New container in Xiamen, China
Today, this inconspicuous container is unprecedented in importance to the U.S. business. If you can't find it, you can't ship your international goods, and the container's supply has never been so tight as . The cost of global trade now depends on how many containers there are and where they are or are not. How many containers are there in
controlled by China? In fact, almost all sea containers in the world are built in China!
According to data from the British consulting company Drewry, more than 96% of the world's dry goods containers and 100% of the refrigerated containers are currently produced by Chinese factories. "I'm worried that these devices are controlled by a state-owned enterprise and we rely entirely on them, and I doubt whether there is market manipulation in this potential monopoly." U.S. airlines do rely on very few Chinese companies that are associated with the government, which are said to be actively managing capacity. But there is nothing the FMC or other Americans can do about it except expressing concerns.
To understand why container manufacturing is dominated by so few Chinese companies and why it is not commercially feasible to build such equipment on a large scale in the United States, the U.S. shipper interviewed John Fossey, director of container equipment and leasing research at Drewry. The good news is that with the ease of port congestion and the volume of container manufacturing in China this year is expected to reach record levels, the current global tight container capacity situation should be alleviated.
China's "three major container giants"
In the 1990s, the container manufacturing industry moved from South Korea to China. “This has received strong support from the Chinese government,” he explained. “With the increase in manufacturing capacity in China and their demand for exports, it is also reasonable to build containers there.”
China’s market share has been growing since then and has been absolutely dominant for the past 15 years. According to Drewry, in the first quarter of this year, China's top three container manufacturers accounted for 82% of global container production.
CIMC Group (CIMC) 20-foot TEU production of 580,000 boxes, accounting for 42% of the market share; Oriental International Container, 358,000 TEUs (26%); CXIC Group 200,000 TEUs (14%). According to Drewry, the market share for the whole year of 2020 was roughly the same, with the total output at that time being 3.1 million TEU .
Chart: American shippers based on data provided by Drury Maritime Research
Fossey said: "These large companies have great national interests, and their strategies are controlled by the China Container Industry Association (CCIA) to some extent. I think CIMC Group (CIMC) is undoubtedly the largest company and truly dominates the China Container Industry Association." The behavior of the
factory has changed.
Fossey said that from 2017 to the beginning of 2020, the prices of containers fell sharply, and the profits obtained by manufacturers were very meager, so the three major companies in China decided to try to support some pricing of dry cargo containers.
By the end of 2019, the price of each TEU is around US$1,650-1,750, and the three major companies hope to reach at least US$2,000. After most companies shut down due to the COVID-19 epidemic in the first quarter of 2020, the prices of containers did begin to rise. Since then, container prices have soared with strong consumer demand in the United States and Europe. Until the end of 2020 to this year, the price of the TEU has reached about US$3,500.
During a quarterly conference call earlier this year, Tim Page, interim president and CEO of container equipment leasing company CAI International, claimed that the factory's behavior was different from the past and they were no longer interested in increasing production at the expense of prices. He believes that this is a new trend in this industry and will continue, and the current factories will only focus more on maintaining high container prices.
When asked about Page's comment, Fossey said: "It definitely makes sense.This is exactly the strategy they adopted. These factories can do two 12-hour shifts a day, but they don't want boxes to flood the market because they want to keep the price high now, or maybe slightly lower. They don't want to fall back to $1,750 or $1,800. "
China's production is rising sharply
It is reported that Chinese container equipment manufacturers have increased the price of new containers paid by liners and leasing companies by managing capacity, similar to the behavior of foreign route companies supporting freight pricing by managing capacity. Unlike shipping carriers, Chinese equipment manufacturers are completely out of the jurisdiction of U.S. regulators.
But China's production decisions are not the cause of the shortage of containers in the United States, Fosssey said.
"I sincerely believe that Drury's research has proved that, in principle, there are enough containers running today to meet global trade needs, and the problem is that all containers are placed in the wrong place, all congestion and containers are circulating fairly slowly through the supply chain." ”
Meanwhile, China’s production this year is very high—even if it is not as high as possible under the two-shift . Fauci said: “They have gone from working 10 hours a day to working 6 days a day 10-11 hours a day. "
If there are any signs in the first four months of this year, it is that Chinese factories are expected to exceed the record of 4.4 million TEUs in 2018, equivalent to double-digit year-on-year growth.
Fauci believes that when port congestion is finally alleviated, effective container supply will increase and China's demand for new products will fall. He expects production in the second half of the year "slows down" compared with the first half of the year.
Why can't the United States compete?
containers seem to be a relatively simple device that should theoretically be manufactured in the US factory. But in practice, U.S.-made containers cannot compete with Chinese-made containers for liner and rental customers.
One of the problems is steel, which is the most important investment in the boxing process. Drury estimates that weathering steel accounts for about 60% of the total cost of building containers.
According to Platts Energy Information (S&P Global Platts) provides data to US shippers, the price of hot-rolled coil steel (HRC) in the United States has averaged 28% higher than that of China’s HRC in the past 10 years. Recently, the price in the United States has soared to nearly twice the price in China.
Chart: China = Shanghai/China domestic spot; US = Platts TSI HRC – EXW Midwest
Other competitive advantages in China include lower labor costs and higher government support, as well as near production locations for refrigerated container machinery.
"When you think of all the technology and investments they put into factories, paint workshops and drying equipment, it's hard to see any other country reaching China's scale and having a competitive unit cost ," Fossey said.
There is also a particularly critical advantage in building containers in China: no relocation costs. Liners and leasing companies don't need to spend a lot of money to relocate these containers to areas in demand, and China is the production site for these goods.
"If you are a lessor, you want to load containers directly into the carrier's system during the initial lease period, and you don't want to spend money to relocate these boxes on the other side of the planet." "Fossey said that adding all of this together has the demand, expertise, and invested a lot of money in the field, and produced high-quality containers at very competitive prices. If you compare containers in China to anywhere else, you will find that building containers in China cannot be surpassed."
(Source: Nepton compiled from America Shipper)
