Delays in the supply chain will not be easy to correct and the problems will continue into the next year.

The CMA CGM Marco Polo, an Explorer-class container ship is helped by a tugboat as it crosses under the Verrazzano-Narrows Bridge, to enter New York Harbor seen from Brooklyn, New York, United States, on May 20, 2021.

Brendan McDermid | Reuters

The global economy is based on global supply chains. But this system is now in trouble, and the problems will increase.

Our analysis at IHS Markit of shipping, port and manufacturing data reveals that worsening delays will continue through 2022. Additionally, pessimism is growing among shipping executives – some now expecting it to be. that the disruption continues even into 2023.

Until recently, consumers never had to wonder how the products they buy actually get to them. Not anymore. Growing disruption in supply chains explains why online shopping takes longer to arrive, why there is vacant space on store shelves, and why the furniture you’ve ordered takes months instead of weeks. to arrive.

The disruption caused inflation

This disruption is one of the main reasons for the surge in inflation. IHS Markit’s latest global manufacturing PMI survey shows delays in delivery times to be the largest on record, dating back a quarter of a century. This unprecedented situation is pushing prices up at one of the fastest rates in a decade.

The disruption began with the economic upheaval of the pandemic. But it is now made worse by the strength of the economic recovery, a labor shortage and an overloaded transportation system.

At the heart of the shipping problem are over 20 million metal containers. They transport about half of the world’s trade – everything from electronics and furniture to auto parts and seafood.

Over the past three decades, the global system has become much more complex and highly interdependent. During this period, China became the backbone of the whole system. It is either the source of manufactured goods or the assembler of components shipped from other Asian countries.

Today, 42% of all containers arriving in the United States come from China, which is home to seven of the world’s 10 largest container ports.

The disruption began last year when Americans and Europeans were locked in their homes. No longer able to spend money on services, but with increasing household savings, they instead spent on household improvements and electronics, most of which were ordered online.

Clogged ports

Shipping companies and ports were not equipped to cope with the influx of containers. The situation has been made more difficult by the labor shortage due to Covid. It was then that the ports started to become blocked.

The economic rebound that started with generalized vaccinations has turned out to be very strong. The Delta variant notwithstanding, IHS Markit now forecasts global GDP growth of 5.7% in 2021, compared to the 3.4% decline in the year of Covid 2020 shutdown. This has added to the pressure on the system. Containers shipped from Asia have grown at a rapid rate every month since August of last year.

Previous disruptions to global shipping have been temporary. Not this time. Instead, it was one thing after another. In March, a huge container ship ran aground in the Suez Canal, disrupting trade flows between Asia and Europe.

Next, Covid forced the partial closure of one of the world’s largest ports in China, and then of China’s second-largest container port. A major US railroad has suspended all container movements from the West Coast of the United States due to a bloated backlog in Chicago.

A worker shows a crane lifts goods for export onto a cargo ship at a port in Lianyungang, China, February 13, 2019.

Reuters

Now factories in Vietnam, which have become important suppliers both to China and directly to the world, have stopped functioning as the Vietnamese military enforces a lockdown due to a Covid surge. The next blow could be even worse: Chinese plant closures to contain the delta variant in mainland China.

The entire world system is suffocating in the face of what Gene Seroka, the head of the Port of Los Angeles calls “relentless consumer demand.” Warehouses in China and on the West Coast are running out of space.

Fully loaded container ships are forced to wait for berths at anchorages off the US port’s largest gateway, Los Angeles / Long Beach, as well as at several other ports in North America, from Asia and Europe. Forty-nine container ships were at anchor off Los Angeles / Long Beach as of August 29, the highest on record, compared to just nine on June 18.

All of these disturbances are cumulative. This comes as volumes continue to rebound due to the strong recovery. It effectively reduces the capacity of the container supply chain by significantly slowing the movement of ships and containers around the world.

Higher freight rates

As a result, freight rates have reached unprecedented heights. A single container of cargo that before the pandemic cost $ 1,500 to ship from Shanghai to Los Angeles could cost as much as $ 30,000 today. This additional cost is inevitably passed on.

Containers have become scarce. They can be left unopened for a week or two and therefore cannot be used for another shipment. There are no spare containers that sit idle to fill the void. Likewise, the shipping capacity itself is effectively reduced. Ships that dropped anchor, waiting two weeks to unload, thereby also abandoned the world system, instead of sailing to their next port.

The problem is compounded on earth by a growing shortage of truck drivers. Containers now wait two weeks in Los Angeles / Long Beach to be picked up, instead of the usual 3 or 4 days. The shortage is so severe that trucking companies are offering bonuses of $ 10,000 to $ 15,000 to new drivers.

How disruption is radiating through the economy is captured in this note from a few days ago to customers of the sales manager of a manufacturing company. “The news is not good,” he wrote, apologizing for the inability to meet the promised delivery. “Hardware failures have become a very normal part of our business and have shut us down in many directions this year.”

Additional pressures are already in sight. The surge in consumer spending that began during last year’s lockdown is expected to increase with massive government stimulus and fee spending, as well as depleted inventory replenishment by businesses.

“Container traffic is difficult to book, with many delays at the other end, and the costs are still far too high,” said James Reinis, a 40-year supply chain veteran. “The holiday traffic will only make things worse.”

Then there are labor relations: disruptions generally accompany contract negotiations between the West Coast longshoremen’s union and port employers, as was the case in 2014-2015. The current contract expires next July; and retailers and manufacturers are already starting to re-route goods in anticipation of problems.

New pressure will come from increased climate regulation. A new carbon efficiency rule that will be imposed in 2023 by the International Maritime Organization, the United Nations body that regulates shipping, could force ships to navigate at slower speeds in order to reduce emissions. But that would effectively reduce the critical capacity of the system just when it is needed.

The rapid development of global supply chains has been a major driver for more than doubling global GDP over the past three decades.

But Covid and the rebound have choked the system. All players in global supply chains are scrambling to find short-term solutions and build the resilience of long-term supply chains. Systems will eventually return to equilibrium. In the meantime, the economic consequences will be measured in price and inflation – and in those delays while you wait for your packages to arrive.

Daniel Yergin, vice president of IHS Markit, is the author of The New Map: Energy, Climate, and the Clash of Nations. Peter Tirschwell is Vice President of Maritime and Trade at IHS Markit.


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