Global supply chain pressures are easing… but for how long?

Snarled supply chains have been a hallmark of the pandemic era’s global disruption, from China’s port shutdowns to a giant container ship stuck on the banks of the Suez Canal.

A so-called ‘perfect storm’ of factors including a surge in demand for Chinese covid supplies, bottlenecks in ports, and a shortage of staff to offload freight, led to almost two years of disruption that included a doubling of journey times, a tenfold rise in shipping rates, and a surge in consumer goods inflation.

Now, however, several indicators are starting to suggest the pressures are alleviating as the price of shipping falls, consumer spending slows, and queues at ports start to ease.

In August, the Global supply chain Pressure Index run by the New York Federal Reserve fell for the third straight month in a row, taking it to the lowest level since January 2021. The bank’s index – which incorporates data on shipping costs, delivery times, backlogs and other statistics into a single measure – is down 57% since its peak almost 18 months ago, though it still remains significantly above levels seen just before the start of the pandemic.

A major factor behind the easing pressure is the improvement in the global shipping network. The start of Covid saw huge queues build up outside ports in China and the US west coast and led to mass disruption and delays. Outside Los Angeles’s two ports, 75 container ships were queued up in September 2021. Today, that has fallen to 12 as the ports work their way through the backlog, according to supply chain portal Flexport.

Much of the congestion has been cleared by diverting some ships to the Port of New York & New Jersey and has contributed to the east coast now handling more cargo in a surprising reversal of the long-term pattern.

Shipping times are consequently tumbling, with delays on the trans-Pacific route from China to the US west coast now down from 12 days to less than two, helping to free up capacity on other trade lanes around the world. Shipping routes from China to Europe are also down from 12 days to four, but the higher number of intermediary ports that ships dock at along the way are contributing to a continued partial slowdown.

The quicker times means the lower costs, with the price of moving a standard sized 40 ft shipping container from China to North Europe down from $15k in January to around $10k today. A welcome reduction, but still six times higher than at the start of the pandemic, data from Freightos, a global freight booking platform, shows.

Nonetheless, the improvements are giving some observers hope that the easing situation will help slow the rate of inflation in the months ahead. Before the pandemic, shipping costs accounted for around 5% of the product price for some suppliers. In recent times, that has grown in some cases to over 20%.

Last month, the closely watched purchasing managers’ index reported falling orders and a drop in backlogs, suggesting the price pressures are starting to noticeably ease for many manufacturers. “Higher shipping rates and higher fuel costs just add to the cost of producing everything,” says Robert Sierra, director of economics at Fitch Ratings. “But you’re now beginning to see an unwinding of all the supply congestions and so the goods component of CPI [consumer price index] is beginning to come back down.”

The calming of these inflationary pressures will be widely counted as a good thing, yet there remains a flip side for many businesses in that the reduced pressure is potentially coming thanks to less demand and falling purchasing power among consumers. According to Jennifer McKeown, head of the global economics service at Capital Economics, it is in part this weaker demand that is “opening up some spare capacity and allowing supply conditions to improve”.

That falling demand is not only a threat to sales, particularly of discretionary items, but is contributing to pile-ups in warehouses around the world as businesses struggle to sell products at the same rate they are used to. Last month, the purchasing managers’ index tracking the levels of finished goods stocks hit its highest level on record.

“Inventory levels are becoming more of a conundrum for retailers,” says Siobhán Géhin, senior partner at global strategists Roland Berger, who explains that while businesses initially rushed to build up inventory in light of surging demand and global supply chain challenges, the economic downturn has now left many unable to shift it.

The result is that instead of supply chain bottlenecks on the sea, they are now often taking place on land. The pile-up of goods is even leading some companies to use sea containers to hold their excess stock, thereby placing an added strain on the global supply of containers.

There are also issues handling containers at the ports, with containers at many sites piling up due to a lack of transport to take them away. “There’s just not the ability to handle the incoming volumes,” says Josh Brazil, VP of supply chain insights at Project44, a supply chain insights platform.

“You have to find a way to get those containers out to a holding space quickly and the problem is that all the trains are understaffed. You either have strikes in Europe, or in the US there’s just not enough trained drivers. The infrastructure is antiquated as well.”

Strike action

The situation has been exacerbated by a series of strikes across numerous ports. In June, South Korean truck drivers stopped their trucks and sat down in the street over soaring fuel prices, causing volumes through the port of Busan, which typically handles 80% of the country’s container traffic, to fall by around 75%.

Germany’s North Sea ports also saw strikes in July when dock workers walked out for 48 hours, paralysing cargo handling at major ports including Hamburg, Bremerhaven and Wilhelmshaven. European ports are some of the most troubled in the world, with congestion at Hamburg and Rotterdam now at “critical levels”, according to a recent note from Flexport.

While the duration was brief, the impact was still felt, says Brazil. “Even those two-day strikes quickly held up containers in the port for two weeks. Every supply chain disruption is so sensitive it takes months to get back to normal, whether it’s the Suez Canal or the congestion we saw at Los Angeles. It takes a long time because these ripple effects go out.”

That is a worry for British importers. Last month’s strike at Felixstowe ended on 31 August without resolution, meaning further strikes could be on the cards in the lead-up to Christmas. Felixstowe acts as the primary UK destination for long-distance shipments to and from Asia and handles 48% of our container trade.

While the strike action has paused for now, Danish shipping company Maersk predicted the ramifications would be felt for at least two weeks as vessels are delayed and some cargo diverted to ports including Antwerp and Le Havre. With workers at Liverpool port now also set to stop work for two weeks from 19 September, the threats to UK supply chains look set to continue.

China lockdowns

Across the globe in China lies the other great threat to global supply chains. Beijing’s ‘zero-Covid’ policy of quashing every flare-up is pushing the country into a state of rolling lockdowns, and despite warnings of its impact on global trade, in a speech in May president Xi Jinping insisted the country would “unswervingly adhere” to the policy for as long as it takes.

China is home to seven of the world’s 10 biggest container ports, including Ningbo, Shenzhen and Guangzhou, and the rolling lockdowns are raising alarm among businesses worldwide who rely on materials, goods, and the free flow of ships in and out of the country.

In early May, Joerg Wuttke, president of the EU Chamber of Commerce in China, warned the erratic enforcement of the rules was making it difficult for firms to adjust. There will be “shortages on shelves in Europe at some stage”, he said. “We never had this kind of uncertainty before.”

Shanghai, China’s main commercial hub, was locked down from April to May this year and led to a 20% reduction in container traffic. While that has now eased, the end of August saw further restrictions in several of China’s biggest cities including Chengdu and Shenzhen. Although Chinese officials opted not to impose the restrictions on the ports themselves given the country’s key role in global supply chain, the local restrictions meant trucks could often not travel to pick up loads and meant containers full of frozen food and chemicals were regularly left to pile up.

Military tensions

For now, the situation is undesirable but manageable. That could quickly change, however, if China’s ongoing tension with Taiwan escalates much further. In the past month, China has intensified its military presence in the Taiwan Strait, flying jets and sailing ships ever closer to the island it claims as its own, testing Taiwan’s defence and raising the risk of conflict.

The risk is that a conflict could cause the shipping lanes around Taiwan to effectively close. Around half of the world’s container fleet passes through the Taiwan Strait each year, according to Bloomberg, meaning the potential for disruption is huge. Military exercises at sea are not uncommon but it is unusual for live fire to be used in such heavily trafficked areas. Some ships are already understood to be trying to avoid the area as a result.

“Prolonged or regular drills in the Taiwan Strait could create significant disruptions in Taiwan’s trade with the rest of the world, and in global supply chains,” said Homin Lee, Asia macro strategist at Lombard Odier, in a note last month.

If further disruptions do creep back into global supply chains then the UK may be especially vulnerable to a rise in ‘blank sailings’, a ploy used by shipping lines when schedules are messy to cancel certain routes or stops to make up for lost time. In recent months, these have fallen from 50% in May to 30% now, according to Brazil at Project44.

But if disruption mounts then so will blank sailings, and British ports could be the ones to suffer.

“We’re at the end of the line,” Simon Heaney of Drewry, a shipping consultant, told Politico last month, highlighting that shippers often decide to drop cargo off at European ports such as Hamburg or Rotterdam if ports are too congested. “We’re more vulnerable to the vagaries of shipping lines’ network planning. For them, the incentive is to get back to China. You don’t make money on the backhaul leg. And you certainly don’t make money hanging around outside of the UK, waiting for a berth.”

With retailers now initiating their Christmas planning for the year, it would be poor timing for the easing of the past few months to be reversed. The falling price of shipping has been a rare light in a sea of rising costs, yet it now seems reasonable to believe this could be a temporary respite rather than a permanent shift back to normality.

It has taken around two years for the disruption of Covid to resolve itself and this could well happen again were another major threat to make its force felt. The complexity of global shipping networks leaves their schedules finely balanced, with small changes having big impacts down the line. “As long as those schedules are on time, things work,” says Brazil at Project44. “But as soon as they’re disrupted it disrupts a lot downstream, from trucks to trains to everything else.”