Supply Chain Crisis Ends: Inflationary Pressures Ease

A Forbes news source speaks about the End Of The Supply Chain Crisis: A Relief From Inflationary Pressures.

Global supply chain disruption

Not more than a year ago, all eyes were focused on the disruption in the global supply chain. Ports were backed up, transportation costs were soaring, and there was a shortage of essential consumer goods. These bottlenecks caused massive stress in the economy and skyrocketing inflation. Today, things are very, very different.

Excess capacity in ocean freight shipping, trucking, and other critical components of the supply chain is putting downward pressure on prices, reversing backlogs across the supply chain and contributing to the decline in inflation.

Retailers, manufacturers, and policymakers welcome the “ungluing” of the various components. The New York Fed’s Global Supply Chain Pressure Index (GSCPI), designed to monitor global supply chain stress, might be the best aggregate measure of the current state of the logistics industry, and it highlights a dramatic change over the last year.

Evidence suggests the crisis is over. Every component in the global supply chain has seen improvement – ocean freight shipping, the price of shipping containers, barge transportation, air cargo, trucking, and warehouse capacity – all provide evidence of improvement. Let’s look at each of these components individually.

Remember the crisis in ocean transportation? Shipping costs were a massive concern for businesses relying on the China-US trade route. The lockdown in the US during the pandemic caused a huge demand for goods (since many services were not offered or were limited) and consumers were flush with cash from government stimulus measures. The excess demand led to a surge in shipping costs. The cost to ship a container from China to the west coast of the US quadrupled to over $20,000 in the first nine months of 2021. According to Freightos, a well-known player in international shipping, costs to ship a container on the China-US route has plummeted to less than $1,200. Current pricing in ocean freight shipping indicates a sea-change in supply chain dynamics that favors the manufacturers and retailers, not the shippers.

The turning of the tides for the ocean freight industry is reflected in the stock market performance of publicly-traded shipping companies. AP Moller Maersk, the Danish logistics giant that operates in 130 countries, was a significant beneficiary of the increase in prices across the supply chain, particularly the jump in shipping rates. Its stock price outperformed the S&P 500 by more than 100 percent between the first quarter of 2020 and the end of 2021. The stock has since dropped more than 50 percent from its high, giving back virtually all its relative performance.

Drop in the Price of Shipping Containers

Along with demand for shipping during 2021, the price of a sea-worthy metal shipping container skyrocketed. Pre-pandemic, a 40′ high cube container, the type you often see on giant tankers, could be purchased for around $2,000. Prices peaked in 2021 at around $6,000. Today, prices have fallen back to under $2,000.

In the last year, global production of shipping containers has fallen significantly as demand for goods sank. Containers have piled up at major ports. According to Drewry, a maritime research consultancy, production of 20-foot equivalent units (TEU)— the industry’s standard size for a container — fell 71 percent between the first quarter of 2022 and the same period this year.

For now, there is no shortage of available shipping containers.

Barge Transportation Prices Ease

Along with other forms of transportations, barge shipping costs shot up. One way to track prices in shipping via barge is through the weekly GTR report from the USDA.

The Grain Transportation Report (GTR) provides the latest insights about market developments that affect grain shippers that use trucks, railcars, barges, and ocean vessels to ship their products to market. According to its latest weekly report, barge movements are down 57% vs the same period last year.

Fall in the Cost of Air Freight

Air freight is another supply chain component in the midst of normalization. Recently, the cost of air freight has experienced a notable decline. This can be attributed to both supply and demand factors. Similar to international shipping demand for air freight has fallen due to the drop in overall demand for goods. The increase in supply can be explained by the change in available capacity in passenger aircraft belly-hold space, as airlines intensify their flight programs to respond to meet the renewed demand for travel. Supply of air freight was severely constricted when international travel came to a halt during the pandemic.

One way to measure the cost of air freight is through the Drewry East-West Air Freight index. The index has halved from its high at the end of 2021. A normalization of jet fuel prices following peak pandemic demand and the disruptions relating to the conflict in Ukraine has also helped ease air freight costs.

Decline in Trucking Rates

Trucking rates, a crucial supply chain component, have also declined. Again, less demand for goods and incremental inventory, along with a fall in fuel charges, have helped drive trucking rates lower. According to data from Internet Truckstop, hauling flatbed rates peaked at $3.50 per mile in June 2022 but are now under $2.50.

Internet Truckstop also publishes an index that tracks new hauling demand. Demand peaked in mid-2021 but has since drifted back to pre-pandemic levels. It does not appear that pass-through price pressures or additional bottlenecks relating to trucking are going to be an issue for the logistics industry in the near term.

Improvement in Warehouse Capacity

Wide-spread warehouse shortages contributed to supply chain concerns at the height of the crisis. There was a shortage of space to store inventory, and as a result, costs for warehouse space soared. But both capacity and prices have begun to correct.

According to the latest data in the Logistics Managers Index (LMI), which includes a warehouse subcomponent, capacity has increased dramatically. The latest Warehousing Capacity index was up 6.8 points and up a staggering 22.5 points from the reading one year ago. Capacity has been restored as inventories have fallen and demand for goods has waned.

A deceleration in prices is the result. According to data provided in the latest LMI index, the upward pressure on warehouse pricing has abated, which is welcomed news to businesses that are trying to control warehouse inventory costs.

LMI Warehouse Pricing Index

Impact of Nearshoring

Nearshoring refers to the business practice of relocating critical manufacturing components closer to demand. The recent supply chain disruption sparked a change in the way businesses develop their supply chain. CEOs and logistics managers can ill-afford a repeat of the chaos created by congestion at the ports, exponential jumps in shipping costs, or delays at railyards. To mitigate this risk, US companies are bringing manufacturing closer to home.

Mexico is a clear beneficiary of this trend. The current proximity and the Free Trade Agreement between the United States and Mexico, low labor costs in Mexico, fast and secure supply chains, and stability in relations have made Mexico an ideal place to add manufacturing capacity.

According to Mexico’s finance minister, Rogelio Ramírez de la O, 20 companies have announced more than $13 billion in investments, including $5 billion from TeslaTSLA -1.8% to build a plant that will eventually produce 1 million EVs a year. Toyota and BMW have also announced investments in Mexico in the coming years.

Nearshoring activity is also taking place in the semiconductor market. The CHIPS Act, which Congress passed in the summer of 2022, is designed to reduce reliance on Asia as the key provider of computer chips. During the pandemic, a shortage of semiconductor chips caused great pain to many US industries, particularly automakers. Currently, the US has zero fabrication capacity for leading-edge logic chips. The $52.7 billion investment in domestic semiconductor manufacturing from the CHIPs Act will help to address this issue.

While still small relative to the global shipment of goods, the nearshoring trend, along with the CHIPS Act, should help reduce risks to certain businesses when it comes to getting critical manufacturing components, potentially reducing the negative impact on the economy in the event of another global supply chain crisis.

In conclusion, the current state of the global supply chain indicates the worst is behind us. The logistics landscape is very different a year ag0. Whether it’s the drop in global shipping costs, reduced delays at the main ports, the dip in trucking rates, or the fall in air freight costs– each segment of the global supply chain has improved.

The same forces that contributed to escalating consumer prices are now providing deflationary pressure, providing relief to central banks, governments and consumers. If you are looking at the worldwide supply chain as a source of ongoing inflationary pressure, you should probably look somewhere else.

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Source: Forbes

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