Worldwide Shipping Stagflation Causes Retail Havoc, Upset

4 August 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Last fall, I had what I assumed beforehand would be a relatively simple and inexpensive task:

arranging for the shipping of 40 already packed boxes of books / papers / CDs of my world-famous lectures 😉 from San Francisco, where I used to live, to Singapore, my current home.

When I left in the fall of 2009, a so-called “ghost fleet” had been lying off the coast of Singapore for months –

4 August 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Last fall, I had what I assumed beforehand would be a relatively simple and inexpensive task:

arranging for the shipping of 40 already packed boxes of books / papers / CDs of my world-famous lectures 😉 from San Francisco, where I used to live, to Singapore, my current home.

When I left in the fall of 2009, a so-called “ghost fleet” had been lying off the coast of Singapore for months –

empty cargo ships that wanted to avoid both the high costs of actually berthing here or other developed-nation ports in North America or Europe

and the serious danger of open-water piracy that afflicts most of the global navigation “choke points” located in the Third World, eg the Indian Ocean.

So even though I had no experience in these matters, I thought the whole operation would be straightforward and cheap,

assuming shippers would be clamoring for even my relatively small-time business.

How wrong I was.

Without boring you with all the details, just let me say it took weeks simply to get anyone from the MANY shipping outfits I contacted

to come and look at the boxes beforehand – something on which they all insisted.

Even though the boxes were already packed, and a good 80% of them already sealed, they also all insisted that – for security purposes, allegedly –

ALL of the boxes would have to be “professionally” re-packed by their people.

This seemed a little unnecessary to me, but, as Frankie Pentangeli so aptly put it during his Senate testimony

re his participation in the Corleone family olive oil business, “I said, ‘sure, okay, why not ???”.

Until I got the estimates.

Again, without boring you with too many details,

just let me say it took my friend Sherry about 45 minutes to calm me down –

USD 4000 to ship 40 already packed boxes – by ship ???

By air, maybe I could see such an outrageous sum –

but to send all my precious books and CDs by ship to the tropics,

where god knows what damages the weather would inflict on them ???

And 5 weeks from them to get from San Francisco to Singapore ???

I mean, they’re only crossing one ocean, admittedly a big one, and they are two of the biggest ports on each side of the Pacific.

Talk about sticker shock.

Eventually, with the help of some other friends who regularly shipped vitamins on the same route,

I was able to find a much more reasonable price –

which even included a couple of guys who would come over and “reinforce” the existing packing and sealing.

We’ll pass over the fact, the week before I was expecting the boxes to arrive, I got an email telling me,

“Oh, sorry, they didn’t get on the ship four weeks ago in San Francisco, so it will be another two weeks”.

We can also skip the outrageous amount it cost simply to “clear customs” –

about another 25% of what I had been told was the “full and comprehensive” amount for the job.

In the end, everything arrived safe and sound, and they even brought them to my home in Singapore.

The point is this: despite what was SUPPOSED to be a complete collapse of the shipping industry worldwide,

it turned out to both take much longer AND cost much more than I ever thought it would,

given my regular monitoring of the Baltic Dry Index and all other measures of global transport costs.

So what’s going on in shipping is precisely what we mean by stagflation:

a situation where, simultaneously, there is STAG-nation in terms of the growth and activity within a particular sector –

AND the in-FLATION of prices within that sector, despite the lack of movement in it.

As we have pointed out frequently, this stagflation is a theoretical impossibility, according to the standard schools of conventional economics:

neo-classical / monetarist / and, even, Keynesian, all of which rely on the Phillips curve

that assures us there is an inverse proportion between economic growth, on the one hand, and, on the other, inflation, or a rise in prices.

But, as the King says in Amadeus, “there it is.”

And it turns out I’m not the only one who’s been inconvenienced –

and whose company has had to pay more –

as a result of the current stagflation in the global shipping industry.

It is having a huge effect on retailers as well – and here’s how it’s all playing out.

Cardiac Advisory: This is an upsetting story that may agitate you if you have a weak heart – or ever deal in global transport.

The grills shaped like kegs and toolboxes, ordered for a Father’s Day promotion at Cost Plus World Market, arrived too late for the holiday.

At the Container Store, platinum-color hangers, advertised in a summer sale catalog, were delivered days after the sale began.

At True Value Hardware, the latecomers were fans and portable chairs.

Fighting for freight, retailers are outbidding each other to score scarce cargo space on ships,

paying two to three times last year’s freight rates —

in some cases, the highest rates in five years.

And still, many are getting merchandise weeks late.

The problems stem from 2009, when stores slashed inventory.

With little demand for shipping, ocean carriers took ships out of service:

more than 11 percent of the global shipping fleet was idle in spring 2009,

according to AXS-Alphaliner, an industry consultant.

Carriers also moved to “slow steaming,” traveling at slower and more fuel-efficient speeds,

while the companies producing containers, the typically 20- or 40-foot boxes in which most consumer companies ship goods,

essentially stopped making them.

“All my customers, they’re having a terrible time,”

said Steven L. Horton, principal at Horton Global Strategies, which negotiates freight contracts for companies.

“With the increased cost and them not knowing if they’re even going to get the space or equipment, it’s a weekly battle.”

Retailers and suppliers like Mattel, Polo Ralph Lauren, Jones Apparel Group, Costco, the VF Corporation, Big Lots and Lifetime Brands

have reported being hit with higher prices and capacity shortages.

The fight for space means many retailers are expecting higher sales, which is a glimmer of good news.

And air carriers are picking up some last-minute shipments from desperate retailers;

FedEx reported on Monday that it expected increased earnings for its first quarter, ending next month.

But for most retailers and suppliers, the shipping problems are a huge headache –

yeah, tell me about it –

at a time when retail sales are weak and consumer confidence is waning.

“It’s made this key selling season even more complicated,”

said Edward J. Yruma, an analyst with KeyBanc Capital Markets.

The shipping companies slowly added ships back into the system early this year,

but they did so haltingly, not wanting to add too much supply and risk having their rates fall.

Major carriers largely hew to the rates set by carrier groups,

which are allowed to discuss and set voluntary rates, under antitrust immunity.

Ahhh, it all begins to make sense now …

Lifetime Brands, which makes and sells products under brand names like Cuisinart and KitchenAid,

said it was now paying about double last year’s rates, and Costco said it was now back to 2007 rates.

Companies that lack contracts with shippers – like mine 😉 – are paying even more.

Again, most definitely NOT surprised.

The cost of shipping a 40-foot container from Hong Kong to Los Angeles without a contract, or the spot rate,

was about $871 in July 2009, a five-year low.

This month, that spot rate reached $2,624, a five-year high,

according to the industry consultant Drewry Shipping Consultants, as reported by The Journal of Commerce.

That exceeded even the cost before the recession, which was about $2,000.

Because of slow steaming, which takes containers out of the system for a longer period of time,

and because places like Russia and India began to demand container space,

finding something to ship goods in, much less space on a ship, has been problematic.

“There aren’t enough actual containers,

so therefore, even if the vessel capacity situation is easing up a little bit,”

said Peter Tirschwell, senior vice president for strategy at The Journal of Commerce,

“you now have equipment that people can’t get.”

While container shipping has recovered from last year’s lower spot prices,

commodity shipping, where companies ship raw goods like iron ore or petroleum,

remains in a depression.

This month, the Baltic Dry Index, which measures commodity shipping costs –

no wonder … guess I was looking in the wrong place –

fell for the longest number of consecutive days in almost nine years

because of low demand for materials like steel.

Which may indicate one, or both, of two things, neither of which is good:

Either China and India are NOT growing as fast as they seem to be,

or they ARE, but the rest of the world is in even WORSE shape than we’ve been saying –

which is definitely, er, saying something – something NOT good.

The problems in container shipping from Asia are the most pronounced, retailers say –

and we can certainly confirm –

but shipments from other continents, and via domestic trains and trucks, are difficult as well.

The effects have been severe for some retailers and suppliers.

To get products in on time, they need to spend a lot more.

Cost Plus, for instance, has used air freight for some time-sensitive items,

and that costs about 10 times what sea freight does,

said Jeff Turner, who oversees supply chain and store operations.

And for sea cargo, even though contracts with freight companies exempt Cost Plus from summer surcharges,

known as peak-season surcharges, the retailer is paying them.

“We have agreements that literally say we don’t have peak-season surcharges for our business,

but we’re treading completely new ground.

Our carriers are coming to us and saying,

‘If you want to get on the vessels, we need to figure out how you guys pay peak-season surcharges,’ ” Mr. Turner said.

Mona Williams, vice president for buying at the Container Store,

said the company was telling manufacturers to book space well in advance,

and that it was moving delivery dates earlier.

And for items that simply must arrive, well, there are ways to do it.

“Sometimes you can offer to pay a steamship company a larger amount of money,

and they might take somebody else’s container and not put it on,”

said Jeffrey Siegel, the chief executive of Lifetime Brands,

but “in most cases, you just have to wait.”

To play it safe, Mr. Siegel has started scheduling items to arrive

as long as three months before they need to be in stores.

That means a higher cost for holding inventory than usual,

but interest rates are relatively low,

and he would rather have the goods in hand, he said.

The companies also risk losing sales if anything is late.

For instance, Cost Plus, a home décor chain with more than 260 stores nationwide,

had to quickly revise advertising and in-store arrangements when it learned grills would be late for Father’s Day,

and beach chairs would arrive after a summer promotion ended.

“You’re trying to convince your customers to take a rain check — ‘It’s coming’ —

or explain why it’s not there,” Mr. Turner said. “It’s not easy.”

For True Value, which had difficulty getting summer items like fans and grills on time,

the worry was not about the retail customer, but about the stores it supplied.

“True Value stores can buy from other wholesale distributors, so they can look elsewhere,”

said Don Deegan, vice president for logistics for True Value, in this article from the New York Times.

The company has bought more expensive items when it knew it would miss a deadline, he said, to placate the stores.

Steve Walterscheid, the president of Zing Toys, which makes some summer toys,

said that after his orders kept getting bumped from ships,

some retailers would not take the late deliveries.

“Some will still accept it, some won’t,” he said.

“In a short season, if you miss two weeks of a season, that’s quite a bit.”

So let’s just hope the stag-flation that has hit the global shipping industry –

and having evidently negative effects on ITS customers, the retailers,

who are therefore losing THEIR customers, people like you and me –

doesn’t become a worldwide condition.

Because there’s nothing worse than paying more, and getting less – or, in some cases, nothing at all.

Should something like this start to happen on a global level, then, truly all bets are off –

because the anger that is building in many parts of the world –

the US Tea Partiers / Club Med public service workers / a newly militant Chinese working class –

could then explode unpredictably all over the globe.

And that would be be MOST unpleasant indeed.

 

David Caploe PhD

Editor-in-Chief

Economy Watch.com

President / acalaha.com