it will stop in Al-Hsiris in Spain so many days later, and eventually so many days later it will end up in Rotterdam. And it will do that on the same day every week, and it will be a ship of the same design every week in most cases. So this is called a string in the shipping industry. And so if you have a ship that sails between China and Rotterdam, in my example, every Tuesday, you're probably going to have seven or eight versions of the same ship about the same size

are ready to go on that date. And you're trying to keep on this schedule, which means if one or two or three of them are out of position, it takes a while to get back on that regular rotation. You can't just put any old ship on that run because that's not what the traffic requires. Coordinating these is quite a task. Typically, these days, ships are built with the idea that they will be used on a specific route.

And so you don't want to just plug them in any place. So, you know, there's sort of, I guess, a couple of things going on here at once. There's the acute disruption that we're still working through. I mean, the coronavirus crisis isn't over. Basically, nobody's economy has really returned to normal. So we're dealing with the aftermath of that. And that's obviously snarled shipping and scrambled the situation.

What about, I mean, is there any prospect long term for there to actually be a sustained capacity shortage? if the economies around the world, you know, you have like lots of governments doing fiscal stimulus and they're going to need supplies and so forth. And if we have this sort of boom, I mean, perhaps. Could we have a sustained capacity constraint the likes we haven't seen since prior to the great financial crisis? The capacity shortage, such as it is, comes from the fact that you've really only got these three alliances. And so people are not building so many ships now. because they don't have to worry about their competitors so much. I think, though, in the longer term, the concerns are actually in the other direction.

We had for many, many years, international trade growing probably twice as fast as the world economy. Since 2008, international trade has grown more slowly than the world economy, and I think that's going to continue and the growth of international trade is going to slow down, even more. And that means that we have the prospect of overcapacity returning as the pandemic recedes. You know, I think that there are a couple of reasons for this in the long run. One is that you've got demographics, right? In a world in which most countries, except in Africa, are filling up with older people, there's less demand for physical products. People are spending more and more of their money on services. And I think that that's really just going to affect

the amount of trade in physical goods over the long run. You're seeing a lot of manufacturers and retailers change their sourcing decisions in ways that will affect the demand for container shipping. One of the things I write about is that there was a lot of misjudgment of risk in globalization. A lot of companies looked at production costs and transport costs and said, we've got to make these things in China. People have now taken risk on board. They understand that risk has to be factored into their calculations because if the goods don't arrive on time, it can really be very bad for the bottom line and it can harm their reputation in the long term. You've had many companies now starting to diversify. There's a lot of talk in the same. There's a lot of talk in

states about reshoring. It's not exactly reshoring, though. What's going on is rather redundancy. Firms are concerned about making a product only in one place, being reliant only on one supplier or on one shipline or on one port. And so people are looking for options in case something goes wrong somewhere. This raises production costs a little bit, but provides better insurance effectively in case there's a fire, a hurricane, a strike, a ship sinks, whatever the issue is. And then the other big thing you've got, obviously, coming along is a concern about climate change. And as the costs of making production and transportation more sustainable begin to be felt, that's going to raise the cost of international shipping and domestic freight transportation

and is going to make these long-distance value chains more costly to operate. I have a dumb question, but what's the downside of overcapacity of mega ships? So, you know, I could see it maybe hitting profits of the big three shipping companies, but why is that bad for the overall global economy? Well, I wouldn't say necessarily that it's bad for the overall global economy, but it's really bad for A, the ship lines, for sure. Okay. But B, these mega ships have generally fouled up the transportation system.

Okay. You actually have fewer ships calling at most ports today than you used to have. They're much bigger. And so think of what this does to the operation of the port. You don't have a smooth flow of cargo going through the port. Now you've got nothing happening in the port. It's dead today. And then tomorrow a ship shows up and it will.

wants to unload 3,000 containers in your port. What do you do with this? How do you get it unloaded? Where do you put the containers? One thing that's happened is that ships spend more time in port, which is very wasteful because it just takes more time to get so many containers on and off. The trucks are lined up at the gate because there's so many containers to bring in to send out on these ships or so many containers to deliver. The railroads can't handle this sudden flood of containers. So you have the cargo sitting around longer before it gets removed from the port. All of these things have tended to make transit times longer and have made it harder for shippers to get their freight where it's supposed to be on deadline.

And that's bad for everybody. Who are the three big players right now in shipping? And is there hold on the industry? Like, is it sustainable? Do you expect in 10 years from now, it'll probably just be those three big players still? The big players have formed what are called alliances. So these alliances have kind of squeezed most of the smaller players out of the business.

One alliance involves a Mursk, the Danish company, and Mediterranean Shoeuvre. shipping, which is based in Switzerland. And between them, those two companies have a little bit over a third of all of the container shipping in the world. There's another alliance that has Costco, the China Ocean Shipping Company, the French company, CMA, CGM, and Evergreen, a Taiwanese company. And it has about 30% of the world's shipping.

And then there's another alliance that has the German company, Hapagloid, and the, the Japanese lines and a Korean line, and it has about 20%. So if you put those three alliances together, their market share in container shipping is close to 85%. Will those alliances stay together? At the moment, the system looks pretty stable. You can imagine that at some point a government will step in and say, you guys can no longer have this alliance. It's anti-competitive, but so far that hasn't happened.

You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations. But they usually rerun their radio newscast. throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg

News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. Is there anything that shipping companies could do right now to unsnarl traffic and get it going again? A part of the snarling of traffic is due to things beyond their control. For example, traffic into and out of the UK is totally snarled for reasons related more to Brexit than to problems with container shipping. I think that in general, ship lines have decided that these giant ships were not a brilliant idea.

And so we're seeing now that ship lines are interested in building vessels that were a bit smaller. As I mentioned earlier, the average ship size went from carrying the equivalent of 4,500 containers to the equivalent of 12,000 truck size containers in the small. span of a dozen years. But I think the ship lines have discovered that these ships that have 20,000, 22,000, 24,000, T-EUs, okay, divide by two for the number of containers, that those ships really don't work very well. It takes too long to load them. It takes too long to unload them. There are too many places they can't go. It's too often the case that they're not needed. And so the ship lines are interested in building vessels that are somewhat smaller than that now. As that happens, I think that may resolve a lot of these problems that are caused by these ships just being too damn big.

Is that just the bigness? Was that just on anticipation of a sort of never-ending boom in world trade, such as we saw pre-grade financial crisis? Like, had that vision materialized, had that continued? Had the so-called bricks got bigger and bigger and the commodity boom going on, would that have made sense? And it was just, that was a different world. And now the equipment built for that world is making increasingly less sense. The slump in the growth of trade wasn't really the only factor here. Ship lines like companies in many other industries have relentlessly pursued economies of scale.

Bigger was better. And it was true when you could build a ship that could. carry 3,000 containers instead of 2,000 containers, the costs per container dropped a lot. And when you could build a ship that could carry 10 rather than 5, the cost per container was much lower. So ship lines were aggressively pursuing economies of scale. What they didn't count on was that at some point the vessels would get so big that dis-economies of scale would set in. And that's what's happened in shipping. the point at which ships got beyond perhaps 17 or 18,000 T.E.Us was the point at which they just got too big.

And that's when you started to have this confusion in the ports. That's when you started to have these delays in shipping. That's when you started to have the entire industry become less reliable. And the diminished reliability is one of the things that is leading manufacturers and retail. mailers to have a new sourcing pattern, to make their products in different places and to have redundant value chains. Size isn't everything, and many of the ship lines mistakenly thought that it was. Is there any other sort of key idea, Mark, that you think were sort of missing or that would help us understand the current situation? There is a lot of concern now about shortages of containers and shortages of chastas,

chassis and that sort of thing. In general, part of this is that the ship lines have gotten out of that business and left it to other people to deal with. Yeah, there is a huge amount of confusion. And let me put this way, international trade, after all these years, still doesn't work very smoothly. There are still lots and lots of manual steps in the process of arranging a shipment. There are still lots and lots of unexpected delays. And this situation really hasn't gotten better in recent years. You would have thought that we'd be better at it by now. You would think so.

What happens in a system like we've got in shipping is that the ship lines built ships that they thought were best for their own needs. They didn't really give much consideration to the system. and the system includes the container terminals in the ports. It concerns the ports themselves. It concerns the railroads that pick up and deliver to the ports. It concerns the truck lines that pick up and deliver to the ports. And various other players in the business,

the companies that provide containers, the companies that provide the chassis that trucks use. All of those folks are players in this ecosystem. And what was most efficient for the ship lines alone hasn't been most efficient for this whole system. It's really made it less efficient over time. Well, Mark, that was a fantastic conversation. And I'm always grateful for the opportunity to talk about shipping. And I don't know, part of me, I understand it's still kind of crazy that global shipping isn't as smooth as you might think it would be, given the amount of global trade that we currently do.

But part of me also likes the romance of having, you know, a system that's very physically based where you're moving goods, you know, in these big packages. And you can kind of see the flow of goods. You can see them unloaded at ports. I don't know. I kind of like that in the modern economy. It's nice that there's something still analog. So do you recommend everyone at least do that once, take a global ship as a passenger? Is that a fun experience?

You're asking me? Yeah. I will tell you the truth. I've not done that. Oh. Oh, sorry. I thought... I thought Tracy said that you did.

No, I was not going to contradict Tracy on the air. No, I have not done that. And, you know, most of what happens... There have been several people have tried to write books about the experience of traveling on a container ship. And they're not very good books because nothing happens. They've got to abhor. Yeah. Well, you know, one of the books turned out to be an interesting.

interesting book because the author wrote about things that didn't happen on the container ship that she was traveling on, but she'd heard happened on other containerships. But, I mean, what do you do, right? What book was that? Because I think I'm, I think I was thinking about a different book where it starts out with the author taking like this big container ship journey. Rose George wrote a book on container shipping a few years, a couple of years after I did. Yeah, that must be it. I think I've read both of them. And Rose George's book was called in the U.S. 90% of everything.

It had a different name in the U.K. And what she found, you know, it was a fun book to read, but her conceit was that she was going to write about what went on during this voyage. And the book wasn't successful in that sense because nothing went on during the voyage, which is typical of a, you know, so she was talking about piracy that it occurred on other ships and problems with the treatment of workers on other ships. How long does that take? a ship from Shanghai to Los Angeles? It takes these days somewhere 16, 17 days. It actually takes a couple of days longer than it did 20 years ago. Why is that?

The price of fuel is one of the most expensive costs in shipping. And so initially, the ship lines slowed down their vessels when the price of fuel went up. This was called slow steaming. and the idea was that they would operate more slowly to hold down the total cost of fuel. Then newer generations of vessels were built, like these ships that carry 24,000 TEU, and they were built to steam slowly, so they can't speed up. And one of the reasons for these delays is that it's harder now than it used to be for a ship to make up time. Okay, it used to be that a ship would sail at, say, an average of 21 knots.

But if it got behind, it could sail it, it could steam at 24 knots for a while to get back on schedule. The ships can't do that anymore. They're typically sailing at 17 knots, and they can't go much faster than that. So once they're behind, they're behind. I'm glad we brought this up because it really is painting this picture of global trade is a complicated problem. and why even after all these years, it's not an efficient solved one because even something like that,

it makes total sense, the trajectory, the concern about fuel costs, but then you end up building these boats that can't accelerate. Super interesting and sort of just really sort of drives home how tough this whole thing is. And probably helps explain why these prices are so volatile because, I mean, I know like when I pull up these charts,

I mean, they just swing back and forth all the time. Yeah. one thing that hasn't come to the four yet because interest rates are very low, but it will, is that this drives up inventory costs. You think about the time your goods spend on the ship, right? Those are goods in inventory. And so if it's taking you three days longer to send your stuff, then your cost is effectively higher. Well, right now, with money going out for free, that's not really a big deal.

But if interest rates become significant again, this will be a cost burden. It'll be costly to have their goods sitting on these vessels. All right. Well, Mark, I think we're going to have to leave it there. But absolutely, great conversation. Yeah, really appreciate it. And you laid it out very clearly. Well, I've enjoyed it.

I've enjoyed it. Thank you very much for having me on. Thanks, Mark. I can't believe I mixed up the intros of these two books on shipping that I've read. But yeah, one of them started with someone going on an actual container journey and the other one didn't. Both are pretty good. Although, I mean, Mark laid out his thesis in a really great, clear, and concise way. And I think he was very good at illustrating why global trade the shipping industry isn't as flexible or as efficient as you might think it should be at this point in time.

Yeah, absolutely. I mean, like, I would not have guessed that at all. Like I, you know, I sort of had some intuition that prices were volatile because, okay, you can't adjust supply that fast relative to demand until you could have a modest hit to demand and then suddenly have a glut and vice versa. But then adding in all the different layers of why it's so complicated and delays at the ports and all that kind of stuff, you really start to see. And, you know, anyone should just sort of look up some of these freight index charts. And you can see they really, like, swing wildly in a way that very few things do. And I think he laid it out very well. And, of course, right now, all these charts are basically, you know, surging. I guess the other question is whether or not the current experience, the gridlock and the snarling that we described, whether or not that does lead to a reconsideration for the shipping industry about how they do things. So Mark mentioned this idea that everyone's been obsessed with megashhips because they were more efficient for the shipping companies themselves, but they don't actually work that well for a lot of

the customers. And he made a pretty convincing argument about why they might not work well in a sort of post-coronavirus, post-globalization trade environment where things become a lot more localized. People need to be more nimble. People are worried about supply chain vulnerability. you can see an argument for going smaller. Yeah. You know, we didn't get into it,

but I once watched a reality TV show on like the Discovery channel about shipbuilding, that also seems insanely complicated and really, you know, really difficult and not many people actually know how to like engineer the process of a big building a ship.

So we didn't get into that. But another aspect of this that seems very hard. Yeah, actually that reminds me there's one other really important aspect of this, which is that because all these ships are out of position and in some cases stuck off the coast of various countries, there are people working on the ships who've been stuck on them for months at a time. In some cases, without medical care, in some cases without being paid while they have families back at home, that's been a humanitarian crisis that we've actually been writing about at Bloomberg. we've done a series on this topic. It also lays out some of the problems and issues in getting these ships back into position. The idea of who bears responsibility for the crew and for the vessel itself is not as clear cut as you might imagine.

But if you're interested in this topic, you know, Google seafarers and Bloomberg, and you'll get some really good stories on this issue. All right. And this crisis just needs to end. Yeah, it's a sad note. Yeah, it's a sad note to end on. But, you know, there is a humanitarian cost to global shipping as well. Okay, let's leave it there. This has been another episode of the Alldots podcast. I'm Tracy Allo. You can follow me on Twitter at Tracy Alloway. I'm Joe Wisenthall. You can follow me on Twitter at The Stallwart. You should check out our guest, Mark Levinson. Check out his books, particularly at The Box, as well. as well as his new one outside the box. Follow our producer Laura Carlson. She's at Laura M. Carlson.

Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg, under the handle at podcasts. Thanks for listening. On April 4, 2023, around two in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16.