The last couple of years have shaken up the globe, and one of the hardest-hit areas is the supply chain, namely shipping. US President Joe Biden isn’t just sitting around pondering this situation. Instead, he is in the midst of issuing an executive order that has as its goal reducing shipping costs. But he’s just representing one country (albeit a large, powerful one). Can such an order make an impact on the global supply chain?
Industry Update: Shipping Rates
The cost of shipping has increased significantly during the last 18 months, starting with the stay-at-home orders that shifted consumer behavior. And that bump has made its way to consumers through the cost of goods. Biden feels that trickle effect is harming the American economy and the average Joe.
To put it in perspective, Drewry’s composite World Container Index jumped 333% from this time last year. Keeping in mind that the composite is an average, it is noteworthy that some routes have skyrocketed nearly 600% since July 2020. That’s a huge difference in money out of pocket.
According to the white house, as reported by NBC, Biden aims to slash those costs with his executive order, scheduled to be signed July 9, 2021.
The Situation: Why the Executive Order Is Happening
The goal of President Biden’s executive order is to target and minimize or eliminate anticompetitive practices in oceanic and rail transports. But these practices aren’t new; in fact, they started during the Great Recession of the last decade. Prior to that, shipping companies had been increasing their cargo fleet, but when demand decreased drastically, so did the number of ships transporting goods.
Suddenly, the number of available cargo ships dropped—in some cases up to 50%—leaving shipping companies to combine resources. When space was unavailable on one ship, freightliners would consolidate. These consolidated groups begin to dominate the industry, and today, nearly 80% of maritime shipping is involved in some sort of alliance.
The pandemic has exacerbated conditions due to increased demand and reduced supply (see our previous shipping updates to learn more). And companies that have to pay the higher shipping costs are frankly tired of the monopolies.
Biden’s executive order will direct the Federal Maritime Commission and Surface Transportation Board to crack down on price hikes associated with consolidation.
Projection: Potential Impact of the Executive Order
Tom Derry, CEO of the Institute for Supply Management, feels that once the global workforce truly gets back to work, things will return to normal. Waiting out the pandemic seems to be the only real solution to the supply-chain log jam, as well as the associated bump in prices. We had the same number of containers a year ago when prices were significantly lower, and the only real change in that time has been the pandemic. He feels this is a “self-correcting problem.”
Then will the executive order do anything in the immediate future? Likely not. All it’s really doing is telling people to do their jobs, which they are. With the economy and world as they are at the moment, perhaps the only thing to do is wait it out.
As we’ve been sharing for months now, if you have product you’re shipping across the globe, you need to have plans A, B, and C. You need to keep your finger on the pulse of what’s happening in the shipping industry. Executive order or not, you need a freight forwarder in your corner advocating for you.
That’s what we do at Cyclone Shipping.
We stay informed so we know about everything that’s happening, from container demands to shipping costs (and even the random executive order). Contact us to develop your strategy and keep your shipments moving.