What is happening with shipping costs and supply shortages?

Sharing is Caring!

by Shaun Richards

The Covid-19 pandemic has affected businesses and economies in many ways but as 2021 has developed it has hit us at a point which was previously considered a success. If we look at in terms of manufacturing I mean the “just in time” process.where it is considered efficient to have inputs arrive just when you need them on a 24/7 basis. In terms of costs it keeps them low because you avoid – as much as possible – storage costs. The problem is if there is a dislocation in the supply chain which is exactly what the pandemic created for many of them.

Ironically the place that invented the concept Japan had seen its own issues with this. Because of the strength of the Yen it moved some production abroad but hit trouble as Thailand for example was affected by floods. This and the Great Eastern Earthquake of 2011 led to the changes at Toyota as Reuters describes.

That’s why Toyota came up with a business continuity plan (BCP) that required suppliers to stockpile anywhere from two to six months’ worth of chips for the Japanese carmaker, depending on the time it takes from order to delivery, four sources said.

That is why it’s announcement earlier this month was significant as even those who had laid plans were affected too. Also ironically the Japanese move to neighbouring countries has not helped as much as they hoped.

but a resurgence in COVID-19 cases in Japan, Philippines, Thailand, Vietnam and Malaysia – home to auto factories and chip plants – have led to stricter curbs and compounded the crisis.

So “just in time” was an example of a cost efficiency that created a vulnerability or to be more precise made us more vulnerable. Even this morning a Bank of Japan Board Member has been on the case of the chip shortage.

“If the pandemic suspends chip production in Southeast Asian factories, that will emerge as among source of uncertainty for the global economy,” Nakamura told an online news conference on Wednesday. “The chip crunch may not be fixed for the rest of this year.” ( Reuters_

Shipping

Here we have seen costs rise as described by tradewindsnews.com on Friday.

A hectic week in the capesize market helped the Baltic Dry Index (BDI) rise above 4,000 points on Friday for the first time since June 2010.

The index, which gives an overall indication of the strength of dry cargo markets, climbed by 116 points to reach 4,092.

According to them it was a record week for price rises.

Baltic panellists assessed the 5TC weighted average spot rate across five key capesize routes at $49,731 per day on Friday, up by $2,370 since Thursday.

The assessment marks the end of a week of record gains for the capesize market.

The 5TC assessment has risen by $9,494 since Monday, surpassing the old one-week record of $9,333 set in October 2020.

In terms of geography and drivers this was what was in play.

Steady chartering activity and increasingly firm rates have driven up the Baltic assessments this week, especially for iron ore cargoes from Brazil and Western Australia.

It rose to 4201 yesterday driven by factors we have been noting.

Disruptions such as port congestion and global shipping constraints have contributed significantly to gains across the shipping sector, sharply cutting tonnage supply for months, Allied Shipbroking said in a weekly note. ( gcaptain)

Regular readers will be aware I have made the case for the Harpex Index in the past as it “reflects the worldwide price development on the charter market for container ships ” . But in this instance we are getting the same old song. It hit a pandemic low of 412 in early summer last year whereas it now has set an all-time high of 3560. The average of the past 2 years is 1082 and that was only passed in late January to give you an idea of the surge which has accelerated this summer.

Looking at Canada here is CBC News on the subject.

Alok Kansal, co-owner of Hari Stones Limited, says his business uses about 70 shipping containers a month and each container is costing him more than 500 per cent more than what it did last year.

“It’s just been an uphill rise,” Kansal said. “Last year, we were paying about $1,500 to $2,000 a container from China and right now, its $10,500.”

According to the Daily Telegraph we have made ourselves more vulnerable in this area too.

According to Andi Case, chief executive of shipbroker Clarkson, orders for new ships are equivalent to just 4pc of the current global fleet, down from almost 20pc about a decade ago. “It’s a story we have been telling the market for years. The fleet size has grown 50pc since 2008 but shipyards are closing,” said Case at the company’s financial results presentation earlier this month. “There’s a fundamental shortage of shipping.”

This opens some familiar themes of of you like boom and bust. Ships were ordered and yards did well and 2008 saw a boom. But then we had too many ships and so orders faded and so did some yards. Others say orders right now are higher but we face time before they will be built anyway as we look at another supply constraint.

There have been the beginnings of an effort to deal with this as the UK has a National Shipbuilding Strategy. But whilst this has seen some success in the military sphere with the Type 26 frigate even as we cross over to the Royal Fleet Auxiliary there are problems. The Tide class tankers were built in Korea because it was cheap and the Fleet Support Ships have not even been ordered.

Trucking and Labour Shortages

The same themes have been in play here and we have looked at it before. But yesterday the LA Times picled up the baton.

Some of the largest U.S. food distributors are reporting difficulties in fulfilling orders as a lack of workers weighs on the supply chain.

Sysco Corp., North America’s largest wholesale food distributor, is turning away customers in some areas where demand is exceeding capacity. The Houston company also said prices for key goods such as chicken, pork and paper products for takeout packaging are climbing amid tight supplies.

At this point we have not even arrived at the issue of getting the goods to the stores as we are looking at producing them. This has popped up in the UK too over chicken supplies to KFC and Nando’s. But trucking is in there too.

Another major distributor, United Natural Foods Inc., is having trouble getting food to stores on time. The company said the labor shortages, as well as delays for some imported goods — including cheese, coconut water and spices — are causing the problems.

Which gets reinforced here.

Sysco is aggressively hiring warehouse workers and truck drivers and offering referral and sign-on bonuses along with retention money for current staff.

Just like in the UK but solving it is proving harder than expected.

Finding truck drivers is “next to impossible,” he said, and freight costs are rising daily. The company’s orders are arriving late and consequently facing delays in being sent to customers. On the outbound side, on-time deliveries are still above 50% but have fallen from the usual rate of more than 90%.

Comment

See also  Biden’s vax mandate could collapse trucking supply lines, leading to instant shortages of food, fuel and medicines

In some ways the issues we are facing are the consequence of what were parading as successes at the time. For example “just in time” manufacturing does reduce costs but at the expense of making you more vulnerable to supply shocks. Also stockpiles do fade as Toyota has shown, but to be fair to it the buffer it created has worked well up until now. If others had copied them we would not have seen the surge in used car prices for example. In a way the UK National Shipbuilding Strategy was looking at such issues but unlike Toyota has yet to get off the ground.

Also there is the wages issue which has been in evidence in the credit crunch era and has particularly affected my country the UK. As real wages struggled companies got out of the habit of paying more in some areas. Some of this was due to the availability in some areas and locations of cheap imported labour which for several reasons is now in reduced supply via changes in rules and quarantines. So the wages response function was zero for a while and took its time to gain some speed. Also we return to the timing issue as you cannot 3-d print trained truck drivers and  the like so again we left ourselves vulnerable as the workforce aged. That may also be something of a metaphor for and perhaps even prescient for demographic issues.

So some of this will pass as supply catches up but some of it shows that we have a failure of long-term planning. In another form rather like the botched withdrawal from Afghanistan

Let me end by saying RIP to Charlie Watts of the Rolling Stones who turned out to be part of a group who could succeed over the long-term and thank him for the music.

614 views

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.