Inflation alert: Supply chain mess feels increasingly less transitory
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.
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 top” predictions have slid from Golden Week 2020 to year-end 2020 to Chinese Lunar New Year 2021 to midyear to year-end 2021 to sometime past Lunar New Year 2022. Liner companies have persistently proven far too conservative in their forecasts. Maersk has upgraded its guidance three times this year; current 2021 earnings guidance is more than twice initial expectations.
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.”
‘Whole of 2022 may be another peak season’
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.”
The U.S. inventory restocking cycle could be further dragged out by power constraints in China. Output from factories is being curtailed by widespread electricity rationing due to a shortfall of natural gas and coal supplies — making it even more likely that the U.S. inventory replenishment cycle will persist well into next year.
How this could end: Shipping demand factors
The congestion crisis would abate if transport demand declines, either suddenly due to some sort of crisis, or gradually, due to normalized American consumption.
On the demand front, Seroka said, “If we look a little bit deeper into the future, we make it past the delta variant and the mu variant, there will come a day when we start moving more of our discretionary income back into the services sector. We’re not quite there yet. We’re still spending a lot of our money on retail goods. But when we get there, I think we’re going to see a leveling off of imports. It’s not going to go off a cliff, but we’ll see money go back into the services sector.”
Shipping demand could also fall if China’s electricity shortages curb its manufactured-goods export potential. This risk now appears to be weighing on container-shipping stock sentiment. Shares of ZIM (NYSE: ZIM) plunged 12% on Friday and another 12% on Monday.
“The potential for a slowdown has created some apprehension that even a slight easing in Chinese exports could create enough slack in the system to bring freight rates lower,” said Clarksons Platou Securities.
How this could end: Shipping supply factors
The congestion crisis would also abate when transport supply expands enough to exceed shipping demand. The supply side of the equation relates to container equipment, container ships and land-based cargo-handling capacity.
In terms of container equipment, Textainer estimates that Chinese factories will produce a record 6 million twenty-foot equivalent units of new containers this year, triple the pre-COVID output in 2019.
“Olivier believes that production levels in 2022 will see a natural pullback,” reported KBW. “The first signs of this are showing up, and it is not due to lack of cargo demand — that is still at record levels — it is due to the fact that there are limited slots on ships.”
As for new container ships, orders have surged since Q4 2020. The ratio of tonnage on order to on-the-water tonnage is now over 20% for the first time since 2015. But according to data from Maritime Strategies International (MSI), the vast majority of tonnage on order (excluding those for smaller feeder-class ships) won’t be delivered until 2023-24.
Even when new ships are delivered, that won’t solve land-based capacity issues. Indeed, the problem today in the trans-Pacific is not a lack of ship capacity — it’s that there are too many ships arriving for terminals to handle, particularly given limitations of trucking, rail and warehousing.
How long will this last? Until effective capacity can start going up, until we start removing some of the bottlenecks at the ports — be it chassis, drivers, etc. — I think this will continue.
Seroka believes that there will be a new normal, with lessons learned during the current crisis informing future strategies. “I don’t see this ever returning to any semblance of normalcy again,” he acknowledged to American Shipper, referring to pre-COVID normalcy.
“We’ve got to learn to pivot, to scale up and down depending on seasonality and the flow of cargo. The learnings we take away from this episode will make us more resilient. And I think a lot of this is going to be about information sharing [so] we can see upstream better and look around the corners and anticipate things much better than we’ve done so far.”