Is the container shipping system running out of capacity?

The return of vessel queues outside Singapore, and many other ports for the first time since Covid point to trouble in the system that transports 45% of global trade by value.

The fact the port congestion is recurring illustrates a truism many in the industry believe is beyond dispute: that the system remains vulnerable especially when volumes grow quickly, and that weaknesses exposed during Covid remain unfixed.

The backups are contributing to a surge in shipping costs - spot freight rates have tripled on major routes like the trans-Pacific over the past eight weeks -- and are occurring despite 2024 being a record year for new container ship deliveries; 461 new vessels, many of them capable of operating on zero-carbon fuel, are forecast to hit the waves this year, the result of a surge in vessel ordering during the pandemic, according to S&P Global Market Intelligence.

Yet despite the new tonnage, virtually no ships currently are sitting idle or are being scrapped and the price to hire a ship on charter has spiked in recent months.

The conclusion is inescapable: just like occurred during Covid, a surge in demand is overwhelming the ability of the end-to-end system to cope. Volume growth in containers has roared back to life this year, with volumes up 9% in the first quarter on the strength of inventory restocking, an earlier peak holiday season, and global growth momentum. S&P Global Market Intelligence has twice raised its forecast for global GDP growth this year.

The surge in growth is colliding head-on with two factors conspiring to reduce system wide capacity: Diversions of ships around Africa to avoid attacks in the Red Sea, and vessels falling off schedule, reducing port efficiency.

At least 6-7% vessel capacity was effectively taken off the market early this year due to the longer voyages ships must take around the Cape of Good Hope to avoid attacks in the Red Sea. The longer sailing times absorbed container equipment as well, an issue that strikes at the heart of the system because without containers, cargo can't move. Sharply higher new and used container prices and leasing rates in China as reported by Container xChange point to the shortage.

Robust cargo growth leads to the other big issue: too much cargo moving on and off ships results in ships more easily falling off schedule because they are forced to remain in port longer. A result is they frequently miss their scheduled berthing slot at the next port, forcing them to wait offshore until the next slot opens.

"The increase in container vessels arriving off-schedule and the increased container volumes handled in Singapore have resulted in longer vessels' wait time for a container berth," PSA Corp. the operator of the Singapore port, said on May 30. The port was recently forced to reactivate dormant port facilities to handle the increase in volume.

This is a stark reminder of the central role of ports in the supply chain and how easily things can go off track. During Covid, when containerized supply chains experienced their worst disruption since the first container ships sailed in the late 1950s, the core problem was congestion at ports.

Too many containers not moving quickly enough through ports - often due to issues outside ports such as lack of trucking or warehouse space -- led containers to pile up at the port and prevented ships from being worked at their normal pace. As a result they occupied limited berth space for longer and ships that were waiting backed up offshore; at the height of the crisis in Jan. 2022 109 container ships were backed off of Los Angeles-Long Beach, the largest port in the Western Hemisphere, when typically the anchorage areas are empty.

Today a similar phenomenon is playing out, still on a milder scale but pointing to the same issues that have gone unsolved since Covid: inadequate advanced visibility to cargo volumes and thus the inability of ports, container lines, truckers and other players in the ecosystem to effectively prepare. Add to that an unwillingness of transport providers to invest in surge capacity under the theory that "you don't build a church for Easter Sunday."

The lesson for companies dependant on container shipping for their supply chains isn't that the system is running out of capacity. Though it may function with little disruption for months or even years as it did prior to Covid, it remains fragile and vulnerable to external shocks, whether it's Covid, attacks on shipping or a volume surge. That vulnerability is unlikely to go away. Lean inventory, or "just in time" strategies which depend on reliable and consistent logistics connections will always be vulnerable. That is as much the case today as it was in 2020 or any other year.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.