November 2021 Market Update

Over the past month we have heard from Supply Chain Managers and Purchasing Departments that their roles are more akin to firemen, constantly putting out blazes left and right. With a focus on immediate emergencies, it can be difficult to find the time to keep up with recent developments. Below are some of the most impactful updates we are keeping an eye on.

With Peak Season for ocean freight on top of strong consumer demand, the largest US port now has a record 100 ships waiting to dock. Even with President Biden`s recent focus on relieving congesting, disruptions are rippling through the complex global freight market.

In August there were a record 44 ships waiting for space at the Port of Longbeach / LA which processes about 35% of all US Imports (more than double the volumes of the next largest port, Newark). For supply chains this was an unprecedented disaster clogging the already tight ocean freight system that relies on timely turnaround of equipment to keep operating smoothly. As of last week there are over 100 ships waiting for berths. To understand the scale of current congestion, the pre-pandemic record for ships waiting at the port was 12, back in 2014.

Why is congestion so bad right now?

The problem with congestion at ports, which is also an issue outside of the United States, is that the ships and containers dedicated to a trade-lane are lost from circulation while they wait to load or unload. The freight market works most efficiently when equipment is always in operation and any delay in operation ripples through to future sailings. This causes delays for material that is physically on the ships waiting to unload, but also for material waiting for the ships to complete their voyage and start a new trip. The typically high demand from retailers to stock shelves in advance of the December Holidays has increased demand in the past few months, further disrupting the system. Retail imports are at their highest levels ever, making this Peak Season even more disruptive than normal. There has also been a shortage of dockworkers and truck drivers, which we dive into deeper below.

The graphs below from the National Retail Federation shows 2021 Retail imports surging this year, with growth since August constrained by port congestion rather than lack of demand.

Continuing power shortages in China have limited production capacity and increased costs for factories, many of which now depend on diesel generators or face reduced capacity.

Power shortages in China have continued and are likely to persist over the coming months, despite Chinese Government efforts to import more coal and reduce price caps on electricity. The high demand for imports from countries like the US is causing increased power demand from manufacturers in China, and with demand expected to remain high through 2022 many Chinese factories have resorted to producing their own electricity with diesel generators. The Chinese Government has allowed coal mines to increase production, and afforded electricity producers a 20% price fluctuation to pass on increased costs.  Still, the price of coal in China is now at all-time highs and officials have been warning factories in China of power rationing for the months ahead, especially as the colder weather brings higher demand for electricity to heat homes.

How did this happen? Chinese emission targets have reduced the production of coal in China, which forced prices higher. The government strictly controls electricity prices in China to keep them artificially low, and this means that coal burning power plants had two choices – continue production and operate at a loss or reduce output of electricity. At a time when global demand is rising for durable goods which China produces, this has caused a mismatch of incentives. Even with powerplants now working on acquiring more coal at any cost, the Chinese Government is warning businesses to prepare to ration electricity over the next few months, so this problem will remain for some time.

The top 3 most productive Chinese provinces of Jiangsu, Guangdong and Fujian all have power rationing in place

Labor shortages across the US are adding to higher prices and delays, with ports, truckers and warehouses struggling to attract workers.

Part of the delays seen in freight have been due to lack of dockworkers and drivers, which is causing 30% of pickup appointments at LA-Long Beach to go unused. Ports have complained for months that it is taking importers longer than ever to accept delivery of their containers, which has crowded staging areas and made it difficult to unload additional vessels. To find space for the backlogged containers, Long Beach has allowed stacks as high as 5 containers up from the previous limit of 2.

Warehouses that normally take delivery of containers as soon as they are unloaded are now allowing containers to remain at ports for 5-10 days, much to the lament of port directors. This demurrage costs thousands of dollars per container, but in a market where container rates are over $20,000 and warehouses do not have enough workers to meet demand many importers are opting to use ports as secondary storage. There are almost 500,000 open jobs in the warehouse and transportation industry, and demand for warehouse workers is rising as the holidays approach.

The graph above from Bloomberg shows hiring data up to July 2021

“Transitory” inflation may last longer than previously expected, with some central banks and governments preparing for years of price increases as the world rebounds from COVID-19.

In previous Market Updates we have discussed the possibility of extended inflation, and the dilemma that expected inflation impacts actual inflation. While inflation doomsayers are always sounding the alarm on the risks of higher prices, it would be imprudent to ignore the possibility that the various challenges affecting supply chains could cause an extended period of inflation. This week the Bank of England announced it would begin raising interest rates in response to the threat of “medium-term” inflation spurred on by shortages and continued supply chain disruptions. All the issues in this update (record-high freight costs, rising manufacturing costs in China, labor shortages) lead to increased costs for businesses, some of which are passed on to consumers. With additional government spending on the horizon and a push toward a green energy transition, demand for industrial products and durable goods is likely to remain high in the coming years, leaving little time for supply chains to catch up.

While specific issues will be resolved in the short term, global supply chains are currently stretched beyond capacity and any further shocks to the system will have outsized impacts. Severe storms, COVID outbreaks in Asia this winter and a possible oil spill near the Suez Canal could all disrupt global supply chains.

Regarding fasteners, even extremely common items are stocked out domestically. Companies needing immediate inventory replenishment may need to use substitute items.

Since April/May 2021 domestic stock levels of fasteners have been falling dramatically. Companies that realized they were low on fastener inventory began scrambling to buy any material they can find, leaving many top factories out of stock for months. Whereas there are normally many suppliers with available material many are now completely stocked out. Some common parts are out of stock across the country, forcing companies to use substitute items.

The market has shifted to favor those who are able to plan and forecast. The situation is so tight that we regularly have calls now from our competitors looking for parts. Domestic manufacturers still have lead times extending 12-20 Weeks.

The question we are asked most is, “When will things return to normal?” The answer is complicated; the proper course of action is clearer.

As the volatility since 2020 shows, forecasting is unpredictable to say the least. COVID has illustrated the successes and failures from past decades of globalization – A seemingly small disruption such as 30 COVID cases in a Chinese City can delay hundreds of billions of dollars’ worth of goods, for instance.  What we can say with certainty is that supply chains that were previously optimized for just-in-time delivery and low cost are proving less resilient than necessary. The global freight market is at a delicate point where additional disruptions will cause enormous delays. Manufacturing centers in Asia are generally operating at capacity, and the push toward green energy and government spending in the US will likely keep demand high in the near-future.

The answer to the question above is “it depends”. If there are no additional disruptions or shocks to supply chains, some experts, including Jamie Dimon of JP Morgan, are predicting a return to stability in early 2022. Other experts and economists are predicting disruptions to continue through 2023, as worker shortages and additional waves of infections continue to cause issues.

Our view at Uneeda is that the future is uncertain and risks for further disruption remain high. Our inventory planning has always taken a “plan for the worst and hope for the best” approach, and it has served us well through the past 67 years. To date, Uneeda has never enacted a Force Majeure or changed the terms of an order due to market fluctuations, and we intend to uphold our integrity moving forward.

We urge all customers to review their inventory and demand visibility in their supply chains – the earlier a potential issue is discovered, the more options you will have to react and find a solution.

If you have any questions, feel free to reach out to us and we would be happy to discuss further.

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