Over the past year, we’ve seen record-breaking queues of shipping containers outside major U.S ports and an unprecedented spike in shipping rates. Spot rates for transporting a 40-foot container from Asia to the U.S. are reported to have increased tenfold from a few years ago.¹ How did an industry that has historically been associated with an inability to cover its cost of capital, low barriers to entry, a commoditized offering and a fragmented marketplace become center stage of the supply chain bottleneck discussion?
While there’s plenty to debate around increased maritime environmental regulations, slow steaming practices, idling and the Suez Canal blockage, we see the supply/demand imbalance broadly as the result of a few key factors: First, there’s been strong demand in Asia-to-U.S. trade lanes (about 20% above pre-pandemic levels) due to pandemic-related shifts in demand; seaborn imports to the U.S surged as manufacturers and retailers tried to rebuild inventory depleted by shoppers early in the pandemic. Second, on the supply side, we’ve seen structural network constraints in the U.S, given downsized rail capacity because of recent PSR implementation, reduced airfreight capacity and disruption of cargo-carrying international passenger planes, and historically tight trucking capacity. Third are labor-related issues, with COVID-19 absences on the ports and a driver shortage in the U.S. (resulting in delays in containers being moved out of ports and a lack of storage space to unload incoming containers).
While structural issues within U.S. supply chains were present long before COVID-19, we’ve seen the pandemic exacerbate and pull forward impending issues. Port congestion remains elevated; and with a lack of trucks and drivers, and a reduction in staff due to COVID-19, we do not see an immediate resolution. Meanwhile, the aggressive spread of Omicron has halted reopening plans, extending the demand boom and slowing the shift in discretionary spending back to services.
Shipping costs and stalled logistics are having a material impact on profitability for companies across all sectors. We have started to hear anecdotal evidence on earnings calls about contracting margins, ranging from 100 to 400 basis points, depending on the industry. Understanding the details behind what is causing the delays and increased costs is important in determining when these concerns could subside. Inventory rebuild, strong demand and infrastructure constraints could mean that the supply chain bottlenecks continue into 2022.
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