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  • Writer's pictureStephen Fodor

The world is short on everything, big importers have a competitive edge, rail congestion persists

Monday Morning Wake Up Call

August 30, 2021

The World Is Still Short of Everything. Get Used to It.

(TheNewYorkTimes) Pandemic-related product shortages — from computer chips to construction materials — were supposed to be resolved by now. Instead, the world has gained a lesson in the ripple effects of disruption.

Like most people in the developed world, Kirsten Gjesdal had long taken for granted her ability to order whatever she needs and then watch the goods arrive, without any thought about the factories, container ships and trucks involved in delivery.

Not anymore.

At her kitchen supply store in Brookings, S.D., Ms. Gjesdal has given up stocking place mats, having wearied of telling customers that she can only guess when more will come. She recently received a pot lid she had purchased eight months earlier. She has grown accustomed to paying surcharges to cover the soaring shipping costs of the goods she buys. She has already placed orders for Christmas items like wreaths and baking pans.

“It’s nuts,” she said. “It’s definitely not getting back to normal.”

The challenges confronting Ms. Gjesdal’s shop, Carrot Seed Kitchen, are a testament to the breadth and persistence of the chaos roiling the global economy, as manufacturers and the shipping industry contend with an unrelenting pandemic.

Delays, product shortages and rising costs continue to bedevil businesses large and small. And consumers are confronted with an experience once rare in modern times: no stock available, and no idea when it will come in.

In the face of an enduring shortage of computer chips, Toyota this month announced that it would slash its global production of cars by 40 percent. Factories around the world are limiting operations — despite powerful demand for their wares — because they cannot buy metal parts, plastics and other raw materials. Construction companies are paying more for paint, lumber and hardware, while waiting weeks and sometimes months to receive what they need.

In Britain, the National Health Service recently advised that it must delay some blood tests because of a shortage of needed gear. A recent survey by the Confederation of British Industry found the worst shortages of parts in the history of the index, which started in 1977.

The Great Supply Chain Disruption is a central element of the extraordinary uncertainty that continues to frame economic prospects worldwide. If the shortages persist well into next year, that could advance rising prices on a range of commodities. As central banks from the United States to Australia debate the appropriate level of concern about inflation, they must consider a question none can answer with full confidence: Are the shortages and delays merely temporary mishaps accompanying the resumption of business, or something more insidious that could last well into next year?

“There is a genuine uncertainty here,” said Adam S. Posen, a former member of the Bank of England’s monetary policy committee and now the president of the Peterson Institute for International Economics in Washington. Normalcy might be “another year or two” away, he added.

In March, as global shipping prices spiked and as many goods became scarce, conventional wisdom had it that the trouble was largely the result of a surplus of orders reflecting extraordinary shifts in demand. Consumers in the United States and other wealthy countries had taken pandemic lockdowns as the impetus to add gaming consoles and exercise bikes to their homes, swamping the shipping industry with cargo, and exhausting the supplies of many components. After a few months, many assumed, factories would catch up with demand, and ships would work through the backlog.

That is not what happened.

Just as the health crisis has proved stubborn and unpredictable, the turmoil in international commerce has gone on longer than many expected because shortages and delays in some products have made it impossible to make others.

At the same time, many companies had slashed their inventories in recent years, embracing lean production to cut costs and boost profits. That left minimal margin for error.

A giant ship lodged in the Suez Canal earlier this year, halting traffic on a vital waterway linking Europe to Asia for a week, added to the mayhem on the seas. So did a series of temporary coronavirus-related closures of key ports in China.

The world has gained a painful lesson in how interconnected economies are across vast distances, with delay and shortages in any one place rippling out nearly everywhere.

A shipping container that cannot be unloaded in Los Angeles because too many dock workers are in quarantine is a container that cannot be loaded with soybeans in Iowa, leaving buyers in Indonesia waiting, and potentially triggering a shortage of animal feed in Southeast Asia.

An unexpected jump in orders for televisions in Canada or Japan exacerbates the shortage of computer chips, forcing auto manufacturers to slow production lines from South Korea to Germany to Brazil.

“There is no end in sight,” said Alan Holland, chief executive of Keelvar, a company based in Cork, Ireland, that makes software used to manage supply chains. “Everybody should be assuming we are going to have an extended period of disruptions.”

In the West Midlands of England, Tony Hague has tired of trying to predict when the madness will end.

His company, PP Control & Automation, designs and builds systems for companies that make machinery used in a range of industries, from food processing to power generation. Demand for his products is expanding, and his roughly 240 employees have been working at full capacity. Still, he is contending with shortages.

One customer in England that makes machines to seal packaged food has been hobbled by its inability to secure needed parts. Its supplier in Japan used to take four to six weeks to deliver key devices; now it takes half a year. The Japanese factory has struggled to secure its own electrical components, most of them produced in Asia and using computer chips. Auto manufacturers’ desperation to secure chips has made those components harder to obtain.

“It’s definitely getting worse,” Mr. Hague said. “It hasn’t bottomed out yet.”

For the global economy, shipping is at the center of the explanation for what has gone awry.

As Americans enduring lockdowns filled basements with treadmills and kitchens with mixers, they generated extra demand for Chinese-made factory goods. At the same time, millions of shipping containers — the building blocks of sea cargo — were scattered around the globe, used to deliver protective equipment like face masks.

The container shortages were exacerbated by delays in unloading cargo at American ports, because workers stayed home to slow the pandemic’s spread.

Then, in late March, came the fiasco in the Suez Canal, the pathway for about 12 percent of the world’s trade. With hundreds of other ships blocked, the impact played out for months.

In May, China shut down a huge container port near Shenzhen — one of the nation’s leading industrial cities — after a small outbreak of a coronavirus variant. The port did not resume operations for several weeks.

Then, in the middle of August, Chinese authorities shut down a container terminal near the city of Ningbo, after one employee tested positive. Ningbo is the world’s third-largest container port, so its closure held the potential to snowball into a global event, even threatening the supply of goods to American stores in time for Black Friday sales around Thanksgiving.

By Wednesday, the Ningbo terminal was back in operation. But China’s decision to close it because of a single Covid case resonated as a warning that the government might shut other ports.

In Miami Beach, Eric Poses, an inventor of board games, developed a product aptly named for the pandemic: The Worst-Case Scenario Card Game, a title that could also be applied to his experience relying on China to make and ship the product.

Before the pandemic, shipping a 40-foot container of games from Shanghai to the warehouse he uses in Michigan cost $6,000 to $7,000, Mr. Poses said. His next shipment, scheduled to leave China in mid-September, will cost at least $26,000. And his freight agent warned him that the price will most likely rise, to $35,000, because of rail and trucking difficulties in the United States.

Cheap and reliable sea transport has long been a foundational part of international trade, allowing manufacturers to shift production far and wide in search of low-wage labor and cheap materials.

Columbia Sportswear has typified the trend, expanding from its base in Portland, Ore., to become a global outdoor gear brand. The company has relied on factories in Asia to make its goods and taken the ocean cargo network for granted.

“It’s sort of like, everyday when you get up in the morning, you turn on the lights and the lights always work,” said Timothy Boyle, Columbia’s chief executive.

But the price of moving goods to the United States from Asia is up as much as tenfold since the beginning of the pandemic, and Columbia might have to reconsider its traditional mode.

“It’s a question of how long this lasts,” Mr. Boyle said.

Some trade experts suggest that product shortages are now being exacerbated by rational reactions to recent events. Because of the pandemic, humanity now knows the fear of running out of toilet paper. That experience might be driving consumers and businesses to order more and earlier than previously needed.

Ordinarily, the peak demand for trans-Pacific shipping begins in late summer and ends in the winter, after holiday season products are stocked. But last winter, the peak season never ended, and now it has merged with the rush for this holiday season — reinforcing the pressure on factories, warehouses, ships and trucks.

“We have this vicious cycle of all the natural human instincts responding, and making the problem worse,” said Willy C. Shih, an international trade expert at Harvard Business School. “I don’t see it getting better until next year.”

To Read More:

Shipping chaos gives top importers ‘massive competitive edge’

(American Shipper) The Asia-U.S. container market is now in a class by itself, with the trans-Pacific eastbound trade pricing differently than any other route in the world.

Because stimulus-driven demand is so high compared to capacity — not just capacity of ships and boxes but of ports, trucks, rail and warehouses — the high-low spread of trans-Pacific spot pricing has ballooned.

The largest importers are paying far lower freight rates than smaller importers, the playing field is becoming increasingly uneven, and foreign ocean carriers are in position to pick the American import sector’s winners and losers.

“We’re seeing a price differential of $15,000 [per forty-foot equivalent unit or FEU] between the lowest short-term price in the [trans-Pacific] market and the top price,” said Erik Devetak, chief product and data officer of Xeneta, a Norwegian company that analyzes freight rates, during a press conference on Thursday.

“That implies a huge competitive advantage for established players, which has consequences across the economy and for everyday life, and also, from a point of view of lowering competition and increasing barriers to entry for future competitors.”

Patrik Berglund, CEO of Xeneta, added, “Everybody’s seeing price increases but … being really big is really a massive competitive edge in this market.”

Berglund warned, “When I think about the smaller mom-and-pop importers and exporters, I’m really concerned that if this lasts, the big players can eat even more market share simply because the infrastructure now is so tilted in favor of the big players.”

Origins and destinations matter a lot more

According to Devetak and Berglund, the trans-Pacific is no longer a single shipping market with a single “right price.” Rather, the vast spread between the high and low price has allowed carriers to splinter the trans-Pacific into multiple market layers. This explains why different container indexes are showing vastly different spot rates for the trans-Pacific.

“There is a whole series of different markets now for different situations and different import parameters,” explained Devetak.

Port of origin has become one key parameter. “Historically, when we think of a single trans-Pacific market, if you go back a year, or a year and a half to pre-corona, the price differential between shipments originating in China, Taiwan, Japan or Singapore [to the west coast] was small — $100, $150, $250 [per FEU] max — on the order of 5-10% of the market rate,” said Devetak.

“Right now, we’re seeing the prices from China [to the U.S.] can be $2,500 lower than the prices one can achieve in Taiwan or Japan and $3,000 lower than Singapore. It can cost 40% more to ship from Busan [South Korea than from China]. That’s a striking price differential.

“There seems to be a strong preference [among carriers] to have a major port in China as the origin port and it seems like every other origin is indirectly being punished, probably because by concentrating on the main ports in China, one can deliver more goods and therefore have the highest profits.”

There are also trans-Pacific price disparities on the destination side. “Basically, anything that isn’t Los Angeles is preferred because you’re going to get stuck waiting for a berth in Los Angeles,” said Devetak. Short-term rates into Los Angeles/Long Beach can now be $1,000 per FEU higher than rates into Vancouver.

There is much less “geographic dependency” for pricing in the Asia-Europe trade lane compared to the trans-Pacific, Devetak noted.

Attractive vs. unattractive customers

Xeneta also found price differentiation regardless of origin and destination. It looked at short-term rates for cargoes from China to Los Angeles and found “huge developments in the market spread between the best performers and the worst performers,” said Devetak.

The differential between the high and low China-Los Angeles rates was $150 last year, or 5% of the market rate. It’s now $1,200, or 20% of the market rate. The spread has widened only recently, in the past few months.

“This is the price difference between what is an attractive customer to the carrier and what is a less attractive customer to the carrier,” he continued.

An attractive customer is generally one with large volumes, a strong preexisting relationship with the carrier, accurately predicted flows, a long-term contract being supplemented with short-term deals, and, in the case of a beneficial cargo owner (BCO), a direct relationship with the carrier as opposed to one using a freight forwarder middleman.

The rise of trans-Pacific premiums

By far the most important price differentiator in today’s market is the premium paid to guarantee a cargo is loaded on a ship.

This is the biggest change since last year and the biggest differentiator of the trans-Pacific versus the rest of the world. Premiums are also being charged in the Asia-Europe trade lane, but not to the magnitude seen in the trans-Pacific.

“Shipping guarantees are not a new phenomenon, but the amount you used to have to pay to guarantee a spot on a ship was $100,” said Devetak. “Now, when we look at CMA CGM or Matson or ONE, we see premiums in the region of $2,500 or even more. If you look back to May, the premium you were seeing from MSC was less than $2,000. Now MSC is charging almost $4,000.

Carrier preferences for certain customers come into play when charging premiums, meaning that this too creates a more uneven playing field for importers.

According to Devetak, “The more attractive customers see both prices [the basic rate and the rate plus premium]. But a lot of the customers that are less attractive to the carriers — the small freight forwarders, the small BCOs — only have visibility on the rate with the extra charge. A lot of the market, at this point, has no availability of the non-premium offering.”

In other words, for many U.S. importers, it’s either pay the higher rate including the premium or find another carrier.

Same customer, same carrier, same contract … different price

Highlighting just how much the trans-Pacific has changed in recent months, Xeneta provided a specific case of prices paid by one freight forwarder over time. The payments were all under the same contract to the same carrier.

Between April and early July, pricing was clustered in the $4,000-$6,000 per FEU range. By mid-July the spread had widened and ranged from $4,000 to $8,000. By early August, it had dramatically increased, with some prices under $6,000 and some as high as $18,000.

“We saw one market in the trans-Pacific in the beginning of April. But now we clearly see a market that has fragmented,” said Devetak.

“If you add all this up, you can conclude that if the origin is China, the destination is Canada, you’re an attractive customer, you go direct with the carrier and you ship next month, you end up paying $5,000 [in the short-term market].

“But if your origin is not China, your destination is Los Angeles, you are not an attractive customer, you go via freight forwarder and you need to ship as soon as possible, then all of a sudden, your rate is $20,000.

To Read More:

Congestion persists at rail terminals servicing imports

(FreightWaves) Chassis shortages and efforts to dig out containers at rail terminals continue to characterize the rail side of the U.S. import supply chain in some areas, according to customer advisories published this week by Maersk and Hapag-Lloyd.

Maersk is continuing to see “high impact” for rail operations serving facilities at Chicago, Cleveland, Atlanta and Memphis, Tennessee, because of chassis shortages.

For instance, at Memphis, a reduction in allocation per day at the rail ramps is resulting in issues with returning empty containers, Maersk said Thursday. But “to combat congestion,” BNSF (NYSE: BRK.B) has reopened a Memphis-area terminal in Arkansas that will receive trains arriving from Pier T at the Port of Long Beach, the company said. Maersk also said it is continuing to work with BNSF toward options to improve situations at inland facilities.

In Chicago, CSX (NASDAQ: CSX) is using the Forest Hill yard to address overflow at Bedford Park. CSX will move containers that have been at Bedford Park for over 10 days to Forest Hill, according to Maersk. Maersk and CSX are seeking to address the “heavy” dwell at CSX ramps.

Norfolk Southern (NYSE: NSC) said in a service advisory Friday that it is reopening an auxiliary parking lot near its Inman terminal in Atlanta next Wedensday in response to high freight volumes in the Atlanta market. The parking lot will serve only for container pickups, and no drop offs will be allowed at the facility, NS said.

Meanwhile, Hapag-Lloyd said Tuesday that it is seeing rail congestion at a number of ports as the broader supply chain grapples with peak season and the ensuing import spike.

Indeed, the Port of Los Angeles is dealing with maxed-out rail yards and warehouses, as well as chassis shortages, Executive Director Gene Seroka said recently.

At the ports of Los Angeles and Long Beach, rail operations “from all terminals and the off dock ramps continues to deteriorate as demand exceeds capacity, therefore inland moves by rail can suffer considerable delays,” Hapag-Lloyd said. However, local trucking delays have been reduced and are being closely monitored, the company said.

Import rail loads are also taking longer to move off the terminal at the Port of Oakland, while rail car shortages to get imports off the dock is a major contributing factor to the overall congestion at the Port of Seattle, Hapag-Lloyd said. Investments at the port that will open in 2022 will bring much-needed additional capacity to the region, the company said.

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