How three Chinese companies cornered global container production
Never before has the humble shipping container been so important to American businesses. If you can’t get one, you can’t move your international cargo – and supply has never been so tight. The cost of global trade now depends on how many containers there are, where they are and where they are not.
The number of existing containers is controlled by China. Virtually all of the world’s shipping containers are built there.
Only three Chinese companies account for the majority of production, with Chinese factories now building more than 96% of the world’s dry freight containers and 100% of the world’s refrigerated containers, according to British consulting firm Drewry.
Carl Bentzel of the Federal Maritime Commission (FMC) said earlier this month: “I am concerned that this equipment is controlled by a public company and that we are totally dependent, and I wonder if there is had or not had market manipulation. of what is potentially a monopoly. “
Indeed, US shippers depend on equipment manufactured by a very small number of state-linked Chinese companies that actively manage capacity. But beyond worrying, there is nothing the CMF or anyone in America can do about it.
To understand how container manufacturing has become dominated by so few Chinese entities and why it is commercially impossible to build this equipment competitively on a large scale in the United States, American Shipper interviewed John Fossey, head of research on equipment and container rentals at Drewry.
The good news, according to Fossey, is that the current global equipment capacity crisis is expected to ease as port congestion eases and China is on track to manufacture a record number of containers this year.
China’s “ big 3 ”
Container manufacturing migrated from South Korea to China in the 1990s. “It got a lot of support from the Chinese government,” Fossey said. “With the increase in Chinese manufacturing capacity and their need to export everything, it made sense to build the containers there as well.”
Since then, China has increased its market share and has been completely dominant for the past 15 years. In the first quarter of this year, China’s top three manufacturers accounted for 82% of global container production, according to data from Drewry.
China International Marine Containers (CIMC) produced 580,000 Twenty Foot Equivalent Units (TEUs), representing a market share of 42%; Dong Fang International Containers, 358,000 TEU (26%); and Groupe CXIC 200,000 TEU (14%). Market shares were similar in 2020, when 3.1 million TEUs were produced in total, according to Drewry.
“The state is very interested in large companies and the strategies are to some extent controlled by the China Container Industry Association. [CCIA]”Said Fossey, who added,” I guess you could argue that the CIMC, which is by far the largest, really runs the ICC. “
“ Factories behave differently ”
Between 2017 and early 2020, “container prices fell quite dramatically and manufacturers benefited from slim margins at best, so the top three companies decided to try and support some sort of pricing for boxes of. dry freight, ”Fossey said. “Basically they got together and said, ‘Look, we’re not going to produce these containers at a loss.’
“At the end of 2019, the price was only $ 1,650 to $ 1,750 per TEU and they wanted a minimum of around $ 2,000. After the COVID closures in the first quarter of 2020, they started to raise their prices. And as we all know, with strong consumer demand in the United States and Europe thereafter, prices have skyrocketed. At the end of 2020 and into this year, we’ve seen prices around $ 3,500. “
In a quarterly call earlier this year, Tim Page, interim president and CEO of container equipment lessor CAI International (NYSE: CAI), said, “Factories behave differently than they do. they have done in the past. They have no interest in increasing production at the expense of price. I think this is a new dynamic in our industry. And I think it’s going to stay. They focus more on keeping container prices high. “
Asked about Page’s comment, Fossey said, “It makes absolute sense. This is exactly the strategy they adopted. These factories could do two 12-hour shifts a day, but they don’t want to flood the market with boxes because they want to keep the price where it is now or maybe slightly lower. They never want to go down to $ 1,750 or $ 1,800. “
Chinese production is increasing sharply
At a time when the availability of container equipment is more important than ever to shippers, this configuration may seem worrying from a US business perspective.
Like foreign-flagged liners that manage vessel capacity to support freight prices, Chinese container equipment manufacturers would manage production capacity to support new crate prices paid by liners and lessors. And unlike maritime carriers, Chinese equipment manufacturers are completely outside the jurisdiction of American regulators.
But Chinese production decisions are not responsible for container shortages in the United States, Fossey said.
“I sincerely believe and Drewry’s research has shown that in principle there are enough containers in service today to meet global trade demand. The problem is, the containers are all in the wrong place, with the congestion and speed of containers moving across the network being considerably slower.
Meanwhile, Chinese production this year is very high – although not as high as it could be in a two-shift system. “They went from five days at 10 am a day to six days at 10 am to 11 am a day,” Fossey said.
If the first four months of this year are any indication, Chinese factories are on track to surpass 2018 record of 4.4 million TEUs, which equates to double-digit year-over-year growth. .
Fossey believes that when port congestion decreases, the effective supply of boxes will increase and the demand for new production in China will decrease. He expects production to “slow down a bit” in the second half compared to the first.
Why can’t America compete?
A container appears to be relatively simple piece of equipment that could theoretically be built in an American factory. In practice, however, a US-built container could not compete with line and lessor customers with a China-built box.
One of the problems is steel, the most important input in the construction process. Drewry estimates that Corten (aged) steel accounts for about 60% of the total cost of building a container.
According to data provided to American Shipper by S&P Global Platts, the price of US hot-rolled roller (HRC) steel over the past decade has averaged 28% higher than that of China’s HRC. More recently, the US price has climbed to almost double the price of HRC in China.
China’s other competitive advantages range from lower labor costs and higher government support to the proximity to where the refrigerated container machinery is produced.
“When you think about all the technology and the investment they’ve made in factories, paint shops and drying facilities, it’s very hard to see other countries reach the same scale as China and have a competitive unit cost, ”said Fossey.
There is yet another advantage to building containers in China that is particularly crucial: the lack of repositioning costs. “Doublers and lessors don’t have to spend huge sums of money repositioning these containers in areas of demand. China is where the cargoes are produced, ”he said.
“If you’re a lessor, you want to ship your containers during your initial rental period directly into the carrier’s system with a charge. You don’t want to pay to reposition those boxes halfway around the world. ”
Add it all up, Fossey said, and China “has demand at its doorstep, it has the expertise, it has invested heavily in the sector and it produces quality boxes at very competitive prices. If you compare building a container in China to anywhere else, you can’t beat it. “
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