09/10/2021
Supply chain woes continuing into next year, probably, and holding up inflation longer than we thought. (Source: Internet)
Supply chain woes and port congestion are now getting attention at the central-bank level, given their effects on inflation. Federal Reserve Chairman Jerome Powell recently lamented, “It is frustrating to see the bottlenecks and supply chain problems not getting better. In fact … [they are] apparently getting worse.”
Powell foresees supply chain woes “continuing into next year, probably, and holding up inflation longer than we thought.”
But could shipping logjams last even longer, into 2023, propping up inflation even longer than central bankers expect?
Industry experts speaking to American Shipper, as well as other market players and analysts, are increasingly talking about a scenario in which high ocean shipping costs and congestion could persist throughout next year, if not into the following year.
Average spot rate in $/FEU, excluding premium fees. Blue line: 2020-2021 period. Yellow line: 2019-2020 period. (Chart: FreightWaves SONAR)
Timing the top: A guessing game
The Golden Week holiday is now underway in China. At this time in 2020, some market watchers expected spot ocean freight rates to peak just after Golden Week, then fall back. Asia-West Coast spot rates, as measured by Drewry, are triple what they were when those predictions were made, despite a recent dip.
Timing the market peak appears to be little more than a guessing game amid the unchartered territory of the COVID outbreak and massive fiscal stimulus. As Maersk CEO Soren Skou put it back in February, “Who knows what happens when you get out of a pandemic? I don’t think any of us alive have been in this situation before.”
Nerijus Poskus, vice president of global ocean at digital freight forwarder Flexport, told American Shipper, “We have been in a never-ending peak season. In my opinion, peak season is when there is less supply than demand and there is a backlog building somewhere. And I think we have been in it ever since COVID hit.
“I would say that the shippers that don’t have enough inventory at this time are going to sell out prior to Christmas because of all of the delays,” Poskus said, adding that the current lead time for cargo from Asia to inland U.S. points using non-premium ocean and rail can now be over 100 days.
“I think this chaos will last well into 2022. [Shippers] should expect that the whole of 2022 may be another peak season,” he said, adding, “Importers should expect the spot market to remain high for 2022.”
Container-equipment lessor Textainer (NYSE: TGH) recently held meetings with investors and analysts. The ocean carriers are Textainer’s customers. According to a report from investment bank KBW, “TGH’s customers are saying the congestion is worse than what they were expecting.” KBW quoted Textainer CEO Olivier Ghesquire as stating that “shipping-line customers expect the market to stay intense through 2022.”
Port of Los Angeles Executive Director Gene Seroka told American Shipper, “We see a very strong market through the end of this year into Lunar New Year, which is early next year, in the first week of February.
“Then, the major retailers are telling me that after Lunar New Year, we’re going to see a very strong focus on replenishment of inventory. Our inventory-to-sales ratio is the lowest it’s been since the pre-recessionary days. The replenishment concept may take us through the second quarter into the summertime. And if it goes a bit longer than that, we may pivot again into peak season next year.”
It's only the beginning of October, not yet the retailer's peak season around the world. However, the retail sector has had to go through various levels of panic buying because the supply of goods from Vietnam to China has been disrupted.
According to Bloomberg, as firms are now struggling to prepare for the Christmas season, the situation will worsen. Experts warn this shock could eat into corporate profits of many retailers, including Amazon, Macy's and Best Buy.
Fostering investment in logistics services, such as cargo planes or chartering an entire cargo ship, could be the most optimal scenario for Q4/2021.
In this case, the retailer's profit margin is highly likely to decline. However, they can gain market share from competitors who do not have the financial advantages to develop such expensive technologies.
According to Michael Mathias, CFO of apparel chain American Eagle Outfitters: "We feel more comfortable than most of our competitors because there will be enough supply for the upcoming holiday season. Some of the other companies won't even be able to access their products.
Mr. Ken Hicks, CEO of Academy Sports and Outdoors, is also focusing on investing in technology to grow the business. The Texas-based chain has been using scale to stock up for peak shopping season for months.
Specifically, this business imported goods during early times, moving cargo ships from crowded ports on the west coast to ports like Galveston (Texas)
Shoe maker Steve Madden is shifting half of its capacity to Mexico and Brazil, reducing shipments from Asian markets such as Vietnam. Producing goods near the US helps Steve Madden to minimize delivery times by two times compared to competitors.
Don't underestimate consumer spending, especially during the year-end holiday season. Right now, not many people are thinking about shopping anytime soon, but once it does, the effects will spread quickly. Therefore, businesses need to have carefully prepared plans to reduce the shortage of goods due to the impact of the pandemic.
Theo U&I Logistics
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