Vanishing ships underscore supply woes, crisis peak may be a mirage

LONDON (BLOOMBERG) – A line of more than 80 container ships waiting to dock at the ports of Los Angeles and Long Beach, California, was cut in half in late November – or so it seemed. Turns out the vessels disappearing from the queue were merely hiding from it, loitering in the Pacific out of reach of the official count.

The actual bottleneck at midweek stood at 96 ships. In a recurring theme in economies from Germany to the United States, progress repairing this supply snarl proved to be a mirage.

As the year supply chains went haywire winds down, logistics experts are struggling to distinguish between the rays of real improvement and the false dawns. Even if the optimists are proved correct in detecting a peak in the gridlock, the fragile global trading system faces months of additional pain and remains at risk of collapsing again from even one unforeseen shock.

“I wouldn’t necessary call this a bottom,” said Ms Jennifer Bisceglie, the chief executive officer of Interos, a supply-chain risk management company. She sees any return to normal as an 18- to 24-month transition, partly because companies are grappling with pandemic challenges alongside efforts to fortify supplier networks with digitisation.

Among the signs of a nascent turnaround is an Oxford Economics report released this week that showed an easing of US supply-chain stress in November. But the fallout from the new Omicron Covid-19 variant, which triggered another round of restrictions ahead of the Christmas travel season, “risks slowing the pace at which supply-chain problems are resolved, and could unwind the progress achieved thus far”, it said.

“It’s far too early to say we’ve seen the peak of supply-chain disruptions,” said Mr Oren Klachkin, lead US economist at Oxford Economics. “The situation is very fluid and the Omicron variant could make the situation worse.”

No relief in sight

The monthly US Logistics Managers’ Index (LMI) released this week hardly showed a lurch towards normal, either. The main gauge climbed for a second month in November, reflecting warehouse costs that jumped to a record, as well as rising inventory and transportation expenses.

Respondents to the LMI’s survey don’t anticipate any significant relief over the next 12 months.

Dr Zac Rogers, who helps compile the LMI as an assistant professor at Colorado State University’s College of Business, said the worst is probably over in the mismatch between logistics capacity and demand.

Still, he cautions that passing the bottom does not mean supply chains are in the clear or cannot return there. Dr Rogers points to the ongoing semiconductor shortage as the heart of the problems because it means, for instance, a new class-8 truck ordered today won’t be finished until February 2023.

“We still have a long way to go until things are back to normal,” he said. “We aren’t going to wake up on Jan 1 and suddenly have all of the trucks and storage that we need to get costs to go down in any meaningful way.”

Ocean shipping

Container ships wait off the coast of the congested ports of Los Angeles and Long Beach in California on Oct 1, 2021. PHOTO: REUTERS

Capacity constraints continue to keep ocean shipping rates at high levels.

The price for a 40-foot container to the US West Coast from China inched back up during the past two weeks, to US$14,825 (S$20,000), according to Freightos data that includes surcharges and premiums. While that is down 28 per cent from a record of US$20,586 reached in September, it is still more than 10 times higher than what it cost in December 2019.

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Many observers note that those headline-grabbing rates reflect the spot market, and most big retailers and manufacturers pay lower rates spelled out in annual contracts typically renewed with the carriers around April each year.

Now, long-term contract rates for containers are heating up, with a 16 per cent jump in November leading to a 121 per cent surge year over year, according to Xeneta, an ocean- and air-freight market-analytics platform.

“It’s difficult to see a change of course ahead, with the fundamentals stacked very much in favour of the carrier community,” Mr Patrik Berglund, CEO of Oslo-based Xeneta, said in a online post. “In short, they’ve never had it so good, while many shippers, unfortunately, are well and truly on the ropes.”

Air freight

Cargo is unloaded from an international flight at Rickenbacker International Airport in Ohio on Oct 11, 2021. PHOTO: AFP

Pressure is also unrelenting in the air-cargo market, where rates are still climbing amid demand fuelled partly by the delays and soaring costs for ocean freight. As the Federal Reserve’s Beige Book noted, the cost of transporting goods on ships recently exceeded the cost on airplanes.

So analysts say there is little to reason to expect air freight rates will go down in the short run. Ms Camille Carenton, a senior air cargo manager with Flexport, said on a webinar this week that demand is “really strong” and is leading to backlogs at US and European airports, with delays ranging from two to seven days.

“The past few months have seen a rare convergence of limited capacity, higher demand, and a peakier peak season but the elevated prices so far are still likely more seasonal than anything,” said Mr Eytan Buchman, chief marketing officer at Hong Kong-based Freightos, an online cargo marketplace. “That doesn’t mean the worst isn’t over though.”

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Europe’s struggles

German manufacturers have been held back for months by global supply problems. Underscoring their challenge, data on factory orders released on Monday showed a slump that was far worse than any analyst predicted. On top of that, consumers are being squeezed by the fastest inflation since the early 1990s.

“Persisting supply bottlenecks are weighing on production and retail trade,” ZEW research institute president Achim Wambach said in a statement. “The decline in economic expectations shows that hopes for much stronger growth in the next six months are fading.”

UK trucker shortages

Lorries queue up following the road closure at the entrance of Port of Dover in Britain on Sept 24, 2021. PHOTO: REUTERS

In Britain, the economy is still grappling with strains ranging from crammed ports to truck driver shortages. A.P. Moller-Maersk recently said it is omitting until March some container services through the congested Port of Felixstowe, Britain’s busiest container gateway, and routing British cargo on shuttles from mainland Europe.

A lack of lorry drivers is still perhaps the biggest cause of British cargo backlogs. Logistics UK said in a report this week that the number of heavy goods vehicle, or HGV, drivers dropped by 72,000 – or 24 per cent – between the second quarters of 2019 and 2021.

British logistics companies are taking steps to boost training, recruitment and pay, “yet there remains concern that some supply-chain disruption will continue in 2022 until these crucial roles are filled across the industry”, the report warned.

After falling in October and November, the Transport Exchange Group’s index for courier and haulage prices may jump this month if spikes in the past two Decembers are any guide.

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