The Ferrari Consulting and Research Group shares a Part Three commentary addressing our mid-year assessment of published 2022 Predictions for Industry and Global Supply Chains made available at the beginning of 2022, and specifically addressing supply chain cost inflation implications.

In a previously published Part One look back commentary, we noted how outlooks for the global economy and for business uncertainties have significantly changed at the mid-year mark as the global economy shows definitive signs of uncertainty and lowered momentum.

In our Part Two look back commentary, we observed efforts and activities by businesses directed at restoring more direct control of supply network materials sourcing. Our takeaway observation was that in a period of six months, there has been a new, likely more sobering awareness that geopolitical risk is likely to influence business and supply network strategies going forward.

In this particular assessment, we reflect on our prediction that cost inflation trends that occurred among global logistics and transportation modes last year, would be unsustainable, and would drive remediation efforts.

 

Mid-Year Global Transportation Assessment

One of the benchmarks we referenced as part of our prediction was The World Container Index, a measure of container shipping rates among eight major global transshipment lanes, which is published by Drewry Shipping Consultants. This index closed the year 2021 at a value of $9,304 per TEU, reflecting a 113 percent year-over-year increase from that of 2020. At the end of 2019, prior to the onset of the Covid-19 global pandemic, this index stood at $1,832 per TEU.

There has been a growing perception and belief that the current extraordinary high rates of global-wide inflation have been fueled, in-part by excessive freight rates garnered from shipping container lines, as well as passed along in required product or service price increases. That is because so many products and/or services are predicated on global supply network movements.

At the end of July of this year, this same index stood at $6,628 per TEU, reflecting a reported 23rd consecutive weekly decrease, and 29 percent below the same period in 2021. The index value for the Shanghai to Los Angeles, however, was reported as $6,985, while the Shanghai to New York routing stood at $9,774. Carriers have placed a special emphasis on these lanes because of the high volumes of shipments that occurred last year. There are industry reports that carriers have again allocated a lot of added capacity to support the seasonal holiday surge movement that occurs in the second half of the year.

Our prediction was that with exploding supply chain driven inflation garnering increased attention of global economists, government, and maritime regulators, that added pressures would be applied to carrier market influences, especially in the leveraged use of pooled capacity alliances, or blank sailings, in times of extreme demand and supply imbalances. We referenced legislative efforts such as the U.S. Ocean Reform Act of 2021, which had just passed the House of Representatives in December 2021, along with other nation-based efforts occurring in parts of Europe.

Since that time, the political rhetoric has indeed escalated, and has included dialogue as to what added powers could be utilized to overturn ocean carrier antitrust immunity status. The Ocean Reform Act legislation was passed by the U.S. Senate in March of this year, after lengthy debate and is now law. The process of compromise watered down the legislation, but the voice of multiple industry trade associations and legislators regarding perceived windfall profits of carriers remains.

This week, a published report from the American Journal of Transportation, indicated that The International Federation of Freight Forwarders Associations, representing upwards of 40,000 logistics firms has questioned whether the global container shipping market functions free of distortions. Further noted was that in July, France’s National Parliament narrowly rejected a proposed windfall tax on the profits generated by transport companies.

Further, for some, profits are being plowed into added shareholder dividends, stock buyback, or ongoing efforts to acquire providers of land-based logistics and shipping services firms. The goal seems one of creating a fill-services door-to-door transportation and logistics services provider.

This same report indicates that the globe’s biggest container lines are on course to generate a record $256 billion in operating profitability this year, based on an analysis of 11 carriers conducted by Blue Alpha Capital. That figure represents a 73 percent increase from a reported $148 billion in profitability generated in 2021. Also noted is data from Sea Intelligence indicating that on-time performance by ocean carriers remains at the woeful rate of 40 percent.

Last week, number two ranked global container shipping provider Maersk, and number six ranked shipping provider and Hapag-Lloyd, each raised their operating profitability forecasts for this year in anticipation of high shipping prices. In the case of Maersk, it was the second upward revision, with anticipation of $31 billion in profitability, compared to an earlier estimate of $24 billion. Hapag-Lloyd indicated that rates are about 80 percent higher than in the first half of 2022.

While the spot market rates for ocean transit are trending lower, many businesses apparently elected to establish shipping contracts with various carriers at prevailing contracted rates when agreements were struck earlier this year. Now there is growing belief that with consumer demand for products turning, and with retailers and business with high inventory levels, the peak second-half shipping period may be lower than prior years. That leads to speculation that businesses may well be seeking to re-negotiate their shipping contracts to adjust contract rates downward.

The other elephant in the room, so to state, is that global labor unrest among global transportation, logistics, port terminal, rail and air freight transport is on the rise as workers perceive the level of windfall profits being garnered by carriers and logistics services providers. They are seeking to share in the rewards, just like stockholders receiving lucrative dividends and stock buybacks. Thus, there is a potential risk for more transportation delays  and added congested ports in the coming weeks.

 

Additional Thoughts and Perspectives

At the mid-year point, we remain of the belief that cost inflation trends coupled with on-time service level erosion centered on global transportation, logistics and other transport modes is indeed unsustainable. The evidence is beginning to build in impacts to operating and financial performance.

The open question is timing and of implications yet to unfold, both for the shipping industry, and for businesses and their supply management teams.

Windfall profits occurring in times of business and economic hardship will continue to capture the mindshare and oversight of political leaders, government regulators and businesses large and small. More importantly prior assumptions related to what constitutes lower cost sourcing must now be weighted toward expected on-time fulfillment needs among regional based customer groups.

A further consideration is that the geo-political landscape and politic is quickly changing and national policies are turning more toward added considerations for resiliency of domestic, regionally or termed “friendly’ based trade networks for key industries and products.

We have already observed that there are discernible movements by businesses to restore more direct operational and cost control of supply networks. During 2021, it would appear that many businesses and supply management teams elected to add to overall inventory levels to augment resiliency. Over the coming 2-3 years, our belief is that businesses and supply chain leaders should focus more on strategies that focus upon regionalized customer fulfillment, where supply network sourcing aligned to required service level and product margin needs. be able to service key regions and markets. As always, much of this will be industry or business specific, driven by overall strategy and profiles of current or planned future supply networks.

From the technology dimension, businesses need to place added emphasis on aligning product strategies with short and longer-term materials strategy. Not having the voice of supply and logistics management at the decision table for product development, management and fulfillment strategies will be a meaningful shortcoming. In the same vein, senior procurement leaders need to augment their transportation and logistics contract management and assessment capabilities with tools that weight and determine overall pricing and service level risks during volatile or uncertain periods. There should always be a basis for contingency planning or scenario-based options.

Global trade and supply network dynamics are indeed changing, and business leaders should not assume that practices of the past are going to cut it in this ever-changing kaleidoscope of added supply and customer fulfillment risk factors.

 

Bob Ferrari

© Copyright 2022, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.