February 5, 2024

The American economy can’t catch a break.  In addition to the massive price inflation of food, cars, housing, energy, and so many other elements, international companies are now suffering from a near-doubling of ocean transportation costs in just the past three months, due to simultaneous crises in Central America and the Red Sea that have restricted international shipping through the Panama and Suez Canals.

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This is adding to the cost of goods all over the world, along with damaging lead times, as longer transits cause disruptions to both factory schedules and retail offerings.

For thousands of years, ocean carriers moved cargo.  They would fill up a ship with drums, barrels, crates, and boxes of goods.  Their math was relatively straightforward: charge for the transportation of the goods based on how much it cost to make the trip from port to port.

In the mid 20th century, Malcom McLean introduced a cost-effective way to switch most of the ocean industry to intermodal container shipping.  This means that most ships are now configured to transport thousands of stacked containers each in standard sizes — mostly 20’ and 40’ long — measured in “twenty foot equivalent units” or TEUs.  So, for example, a ship that holds 1750 standard or highcube 40’ containers is referred to as a 3500 TEU vessel.

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There are now thousands of such ships on the high seas every day, traversing weekly scheduled routes, quickly transporting hundreds or even thousands of these reusable cargo containers. Huge cranes swing each container off the ship and onto a waiting rail car.  At rail hubs hundreds of miles inland, another crane swings each container off the train and onto a truck waiting with a specialized chassis for the final delivery to a warehouse or factory.

The shipping lines have had to switch thought processes. They no longer move freight, as such; they now rent out these containers. That means they have to anticipate how many empty containers they will need each week at points of origin, so they can handle the cargo booked for them.  Since there’s never an exact match of imported cargo and exported cargo, the carriers move hundreds of thousands of empty containers all the time.  It’s a cost of doing business.

This process has been honed to a fine point over the past 70 years, and worked wonderfully until the painful market disruptions of the COVID “pandemic,” when massive bottlenecks caused by understaffing at seaports, railroad hubs, and warehouses due to “social distancing” doubled and even trebled transit times. 

Now we are seeing similar problems with two completely different causes.

The global shipping community has become dependent on the Panama Canal. An immense amount of cargo — several dozen ships, holding from 1500 to 8000 forty-foot containers each — have crossed the Panama Canal every single day for decades. 

But last fall, a combination of a severe drought in Central America, and the Panama government’s failure to properly plan for such a drought in their last huge expansion, has required Panama to greatly curtail the vessels using the canal.