January 2022 Market Update

January 2022 Market Update from Uneeda Bolt and Screw

Most of us thought that 2020 was going to be the blockbuster year for supply chain problems; then the sequel came. 2021 showed that global supply chains optimized for efficiency and lowest costs were not resilient enough to handle the disruptions from COVID without severe delays and interruptions. As we enter the 3rd year under a global pandemic, here are 5 things to watch out for in 2022.

1. The freight market should slowly improve, with some major risks

Port of LA/LB with ships waiting to dock – October 2021

The main challenge for supply chains throughout 2021 was freight, with historic backlogs of ships at US ports waiting to offload vital cargo. The delays started in late 2020 with rising freight prices and low container availability – the “canary in the coalmine” moment that foreshadowed the year to follow. Going into 2022 rates are beginning to fall from peak season highs, with rates easing about 15% since Autumn, although availability remains scarce. With how interconnected and complex the freight market is, small disruptions will have an outsized impact that ripple through the chain, and this complexity means that improvements to the chain are slow to deliver results. US Inventory Levels for Retail and Wholesale Durable Goods are still at or near historic lows, and demand from consumers seems to show continued demand growth. (See chart below)

Inventory levels as of 12/8/21

The next 2 months before Chinese New Year will be the real indicator of how 2022 will look – If ports can process the backlog of containers waiting to unload and get empties back to Asia before the CNY holiday, they will be well-poised to handle the flow afterwards. The threat of fees for aging containers has incentivized importers to clear the stacks clogging storage yards, and the US Government has pushed carriers to take more containers back to Asia. Peak season is now over, and many supply chains have now factored longer lead times and higher freight costs into forecasts, minimizing further impacts. Global ocean freight will probably not go back to the low rates of the past (which were unsustainable for carriers), but the situation should improve over the next 6-12 months.

The two main risks with shipping are further disruption due to COVID, and labor negotiations on the West Coast in July 2022 that could seriously reduce capacity. Surges in COVID cases sideline workers who are desperately needed at ports or on trucks, and further variants (like Omicron) could cause delays and labor shortages in the shipping industry. In July, the International Longshore and Warehouse Union, which represents workers on the West Coast, is set to begin negotiations on their next 5-year contract with the ports. In the last negotiation, some ports saw a decline in productivity of 50% and the negotiation lasted months. With the power in the hands of the Union due to labor shortages, there is a real risk of delays and disruptions at ports this summer.

Those that import goods through the East Coast, like us here at Uneeda, should not see impacts as the ILWU only operates on the West Coast. The East Coast has the ILA, who will hold their negotiations separately in 2024.

2. Inflation will persist through 2022, and may be more severe than it is now

While inflation during the recovery from COVID was expected to be “transitory”, the impact on consumer prices has steadily climbed and persisted longer than hoped. No model could have predicted the impact of supply-chain gridlock on inflation, and the global pandemic has been an experiment in the resilience of the globalized economy. Inflation seems to be a result of economies re-opening across the world (inflation is higher in both developed and developing countries), but US Inflation rides higher than most. Much of this is due to the huge demand for consumer products in the US, fueled partly by generous government stimulus measures.

The Federal Reserve has announced plans to raise interest rates and reduce their bond-buying to fight inflation. The Fed has two tasks – maximize employment and keep inflation near their target of 2% per year (now at 6.8%). The focus through the pandemic was on unemployment, which is still higher than it was in 2019. The shift to focus on inflation means the Federal Reserve will need to delicately balance the need for full employment with the need to keep price rises low. These measures by the Fed are projected to reduce inflation to 3.8% by the end of 2022, but with supply chains in such a precarious situation any further troubles will increase inflationary pressure.

Inflation forecasts for 2022 – Red line indicates inflation at 2019 levels, blue line indicates 2021 levels

3. Visibility across supply chains will increase, making forecasting and planning more effective

Disruptions in 2021 had at least one positive effect – many companies are now more aware of the resiliency and reliability of their supply chains. Prior to the pandemic, supply chains were not a focus for many strategic planners beyond the goal of cost reduction, and in our experience, many were expected to operate efficiently without much consideration or foresight. The interruptions this year have brought forecasting and inventory planning into focus, and transparency is increasing at all levels from factories to end users. Communication with factories has ensured that any delays are recognized months ahead of time, allowing for alternative plans to keep production lines humming. More reporting and collaborative planning with customers is resulting in better long-term scheduling and fewer emergencies.

Part of the increase in visibility is the trust that comes with greater communication and sharing of data. We have seen companies that treat their vendors as partners successfully navigate the challenges of the pandemic, whereas those without this cooperation are at the mercy of the market. Factories have been willing to share production information and communicate issues to an extent that we have never seen in our 68 years in business and this trend is likely to continue, as it reduces risk and increases trust among all members of a supply chain.

4. The labor market for Transportation and Warehouse jobs will remain tight in 2022, accelerating the push toward automation

One of the major factors impacting US supply chains is the low availability of labor and the high wages needed to attract workers. The Transportation and Warehouse sector has struggled to attract and retain workers throughout the pandemic, and with the rise of ecommerce and high consumer demand the need has increased dramatically. The graphs below show the increase in openings for Transportation and Warehouse jobs, along with the increase in hourly wages.

The high demand for workers has created a market where they have the power to negotiate for better salaries and benefits. Transportation and Warehouse jobs are in higher demand than ever, yet wages in this sector are still below the national average, pushing them into better-paying sectors. Many want higher wages and increased unionization, while flexible work schedules and bonuses are being offered as incentives to attract talent. With quit rates still at record highs, labor is likely to remain an issue in 2022.

All of this also means increased costs for businesses, which has pushed many to look toward automation to reduce costs and increase productivity. Warehouse workers can be replaced by automated robots, ships are increasingly automated, and the trucking industry is a target for automated driving technologies. Many US factories are investing in equipment that can increase production with fewer employees, and while the initial expense is high, the increasing costs and demands by workers make this shift more attractive.

5. The push to diversify supply chains away from China will continue

It is never a good idea to have most of a supply chain originating in one country, and now more than ever we hear of supply chains moving away from China for political and practical reasons. The political attitudes toward China have shifted in the last few years, with tariffs implemented in 2018 unlikely to be lifted anytime soon. China is now seen as a rival to the United States rather than a partner, and we often hear that customers want products “from anywhere but China”. Part of this is a political calculation as the world starts to split between US influence and Chinese influence, but much of the shift is practical.

Before the pandemic, China boasted over 25% of global manufacturing, almost double the share of US manufacturing. Many supply chains relied solely on China due to their low costs and wide capabilities. This year`s disruptions have revealed how risky it is to rely on any one country, especially China with its “Zero-COVID” policy that has caused frequent shutdowns and delays. Tariffs have eaten away at China`s competitive pricing, and the shifting political landscape makes doing business in China riskier with US consumers. On top of this, there are issues of human-rights abuses in Xinjiang and the threat of additional tariffs or even conflict in the coming years.

Chinese factories we used to work with are now opening new companies in the Philippines, Thailand, and Vietnam to attract US customers. One of the major discussions with US manufacturers over the last few years has been how to move production of inputs away from China to either India or South America, with some partners we work with beginning to source hardware from Saudi Arabia and African countries. We are likely to see the move away from China continue and even accelerate as they challenge US dominance over the coming year.

If there are any topics you are following not mentioned in our updates, please email us at Sales@Uneedabolt.com and let us know what you are seeing!