The Repositioning of Empty Containers

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Author: Dr. Jean-Paul Rodrigue

1. The Container Shipping Market

The growth in global trade and freight distribution has led to a demand for new containers. Each year, about 2 to 2.5 million TEUs worth of containers are manufactured, the great majority of them in China, taking advantage of its containerized export surplus. Production peaked to 3.9 million TEU in 2007 with the global inventory of containers estimated to be at 28.2 million TEUs. This approximately implies 3 TEUs of containers for every TEU of maritime containership capacity. The standard 20 foot container costs about $2,000 to manufacture while a 40 footer costs about $3,000. Therefore, a twenty foot container costs $1.71 per cubic feet to manufacture while a forty foot container costs $0.80, which underlines the preference for larger volumes as a more effective usage of assets. Even so, the twenty foot container remains a prime transport unit, particularly for the shipping of commodities such as grain where it represents an optimal size taking account of weight per unit of volume capacity of containers, around 34 metric tons.

China accounts for more than 90% of the global production of containers, which is the outcome of several factors, particularly its export-oriented economy and its lower labor costs. Considering that China has a positive trade balance, notably in the manufacturing sector which highly depends on containerization, it is a logical strategy to have containers manufactured there. This enables a free movement since once produced a new container is immediately moved to a nearby export activity (factory or distribution center), then loaded and brought to a container port. A long distance empty repositioning is therefore not required for the newly manufactured container. Every container utilization strategy must thus take into account production and location costs.

The great majority of containers are either owned by maritime shipping companies or container leasing companies. With the beginning of containerization in the 1970, a container leasing industry emerged to offer a flexibility in the management of containerized assets, enabling shipping companies to cope with temporal and geographical fluctuations in the demand. Following a period of growth correlated with the ebbs and flows of global trade, the leasing industry went through a period of consolidation in the 1990s, on par with the container shipping industry. An important trend in recent years has been the growing share of container ownership attributed to maritime shipping companies, which reached 59.8% in 2008. This growth can be explained by the following:

Containers are an asset that maritime shipping companies make available to service their customers. Providing containers help increase the utilization rate of containerships.
A growing level of intermodal integration and control where maritime shippers are interacting with port terminal operators (some directly operate port terminals such as APM) as well as with inland transport systems such as railways and inland ports. In such a context, controlling container assets enables a more efficient use of the transport chain.
The rising cost of new containers, the repositioning of empties and systematically low freight rates along several trade routes, have made the container leasing business less profitable. Ocean carriers also have a greater ability to reposition empty containers since the control a fleet and can reposition their containers when capacity is available. It is also not uncommon that a whole containership will be chartered to reposition empties.

About 60% of the equipment available for location is controlled by five leasing companies having fleets exceeding 1 million TEU each. If the 13 largest leasing companies are considered, they account for 90% of the global container leasing market and controlled the equivalent of 10.7 million TEU. Shipping and leasing companies often have contradictory strategies in the usage of their container assets. From the point of view of shipping companies, their containers are assets enabling a more efficient usage of their ships through a higher level of cargo control. They consequently maximize their ship usage, which are their main assets and the container a tool for this purpose. From the point of view of leasing companies, containers are their main assets and the goal is to amortize their investments through leasing arrangements. These arrangements come into three major categories that differ in terms of length of the lease and who is responsible for the repositioning of empty containers. In the past, maritime shippers relied extensively on leasing but recent trends underline their more active role in the management of container assets, particularly because a container spends a large share of its life span idle or being repositioned.

Chassis fleets are also an important element of the market as they are necessary to carry containers by road and sometimes within terminals, particularly rail. A breakdown of the chassis ownership reveals that shipping lines (70%) and leasing companies (10%) have the bulk of the assets. What remains is owned by railroads (8%), truckers (8%), and terminal operators (4%). The high share of chassis ownership by shipping companies is related to their high share of container ownership, particularly if they are as well involved in terminal operations. In this case a chassis pool enables to offer intermodal services such as moving containers in and out of stack and providing drayage operations for their customers.

2. Empty Container Flows

A container is a transport as well as a production unit and can move as an export, import or repositioning flow. Once a container has been unloaded, another transport leg must be found as moving an empty container is almost as costly as moving a full container. Shipping companies need containers to maintain their operations and level of service along the port network they call. Containers arriving in a market as imports must eventually leave, either empty or full. The longer the delay, the higher the cost. Repositioning thus begin immediately after a container has been unloaded and it is important since it involves costs that must be assumed by the shippers and are thus reflected by the costs paid by producers and consumers. Also, they represent development opportunities for export markets as every disequilibrium tends to impose a readjustment of transport rates and can act as an indirect export subsidy. Firms taking advantage of this may reduce, likely temporarily, their transport costs.

An increasing number of containers are repositioned empty because cargo cannot be found for a return leg. The outcome has been a growth in the repositioning costs as shippers attempt to manage the level of utilization of their containerized assets. The positioning of empty containers is thus one of the most complex problems concerning global freight distribution, an issue being underlined by the fact that about 2.5 million TEU of containers are being stored empty, waiting to be used. Empties thus account for about 10% of existing container assets and 20.5% of global port handling. The major causes of this problem include:

Trade imbalances. They are probably the most important source in the accumulation of empty containers in the global economy. A region that imports more than it exports will face the systematic accumulation of empty containers, while a region that exports more than it imports will face a shortage of containers. If this situation endures, a repositioning of large amounts of containers will be required between the two trade partners, involving higher transportation costs and tying up existing distribution capacities.
Repositioning costs. They include a combination of inland transport and international transport costs. If they are low enough, a trade imbalance could endure without much of an impact as containers get repositioned without much of a burden on the shipping industry. Repositioning costs can also get lower if imbalances are acute as carriers (and possibly terminal operators) will offer discounts for flows in the reverse direction of dominant flows. However, if costs are high, particularly for repositioning container inland, shortages of container may appear on export markets.
Revenue generation. Shipowners allocate their containers to maximize their revenue, not necessarily the economic opportunities of their customers. In view of trade imbalances and of the higher container rates they impose on the inbound trip for transpacific pendulum routes, shipowners often opt to reposition their containers back to Asian export markets instead of waiting for the availability of an export load. For instance, while a container could take 3 to 4 weeks in the hinterland to be loaded and brought back to the port and earning an income of about $800, the same time can be allocated to reposition the container across the Pacific to generate an return income of $3,000.
Manufacturing and leasing costs. If the costs of manufacturing new containers, or leasing existing units, are cheaper than repositioning them, which can be possible over long distances, then an accumulation can happen. Inversely, higher manufacturing or leasing costs may favor the repositioning of empty containers. Such a condition tends to be temporary as leasing costs and imbalances are correlated.
Usage preferences. A large number of shipping lines uses containers as a way of branding the company name and to offer readily available capacity to their customers. This observation combined with the reluctance of shipping lines and leasing companies to share market information on container positions and quantities for competitive reasons, makes it very difficult to establish container pools or to widely introduce the ‘grey box’ concept. Still, as demonstrated by the North American rail system (TTX rail equipment pool), it is possible for transport companies to distinctly separate container assets from modal assets so that the efficiency (such as the turnover rate) can be improved.
Slow steaming. Excess capacity and rising bunker fuel prices have incited maritime shipping companies to reduce the operational speed of their containerships from 21 knots to 19 knots, a practice known as slow steaming. The resulting longer transoceanic journeys tie more container inventory in transit, incite transloading in proximity of port terminals and reduce the availability of containers inland.

3. Repositioning Scales

Container repositioning can take place at three major scales, depending on the nature of the container flow imbalances. Each of these scales involves specific repositioning strategies:

Local (Empty interchange). Occurs regularly as containers are reshuffled between locations where they are emptied to those where they are filled. They are of short duration with limited use of storages facilities since containers are simply in queue at the consignee or the consigner, especially if they are managed by the same freight distributor. This problem is compounded by the availability of chassis.
Regional (Intermodal repositioning). Involves industrial and consumption regions where there are imbalances, often the outcome of economic specialization. For instance, a metropolitan area having a marked service function may be a net importer of containers while a nearby area may have a specialization in manufacturing, implying a status of net exporter. The matter then becomes the repositioning of the surplus containers from one part of the region to the other. This may involve a longer time period, due to the scale and scope of repositioning and often requires the usage of specialized storage facilities. This scale offers opportunities for freight forwarders to establish strategies such as dedicated empty container flows and storage depots (or inland ports) at suitable locations. However, locating empty depots near port facilities consumes valuable real estate.
International (Overseas repositioning). Is the outcome of systematic macro-economic imbalances between trade partners, as exemplified by China and the United States. Such a repositioning scale is obviously the most costly and time consuming as it ties up substantial storage capacity, in proportion to the trade imbalance. Significant inland freight distribution capacities are also wasted since long distance trade, especially concerning manufactured goods, tend to involve a wide arrays of destinations in a national economy. This is paradoxical as maritime container shipping capacity will be readily available for global repositioning, but high inland freight transport costs could limit the amount of empty containers reaching the vicinity of a container port. It may even force an oversupply of containers as the trade partner having a net deficit of containers (exporter) may find more convenient to manufacture new containers than to reposition existing units, which disrupts the container leasing market.

Empty container repositioning costs are multiple and include handling and transshipping at the terminal, chassis location for drayage, empty warehousing while waiting to be repositioned, inland repositioning by rail or trucking towards a maritime terminal and maritime repositioning. An empty container takes the same amount of space in a truck, railcar or containership slot than a full container. Shipping companies spend on average $110 billion per year in the management of their container assets (purchase, maintenance, repairs), of which $16 billion for the repositioning of empties. This means that repositioning accounts for 15% of the operational costs related to container assets. To cover these costs, shipping companies have imposed surcharges on full containers on a number of export routes. These surcharges can amount between $100 and $1,000 per TEU and are thus an important share of shipping costs towards developing countries in Africa, Asia and the Caribbean. The outcome is higher costs for imported goods, which is economically damaging for countries having a low level of income.

4. Repositioning Strategies

Within large commercial gateways, containerized distribution and empty repositioning are facing numerous challenges:

Transport companies must cope with access and storing charges at terminals as well as wear and tear on equipment.
Truck drivers are losing hours waiting to access terminal gates and distribution centers to return empty containers and chassis.
Terminal operators lose productivity because of congestion and are facing pressures from localities to reduce the number of idle trucks at their gates.

The fundamental reason behind the repositioning of a container is the search for cargo to insure the continuity of paid movements. A container is an asset which usage level is linked with profit and thus must constantly be in circulation. Its velocity involves higher turnover rates and three main options are available to promote this velocity:

If there are few opportunities to load empty containers on the backhaul trip, an efficient repositioning system must be in place to insure the overall productivity of the distribution system. Transloading is part of such a strategy as it frees maritime containers by moving loads into domestic containers. There are therefore less risks that shipping companies would impose surcharges because of imbalanced containerized flows.
Improve the efficiency of existing cargo rotation with a better link between import and export activities through a synchronization of flows. Instead of returning directly to the rail or maritime terminal, an empty container can be brought right away to an export location to be loaded. However, asymmetry between import and export-based logistics make this a difficult proposition.
Develop an export market taking advantage of filling empty containers with new cargo, notably commodities. This can imply a variety of strategies such as a substitution from bulk to containers or the setting of consolidation centers enabling to regroup small cargo batches into container loads. This particularly benefits small companies and enables them to access new global markets.

The case of the United States is particularly eloquent. For 100 containers entering the United States, half will be repositioned empty to foreign markets. Of the 50 that remains, most return empty to port terminals awaiting for export cargo to become available. When so, the empty container is picked up from the port terminal to a distribution center to return to the terminal once loaded. Only 5 of the 50 containers will be loaded with export cargo shortly after being unloaded of import cargo and without coming back empty first to the maritime terminal. Cargo rotation appears as a simple repositioning strategy but requires a fairly complex coordination. It can take place if import and export activities are located nearby and thus enable a quick rotation. Otherwise, an intermediary stage implying the usage of an empty container depot is required. Thus, cargo rotation is an operational process for repositioning that can be supported by empty container depots, which are physical infrastructures. Those two elements require a management system where involved actors in supply chains interact to combine movements needs and the availability of containers.

In recent years, a new concept was brought forward to help connect the various commercial needs (imports and exports) with the availability of containers, which came to be known as the virtual container yard. This system implies an online market where information about container availability is displayed without the necessity for the container to be in a physical storage depot. The container can as well be in circulation or in a distribution center, but the important point is that its availability, both geographically and temporarily, for a new load is known. The main goals of a virtual container yard are:

Display status information about containers such as their characteristics, location and availability.
Improve information exchange between actors involved in supply chain management such as trucking companies, shipping companies, distribution centers and equipment leasing companies.
Transfer the container lease and the related documentation without bringing back to container to the depot or the terminal.
Assist the actors in supply chain management in their decision making process about the usage of container assets, namely returns and exchanges.

Therefore, a virtual container yard is a "clearinghouse" where detailed information is made available to the the involved actors. Firms that are the most likely to use a virtual container yard are of small and medium size. They generally have less logistical expertise and available resources in the management of containerized assets. Large logistics firms and maritime shipping companies are less prone to use such a system since they already have substantial expertise and their own management systems. A strategy will therefore be necessary to eventually involve all the actors in a system where a market for the exchange of empties becomes possible. In the case of Southern California, investigations have underlined that while an empty container yard have some potential advantages, they should not be expected to be highly significant. It was assessed that the share of containers returning full to a terminal without initially been picked up empty from that terminal or a depot would shift from 2 to 10% if a virtual container yard was used. Thus, repositioning strategies are important in the management of containerized assets, but effectiveness is a difficult goal to achieve.