Supply chains have stopped working accurately for months. Delays in the transport of goods, the lack of chips, low copper inventories … have been threatening the proper functioning of the ‘great pipeline of international trade’ since the end of 2020. However, it has not been until now, with the problem that is already visible to end consumers, when the media has begun to ‘bombard’ with this traffic jam that puts the Christmas campaign at risk. It is convenient to review what has happened in recent months to explain the reasons that have generated this blockage in a pipeline that had been working almost perfectly for years.
It all started more than a year ago with the covid pandemic. An unparalleled crisis paralyzed investment, maintenance and replenishment in many key industries, including logistics, which is responsible for keeping all links in the supply chain well-oiled, allowing goods to flow accurately and quickly through of that great pipe. Containers, ships, trucks were not replaced, nor did the fossil fuel industry invest in the imminent arrival of the energy transition.
However, almost overnight, global demand recovered or even exceeded pre-covid levels (such as the US). Now, the great pipeline of international trade is not prepared to channel so many goods, which are also not the same as before the covid. The jam is served.
The new indicators developed by Bloomberg Economics underscore the extreme gravity. There is no quick fix for this problem, so the great crunch 2021 could get even worse in the coming months. Research Bloomberg quantifies what is seemingly in view across much of the planet, in supermarkets with empty shelves, ports where ships are piling up, or car plants where assembly lines are paralyzed by an unprecedented lack of microchips. All this comes hand in hand with a significant price increase.
The collapse goes further, according to experts from Bloomberg: it is not just a problem of moving goods from one place to another, the world is still struggling to make production meet demand. The boom in demand has taken producers off balance after the pandemic paralyzed a large part of the productive fabric worldwide. Now, the situation could drag on for several more months or who knows how long.
A headache for central banking
Central banks are beginning to recognize that inflation is no longer transitory, which could force them to withdraw stimulus and raise interest rates earlier than expected. That poses new threats to an already slowing recovery. It also poses a risk to equity markets that continue to trade near record highs.
Behind this blockage in the great pipeline of international trade is a combination of overloaded transport networks, labor shortages in key points for trade and a demand in the US that has been reinforced by large fiscal stimuli and that is it has focused more on goods than services.
Problems are occurring at various points, ranging from the production centers to the reception points for the merchandise. In Vietnam, plants that make Nike shoes had to cut production because workers had left for their home provinces for fear of COVID-19. China, the world’s manufacturing powerhouse, it faces new outbreaks of the virus and is responding with targeted shutdowns. Their factory prices are increasing at an annual rate of 10%, the fastest since the 1990s.
Putting all these pieces together, the supply rates of Bloomberg Economics show a high shortage of goods in the US, UK and the euro zone. This indicator is based on a variety of data ranging from prices in factories to the relationship between inventories, retail sales and order backlog for companies in the service sector. Zero readings indicate normal conditions, negative readings mean that goods are abundant, and positive points indicate limitations. The indicators show an abrupt change, from an oversupply before the covid crisis to a significant shortage today.
For multinationals like Toyota, which cut September production by more than a third, as well as companies that move their products around the world and buyers waiting for deliveries, the big question now is: When will the disruptions end? The most optimistic answer speaks of the first part of 2022, but the truth is that nobody knows what comes next.
Amazon and Apple are pessimistic
Even giants like Amazon and Apple, used to shaping supply chains at will, don’t see the situation improving quickly. Amazon has recognized that all the benefits of the fourth quarter could disappear due to the increase in labor costs and the difficulty to fulfill their orders. Apple has acknowledged that it is losing about $ 6 billion in sales due to the inability to meet demand and that it could lose more next quarter.
Conditions in the logistics industry should start to improve after the Chinese New Year, in early February, “although the disruptions could last at least until the middle of next year,” HSBC economist Shanella Rajanayagam explains to Bloomberg. However, uncertainty continues to reign in international trade, nobody knows what will happen in the short and medium term. The excess savings accumulated during the pandemic plays a destabilizing role here, since it can aggravate the problem.
The ‘snowball’ grows
What comes next is uncharted territory, in part because of the sheer number of bottlenecks on the route from assembly lines to families’ shopping baskets. While a supplier waits for another to deliver the merchandise, the retailer has to wait for the arrival of the product that will be placed on the shelf: delays feed each other, they ensure from Bloomberg.
Logistics systems often follow the ups and downs of the global economy in a predictable pattern: Increased demand drives trade, driving up transportation prices and improving the bottom line for freight forwarders, who in turn invest more to help. increase its capacity, reaching a new equilibrium between demand and supply relatively quickly. “But the pandemic has disrupted this cycle. Even with signs of slowing growth, the international trade pipeline has never been so clogged “, say the economists of Bloomberg.
Right now the collapse in shipping goes from Singapore to the Port of Piraeus (Greece). The bottlenecks in shipping have initially been caused by adverse weather conditions and virus outbreaks, such as the recent one in Singapore. However, these traffic jams are diverting container ships to other ports, which in turn is generating new traffic jams. An analysis of port congestion on Monday showed that the delay in Singapore was high, with 53 container ships at anchor, the highest count since Bloomberg began to follow this type of data.
That’s a problem for the US and Europe, where the clothing and electronics that fill shoppers’ carts rely on foreign supplies and assemblies. And with vaccination rates in many Asian countries still low, it is a problem that will not go away any time soon.
The luck factor
“For the supply chain to recover, it will take a certain dose of luck” -avoid meteorological catastrophes or new outbreaks of covid- “as well as time and investment to add more logistical capacity”, says Simon Heaney, research director of Drewry’s containers in London.
For a world economy emerging from the deepest recession in recent history, tight supply caused in part by strong demand is a major problem. Obviously, the opposite would be worse: an abundant supply because the economies remained depressed, with millions more unemployed. The point is that tight supply is going to slow down the economic recovery more than expected.
Supply chains could unravel faster than expected as well. The lack of precedents for a similar situation also generates great uncertainty about the resolution of the problem. The indicator Bloomberg on the shortage in the US, for example, has fallen in recent readings, although it remains at historically high levels.
“The current situation is unique and very different from the more isolated shocks the world has experienced,” says John Butler, president of the World Shipping Council, which represents the largest ocean freight carriers. “The solution to the current congestion will also be different.”
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