A truck driver and entrepreneur named Malcolm McLean had an idea while sitting all day at a port in New Jersey, waiting to get his truck unloaded so he could get back on the road and make more money. The old way of loading bulk material by sling and stacking it in a cargo bay just wasn’t working anymore.
However, McLean put his idea on the back burner while he built a trucking company from one truck to over 1,500. Then, after World War II, when states up and down the U.S. Eastern Seaboard started raising taxes and fees for trucks driving cargo, McLean figured out it was cheaper to go from Atlanta to New York by boat.
So he devised the shipping container. Whole railroad boxcars had been used for such a purpose before, but McLean’s innovation was taking the wheels off the box, the box off the truck, and making everything standardized. Containers had the added bonus of deterring theft as well.
To put his ideas into practice, McLean needed a shipping company. So he bought the Pan Atlantic Tanker Company, which owned a bunch of rusty tankers, and renamed it Sea-Land Shipping. With this added to his trucking company, he experimented with better ways to move cargo, refitting the ships and cranes to stack containers on the decks as well as below.
The first container ship, the Ideal X, departed Newark, New Jersey, for Houston in 1956. The container was better, faster, and cheaper, and it drove down the cost of loading freight by 90%. McLean gave away his patents and encouraged ports to back his ideas, and it worked.
McLean later founded Sea-Land Service Inc., a pioneer in the intermodal cargo transport business. After a $6 million initial investment, he sold Sea-Land to R.J. Reynolds in 1972 for $560 million, netting himself $160 million personally, which is a nice return no matter who you are.
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Where Do We Go Now?
Here it is some 50 years later, and there is no magic bullet out there that will dramatically speed up or reduce the cost of shipping. Sure, companies like IKEA have turned stacking pallets and filling containers into an art form and the size of ships has grown tremendously. But from here on out it is evolutionary change, not revolutionary.
Modern ports can unload huge amounts of cargo but can’t find space for container ships. It can take six hours for trucks to get through downtown LA. The trains are congested and sometimes ships get stuck sideways in the Suez canal.
This is why the shelves are empty and every company from Home Depot to Mattel is warning about supply chains and lack of goods for sale. Add a labor shortage, COVID-19 restrictions, and a surge in shipping rates, and you have a problem.
Drewry’s shipping index, which measures the cost of containers, is up 291% year over year. Busy routes such as China to Rotterdam have seen prices rise 558%.
Furthermore, consumers have switched from service demand like travel to material demand like new furniture. Personal savings are at a 50-year high in the United States. Demand is there but supply is not.
The one sector to benefit from all of this is the shipping companies. They get paid when they are driving across the ocean the same as when they are waiting offshore LA. There is an extreme shortage of ships, and they are taking advantage of it.
One company I follow has a P/E of 2.79 and saw revenues grow over 3,000% last quarter. These guys are printing money.
All the best,
Christian DeHaemer Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
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