Supply Chain Disruption into 2022

Part 1: Transportation

Freight rates

The cost of sending a container from Asia to Europe today is about 10 times higher than in May 2020, while the cost from Shanghai to Los Angeles has grown more than sixfold, according to the Drewry World Container Index. The global supply chain has become so fragile that a single, small accident could easily have its effects compounded. Over the past year, ocean cargo prices on a whole have skyrocketed up to 4 times the amount they previously were. This will of course have a litany of effects on assured operations including less capacity availability, higher shipping costs, and more of an operational squeeze on small – mid size players in the logistics market. According to Freightos Baltic Index (FBX), spot rates for 40-foot containers from China to the US peaked in mid-January 2021 at with East Coast rates at $7,776 and West Coast rates at $6,163.

Shipping Cost Drivers

We have gone into greater detail on the cost drivers in previous volumes of the Falvey Foresight, but shipping is a volatile market and rates can be affected by many factors, and very quickly. This is a fairly straightforward example of an imbalanced supply and demand. The demand for shipping services is high with the relative strength of the global economy, which did see a dip due to the pandemic, but has rebounded quickly. This demand is also being driven by massive growth in e-commerce and online retail, and also by the upcoming holiday season. Ocean freight has received the majority of attention because of its cornerstone position in the global transportation market, but airfreight and trucking capacity seems to be down as well throughout most countries in the world.

Container Shortages

A major kink in the supply chain was and continues to be the container shortage issue. The containers themselves are not as much the issue as is the positioning of the containers. The vast majority of containers are manufactured in China with goods loaded for export from the country and shipped to large economic powers such as the US and Europe. Imports into the US from China have increased 54% year-over-year according to FreightWaves SONAR data, while US exports to China have only grown 4.4% in that same time frame. This means that the flow of goods is uneven and empty containers are not returning to where they are needed most. This effect is compounded with other factors such as delays in handling seen in large ports around the globe, ships at anchor outside port facilities holding up the containers needed to conduct shipping as normal, and a very large abandonment rate of empty containers not being returned from locations with less economic activity.

Labor shortage

COVID-19 has reduced the number of dockworkers and truckers working due to many of them testing positive. At the start of February 2021, over 1,000 dockworkers in California tested positive for COVID-19. Shortages of truck drivers, rail workers, and longshoremen are driving up wait time, freight rates, and driving down handling capacity at a time where many ports are seeing a huge surge in volume such as Los Angeles and Long Beach. Because of these labor shortages, vessels are unable to be unloaded within a timely manner. A lack of longshoremen has even caused many ocean carrier operators to cancel voyages. This snowball effect further slows the rate at which shipping containers are recycled back into service, making the already deep shortage of empty containers that much worse.

Port closures

There have been several incidents of port closures throughout the year for several reasons whether that be worker strike due to working conditions as seen in Montreal, closures due to congestion as seen in Oakland, closures due to political protests as seen in Mexico where several train and truck lines have been blocked off several times, or closure due to COVID infection as seen in multiple Chinese ports this year.

Delta variant

The Delta variant which is the most transmissible version of the coronavirus has been spreading through many countries in the world in the past few months. Delta is one of four “variants of concern” listed by the WHO. Such variants are deemed to be more contagious, more resistant to current vaccines and treatments, or could cause more severe illness. The Delta variant has become the dominant strain causing COVID-19 in many countries. Some of the major players in the shipping and logistics industry, specifically those located in Asia-Pacific had survived the pandemic thus far being relatively less affected, but the Delta variant threatens countries like South Korea, Vietnam, and Indonesia where vaccination rates are low. This could lead to the shutdown of many manufacturing sites throughout these regions. These areas are home to Chinese manufacturers who have shifted their lower-tier manufacturing over the years as China attempts to aim for higher-value production.

World traffic

Below is a live tracking system from AIS Marine Traffic that shows the positions of all cargo vessel traffic across the globe. Three things are very evident and put in perspective all of the topics discussed in Parts 1 and 2 of “Supply Chain Disruption into 2022”.

1. We can see the absolute scale of marine cargo shipping traffic. Accounting for an often cited 95% of transportation of goods for global trade, this is a vital market and immense in size.
2. We can see the global nature of trade. Anywhere there is coastline, there are ships either hugging the shores in travel or making calls to the port cities that sustain the nearby economies.
3. We can see that although there have been many disruptions to the shipping market and supply chain over the past year and a half, there is no stopping global trade. People will continue to require goods and services, and the shipping industry will be there to provide them.

The World Economy’s Supply Chain Problem Keeps Getting Worse - Bloomberg

Covid: Charts show how far delta variant has spread around the world (cnbc.com)

Record shattered: 61 container ships stuck waiting off California (freightwaves.com)

MarineTraffic: Global Ship Tracking Intelligence | AIS Marine Traffic