A Dull Moment Turns into US$800 Million

Malcolm McLean was bored out of his mind. He was a truck driver from North Carolina who, in the late 1930s, had gotten a gig to transport a load of cotton to Hoboken, New Jersey. But once he reached the docks at Hoboken, he was stuck, unable to unload his cargo.

He sat there for hours in a truck queue watching how workers slowly took goods one by one out of the trucks and slowly loaded them onto the ship. You see, the way they moved cargo back then was that goods would be packed into things like bales, crates, sacks, or barrels and then loaded onto a truck. Once the truck arrived at the port, workers would physically take items out one by one and set them on a sling, which would then load it onto the ship.

Once onboard, stevedores would check each package and place them on the hold. This was called ‘break bulk shipping’ and it was the way it had been done for centuries. It took ages.

On average, it took around eight days to load a ship, and then another eight days to unload it. It meant the ship was docked for over half the month instead of at sea. As McLean sat there for hours on end, he had a thought: Wouldn’t it be great if we could lift the entire body of the truck onto the ship?

It took him a while to put his idea into action. He borrowed some money and designed a one-size-fits-all steel box that could be easily moved between trucks, ships, and trains. In 1955 he bought Pan-Atlantic Steamship Co.

A year later, in Newark, New Jersey, he loaded 58 truck trailers onto the deck of a converted Second World War tanker, the Ideal X, and set it on its way to Texas. The container was a simple idea, but it reduced loading times from days to mere hours and decreased shipping costs massively. By McLean’s calculations, loading a medium ship in the ’50s using the break bulk system cost around US£5.83 a ton.

Loading the Ideal X had cost him 16 US cents a ton. McLean later changed the company’s name to Sea-Land and expanded into Europe and Asia. Decades later, Maersk would buy it for a whopping US£800 million.

McLean became known as the ‘father of containerisation’. His moment of boredom had turned into millions and changed the way we do shipping, making globalisation possible. I mean, it’s truly incredible.

We don’t think much about it, but you can find pretty much any Spanish or Argentinean product here in Australia, even fresh food. Sometimes even cheaper than what they are sold for over there. But of course, the pandemic has thrown a wrench into all this.

We are seeing disruptions and lockdowns, and moving around the globe isn’t as easy anymore. It’s driving costs up. The Baltic Exchange Dry Index, which measures what it costs to ship raw materials around the world, is up 176% in the last year.

For a long time, the Baltic Dry Index was seen as a leading indicator. If shipping was increasing, that meant that the global economy was growing. But after the GFC, there were questions on if it was still relevant after China went on a shipbuilding spree, increasing the supply of transport freighters.

Also, much of the economy had changed from products to services, which don’t need shipping. But that’s changed once again with COVID. Consumers stuck at home had money in their pocket and couldn’t travel or go to restaurants, so they bought products for their home — home gyms, offices, and entertainment.

And with that increase in demand, supply couldn’t keep up, especially since new ships take a couple of years to come about. It also didn’t help that there were plenty of disruptions. A few months ago, a shipping container blocked the Suez Canal.

And more recently, China partly closed operation at Ningbo-Zhoushan port, the third-busiest container port in the world, after a COVID outbreak. It means the cost of shipping a 40-foot container from China to the US has gone from less than US£2,000 before the pandemic to around US£15,000 today. There are now even reports of prices going above US£20,000.

By the way, this has been great for shipping companies. Maersk’s share price, for example, is up 87% in the last 12 months. In the first six months of 2021, Hapag-Lloyd’s net profits have been higher than in the last 10 years combined.

And it doesn’t look like this is changing any time soon, especially as we head into Christmas and more stimulus is on its way. And then there’s the Delta variant which is wreaking havoc in Australia…and in China. Here’s 9News:

An official survey of manufacturing activity fell to 50.1 in August from 50.4 in July.

That was just above the 50-point mark indicating expansion rather than contraction, but still the slowest rate of growth since the start of the pandemic.China’s economy initially coped with the pandemic much better than many of its peers, recording growth last year as others shrank. But fallout from the Delta variant and China’s zero-COVID approach has wrought havoc in recent weeks.

The country’s worst coronavirus outbreak in a year spurred authorities to take dramatic measures to stop new infections, including locking down cities, cancelling flights and suspending trade. The aggressive and uncompromising strategy appears to have contained Delta — at the expense of economic activity.

With shipping costs high and more disruptions likely since we don’t have a globalised approach to dealing with the virus, companies may start looking for alternatives. In fact, they already are.

A recent poll by Credit Suisse shows that faced with disruptions, Swiss companies, for example, are already moving to change their supply chains and turning to local or European suppliers. This is also another reason why we’ll likely continue to see inflation. Best,

Selva Freigedo,
For The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey.

We talk about the big trends driving the Australian Economy. Learn all about it here.