April global logistics update; Five key supply chain disruptors
Since the early days of 2020, the COVID-19 pandemic has disrupted global supply chains, creating shortages of goods, even though ships, trains, trucks and planes continued to run, to the best of their ability.
The infrastructure that supports global supply chain operations has struggled to absorb the continuing impacts emanating from COVID-19; including the need for urgent PPE, sustained spikes in consumer demand, idled factories, COVID-safe working regimes and workers getting sick or forced to work from home, through localised lockdowns, globally.
The result has been shortages of shipping containers in the right places, carrier schedules that are completely disrupted by weeks, long delivery delays, a shortage of first mile/last mile truck drivers, a sustained period of soaring freight rates and, inevitably, higher prices for consumers. And now, we have the uncertainty created by Russia’s war in Ukraine and China’s zero-COVID strategy complicating trade in the region; both of which increase supply chain uncertainty and costs.
1. China’s zero-COVID strategy
China is the world’s most important manufacturing hub and home to six of the 10 largest container ports.
While most countries have decided to learn to live with the coronavirus, China has maintained its zero-COVID policy, where even small outbreaks can shut down large population centres and slow economic activity.
In Shenzhen, some of the country’s most important manufacturers had to temporarily shut in March, in Changchun, an industrial hub that accounted for about 11% of China’s total annual car output in 2020, automakers were forced to close and now Shanghai, China’s largest city of 26 million people, is in total lockdown, with no end in sight.
The concern is that continuation of the strategy is likely to have a dampening effect on China’s domestic growth, which will translate more widely as impact on global trade; 80% of which moves on container ships.
2. Russia’s war
Energy prices have soared since Russia’s invasion of Ukraine, increasing costs for every mode of transport, with rising prices and emergency surcharges.
Food supplies are under threat because both countries are big producers of wheat and fertiliser. They are also key exporters of industrial raw materials, including nickel, lumber and neon gas, which is vital for making semiconductors, a critical component in automotive manufacturing.
More than 2,100 US companies and 1,200 European organisations have at least one direct supplier in Russia, and the total reaches 300,000 when indirect suppliers are included. With sanctions blocking commerce with Russia, companies are scrambling to find suppliers elsewhere, as well as sea and air routings that avoid the conflict zone altogether. That is before Ukraine manufacturers which are essential to many industries, such as the automotive sector, are considered as they are unable to operate in the current conflict.
3. The impact on freight rates
At the peak of the COVID supply chain strains in October 2021, ocean carrier spot rates had risen ten-fold on a year earlier on many global lanes, including the important Asia to Europe trade.
The FAK/ Spot market cost for a 40’ container on the Asia-North Europe route has fallen since then, in the first quarter of 2022, but that’s a typical move after CNY and rates are still more than double what they were a year earlier. Largely due to blanked sailings and carrier capacity adjustments, along with continued disruption to shipping line schedules, caused by a plethora of market dynamics.
The massive reduction in passenger (belly-hold) air freight capacity in the 1st quarter of 2020, has never recovered, because the restoration of long-haul passenger services, has been patchy – at best – and now the Ukraine crisis has removed another >10% of global capacity. The impact on rates is inevitable, and that’s without factoring in emergency fuel and war surcharges, which we have seen implemented by most scheduled carriers since the beginning of March, with charter aircraft costs doubling in a month on most global routes.
Any longer-term slide back on rates will be driven by weaker import demand or a seasonal adjustment. Either way, freight rates are still several times higher than 2019 levels and are feeding into price inflation. Air freight traditionally accounts for 40% of products moved globally by value, to put these statistics into perspective.
According to research by the International Monetary Fund, “when freight rates double, inflation picks up by about 0.7%, which implies that the increase in shipping costs in 2021 could increase inflation by about 1.5% in 2022.
4. The BIG three
The leading container shipping lines, mostly based in Asia and Europe, have enjoyed some of their highest-ever profits. And even though these profits follow decades of loss and investment, politicians across all continents have taken the opportunity to blame the concentration of power in the shipping industry for dulling price competition.
In 2017, the dozen biggest container shipping lines formed three alliances to share ships, cooperate on routes and limit excess capacity – 2M | Ocean alliance | THE Alliance – in control of about 80% of the world’s shipping container capacity.
Critics claim the arrangement is an oligopoly, as some busy trade lanes might have several competitors, but smaller gateways for goods might have just one or two.
US and European regulators have raised questions about constrained competition, and while politicians might like to complain about the carriers, the global nature of the industry means it’s mostly beyond the reach of national regulators, who are unlikely to be able to do much to control prices.
If there was action taken, in suspending carriers for their conduct, the impact would be even greater disruption and reduction in shipping availability, which would normally result in even higher prices due to the supply versus demand market dynamics. It’s a dilemma at best, that is difficult to address, resulting in carriers being in the driving seat.
5. Why containers matter
There are about 25 million standard shipping containers, that move globally on around 6,000 container ships. They move within a fragile network of ports, terminals, inland transport and warehouses that are designed to stay synchronised.
They are the backbone of globalisation and globalised supply chains worked so well and became so slick, that they encouraged the widespread adoption of supply chain dependent strategies, like just-in-time (JIT) manufacturing which, at its purest, meant no inventory and assembly lines dependent on the next part arriving (just) in time.
But, there’s a limited supply of containers, to meet what became unpredictable demand two years ago.
The COVID pandemic triggered unusual swings in the demand for goods as well as on-again, off-again lockdowns and the disruption left handlers of containers struggling to manage traffic, creating shortages of equipment, where and when they were needed most.
JIT is being replaced by Just-in-case inventory management, as firms build buffer stocks, as the world continues to deal with many of the previous risks, along with a new set of geopolitical worries.
The other consideration is the fact that we are in the traditional ‘slack’ season where demand for logistics softens and the peak is yet to come – there could be even more trouble ahead…
With continuing supply chain challenges in many regions, we work closely with our network partners, carriers and own offices globally, to monitor the situation and find solutions for our customers, including the most time-sensitive and urgent shipments.
Despite the negative tone of the above market update we are constantly introducing initiatives, innovation and market leading services, that deliver reliability within your logistics platforms and supply chains. Creative, tailored in design and consistent solutions based on an end outcome and your expectations.
With the continued rate and capacity pessimism, there are often new and emerging opportunities thrown up by the market, which is why we share regular intelligence and breaking news.
For the latest insights and to review your situation please contact Elliot Carlile, who will share market conditions and intelligence and explain how we will protect your supply chain in avolatile situation.