A simple box that changed the world

Focus: The shipping industry is booming, underpinned by solid economic growth

By Saeed Shah

By Saeed Shah

30 August 2000

How could a simple box become the eighth wonder of the world, up there with the Hanging Gardens of Babylon? The answer is before our eyes, every day - the container. The simple standardised box that transformed seaborne freight in the Sixties has taken on a vibrant 21st-century life, and the internet may add a knot or two to the speed.

"Container shipping certainly is the great hidden wonder of the world, a vastly underrated business," says Martin Stopford, head of research at Clarksons, the shipping broker. "It has shrunk the planet and brought about a revolution, because the cost of shipping boxes is so cheap. People talk about the contribution made by the likes of Microsoft. But container shipping has got to be among the 10 most influential industries over the past 30 years."

The shipping industry is booming, underpinned by solid economic growth. In the 30 years or so the boxes have been around, the amount of goods shipped in them has expanded at 8 to 10 per cent a year, and the industry is now worth an annual $100bn. The expansion of container shipping far outstrips growth in the world economy, historically, about 3 per cent a year, and even growth in world trade, which runs up by 5 per cent a year.

Before container shipping, sea-borne trade was slow and unreliable. In the early Sixties, unloading a ship at, say, Liverpool docks could take weeks, even months. And during that time a substantial proportion of the goods could fall prey to thieves, or the weather. Today, the goods are protected in a container, during passage and in port. With cranes built specially to lift the containers, a ship can be in and out of a port in 10 hours, saving thousands in port charges and speeding trade.

The world's container shipping fleet trebled in the Nineties and it now accounts, by value, for more than half of all cargo shipped. Most industries would relish these fundamentals, but container shipping has been tough, because the industry is highly fragmented, with steep fixed costs and fierce competition which prevented price increases. Mark McVicar, an analyst at Dresdner Kleinwort Benson, the investment bank, says: "Historically, there's been no problem with demand. The problem lies with supply." In 1980, to ship a 40ft container from North America to Europe would have cost $2,500. Today that costs $2,200. Shipping costs are now, typically, 3 to 5 per cent of the value of the goods transported in a container.

Seaborne transport is so cheap it makes sense for Nike to make its trainers in south-east Asia. And companies in remote parts of the world can snatch business from under the nose of a local producer.

Shipping is a classic cyclical industry, where fortunes are quickly won and lost. Over the past few decades, the shipping cycle has been harsh. But the fair weather days are here. Rates for chartering ships are near 30-year highs, at around $23,000 a day, compared with $12,000 just 18 months ago.

Container costs have risen only modestly over that time, because most deep-sea ships used for them are not chartered, and shipping costs are only 10 to 15 per cent of the cost of transportation. So containers continue to provide a cheap way of moving goods. In fact, if moving goods by container was not so inexpensive, trading many of the products shipped round the world today would not be worthwhile. Second-hand motorcycles are shipped from America to be sold in Europe, where they fetch twice the price, because exporting them costs so little.

The supply problem that plagues shipping is basic. There is a rush to invest in new capacity when times are good - when the world's major economies are booming. When there's an economic downturn, this leaves the market over-supplied. The danger of expensive ships lying idle means operators desperately cut prices. And in an industry with massive capital costs, price cuts destroy profits.

Mark Page, head of research at Drewry, the shipping consultant, says: "The booms [in shipping] tend to be relatively short-lived. If an industry is growing at 10 per cent a year, someone, somewhere, is building to cater for that demand. It's very difficult to keep a highly fragmented market like that in balance." Even the biggest player in container shipping, Mersk Sealand, has just 10 per cent of the market. There are more than 500 operators.

Mr McVicar says there has been irrational behaviour by some players, who have built up big fleets for political purposes. The new industrial giants of east Asia have felt the need to signify their industrial achievements with suitably large shipping fleets. The finger is often pointed at the likes of Cosco, the Chinese state-owned operator, which is accused of growing for the sake of it, without worrying about profits.

Even without political expansions, a fragmented industry means there is little co-ordination over increases in supply, which are brought about by building more ships. With vessels getting bigger, each new one adds significantly to capacity. Ships can now carry 7,000 standard containers compared with 2,000 in 1990.

Until recently, supply was running ahead of demand, and growing at 11 per cent a year, due particularly to orders from east Asia. And in Germany there were huge tax incentives to invest in shipping. But when the Asian "tiger" economies crashed in 1997, orders for building ships fell dramatically.

Barry Williams, a director at P&O Nedlloyd, the world's second-biggest operator, says: "The Asia crisis helped [relieve over-supply]. It put a stop to speculative building by Korean and Taiwanese shipyards."

By the beginning of 1999, the prospects for world economy looked gloomy. East Asia was in severe recession, much of Continental Europe growing very slowly, especially Germany and Italy, and the outlook for America's "miracle economy" was uncertain. All this bore down on shipping, which is so closely tied to economic growth and trade. Then, over the last year, the gloom has lifted.

The "tigers" have bounced back strongly, Germany is growing at an annualised rate of over 3 per cent, and the US economy appears to be headed for a soft landing.

That has meant healthy demand for shipping. But this time supply is well under control. It is possible to see supply about two years into the future, because this is how long it takes to build a ship. "Shipyard order books are full, but it is with cruise ships or oil tankers," says Mr Williams. "For the foreseeable future, there is control over new container capacity. There are signs that the industry is becoming less cyclical." Operators in the Asian region who were foundering in the economic crisis, are more cautious about placing orders for new ships. There have also been some industry mergers, and the formation of alliances of operators. This reduces competition and aggressive behaviour that hurts the whole industry.

And the operators are embracing the internet. Shipping is a process-driven business and the internet cuts paperwork, reduces reliance on middlemen, and allows customers to track their consignments more easily. That makes shipping more attractive and cheaper, opening opportunities for smaller, perhaps more specialised customers, who do not currently use it.

For container shipping the heavy seas seem over for the first time in at least five years. But the historical gyrations of the shipping market mean only the brave would forecast that the industry has finally escaped its cyclic storms.

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

BA/PM,EMIR/Dodd-Frank,London,£450-650P/D

£450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...

Senior Analyst - ALM Data - Banking - Halifax

£350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...

Java developer - Banking - London - Up to £600/day

£500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...

Liquidity Reporting-Basel III-LCR-Bank-£400/day

£400 per day + competitive: Orgtel: Liquidity Reporting - Basel III - LCR - Ba...

Day In a Page

Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
How live cinema screenings can boost arts audiences

How live cinema screenings can boost arts audiences

Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
Shipping container hotels: Pop-up hotels filling a niche

Pop-up hotels filling a niche

Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
Native American headdresses are not fashion accessories

Feather dust-up

A Canadian festival has banned Native American headwear. Haven't we been here before?
Boris Johnson's war on diesel

Boris Johnson's war on diesel

11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
5 best waterproof cameras

Splash and flash: 5 best waterproof cameras

Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

Louis van Gaal interview

Manchester United manager discusses tactics and rebuilding after the David Moyes era
Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

Will Gore: Outside Edge

The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz