Shipping Containers Reigning in on Commodity Boom

China and India’s rapid economic growth since opening their borders in the late 1970s has resulted in strong demand for a wide variety of commodities. These nations preoccupation with rapid industrialization strategies has been the driving force behind shifts in trade flows.

For almost three decades, commodities such as: crude petroleum, unwrought aluminum, forest products (wood pulp, waste paper, logs, lumber), and scrap metal have been fueling world trade. Growing Chinese and Indian demand has traditionally affected the global commodity markets through increased imports, as their manufacturing capacity has outstripped its domestic supplies for most commodity inputs.

We often find that the effects of China and India’s demand for commodities varies due to fluctuations in global prices, it should also be noted that demand for commodities in general never exhausts. Bananas are flying, along with cattle and grains from domestic ports to international markets, all because commodities are flying through the farm gates and on to container ships and cargo planes.

Weighing up the cost
This trend obviously reflects the strategies of multinational corporations positioning their manufacturing efforts in these countries in order to lower costs and maximize new market opportunities. These strategies are being leveraged simultaneously while these companies develop a freight distribution system to support these new opportunities. Regardless of what commodity in mention, one thing is certain, most of these commodities are shipped by sea.

In this whole chaos of movement, containers have completely revolutionized the transport of commodities by playing a complimentary role in the transport chain. The commodity supply chain is a multifaceted system and changes or developments in the containerization system have affected the ability of other supply chain components to perform efficiently.

When discussing commodity trading, a clear distinction has to be made between the actual or physical markets and the futures or terminal markets. Nearly all commodities coming from origin countries are sold through the physical market (commodities traded for cash, also known as cash or spot markets).

The structure and length of the commodity marketing channels differ from region to region within the same producing country as well as across producing countries. At one extreme of the spectrum, the marketing channel between commodity producers and exporters encompasses at least two middlemen: small traders and wholesalers. Small traders buy certain resources directly from producers, visiting them one by one.

Containers as a right fit
Thus, to transport several commodities such as grain, iron ore and coal, containerization will perform a niche role in the total volume handled. Both modes of transport are likely to benefit, bulk cargo offering the lowest transport cost possible while containers provide flexibility. Because of vested interests, in terms of accumulated infrastructure investment and long-standing practices, many opportunities could be captured by commodity producers, large and small alike, over niche markets (high quality grains, organics, etc.).

Another way where containers have contributed towards efficient commodity movement is when small buyers sell the resources to wholesalers, who in turn will re-sell them to exporters. At the other extreme of the spectrum, certain raw materials are sold directly to exporters by farmers’ cooperatives or even directly exported by the co-operatives.

It’s not easy being big
As China and India have emerged as key purchasers of many commodities, an examination of container demand begun to take place among stakeholders. Let’s not rule out the fact that even the United States competes with other emerging economies for the same commodities and requires the same containers to transport their own goods.

Economic implications are severe if commodities are unable to be transported due to shortage of containers. Firms that rely on imported commodities may be affected by changes in the price and availability of supply. Such market changes due to container shortages will also affect their respective commodity exports.

For example, the recent increase in US-China trade. The history of trade imbalance between the world’s two largest economies is known to all. However, the sudden demand for US grain has resulted in raising US exports to China, somewhat easing the already ballooning trade deficit.

For the greater good
Thus, the more imbalanced the traffic is, just as the case with the US-China trade, the more containerized capacities are required. This also leaves opportunities to take advantage of empty back hauls and the lower freight rates they imply. China’s grain trade with South America in particular has driven container demand up. It has long imported soybeans from Latin America and the U.S., and China has just restarted purchases of U.S. corn after a 15-year hiatus, amid efforts to cut its rising pork prices.

What next? Once a commodity reaches a port in China or India, they are stocked in warehouses, while being graded and subsequently loaded onto cargo vessels. Commodities transported in this manner made way for containerization which gradually captured the break bulk cargo market. Since 90% of the break-bulk cargo has been containerized, this process is essentially completed, leaving the possible containerization of niche markets, namely commodities and temperature sensitive cargo (cold chain).

China and India, with their booming populations are already ready to brave the choppy waters ahead and find sustainable solutions to their respective food and energy needs. All this requires resources, and a continuous transport flow.

Thus, global commodity distribution implies a transport chain where several modes are used to move cargo between its origin and destination. On the maritime segment, this has led to the emergence of intermediary hubs connecting different systems of circulation. This requires transshipment and consequently additional containerized capacities and shipping container investment opportunities.

 

Photo Source: columbiacommunique.org