The Global Supply Chain Continues to Struggle
Summary
In this month’s Logistics Market Update we take a detailed look at the following issues:
- What is causing the current market chaos and why are rates so high?
- How long will this go on?
- What can my business do to weather the storm?
- What if we all went to dinner at once?
What If We All Went to Dinner at Once?
Did you ever think about what would happen if everyone showed up at the same time to order dinner at your favorite restaurant? Rather than serving 200 guests over 4-5 hours, what would happen if they all showed up together at 7:00pm and asked for a table?
Then, the guests all tell the hostess that they need to make a 7:00pm movie and need to have their meals expedited. Oh, and the couple behind you says they would be perfectly happy to pay an extra $200 to have the kitchen put a rush on their order so it comes up ahead of yours. And the kitchen is short-staffed due to COVID layoffs. You get the picture.
That, my friends, sums up the current state of global logistics.
The result is a supply chain that is overwhelmed and business that are unprepared for the extreme cost of shipping in 2021.
What is causing this market chaos and why are rates so high?
Everyone wants to know what is causing this global shipping maelstrom and when will it end. We get asked this question all day long right now. In this month’s edition of our Logistics Market Update, I will try to provide a bit of insight, along with some suggestions to ease the pain.
The short answer is that under normal times, there are more than enough ocean containers, sailings, flights, trucks, drivers, and longshoreman to handle the monthly ebb and flow of global trade. Just like the restaurant analogy above, that does not work when everybody orders at one time.
After a year of idled factories, and businesses treading water with staff working from home, everyone has decided it is time to reopen all at once. Businesses need new inventory, new equipment, raw materials, and fulfillment of back-ordered shipments, that their own customers are desperate for.
In the face of this unprecedented demand, add in reduced air and ocean capacity, massive demands from governments for COVID supplies, short-handed carriers caught flat-footed by the sudden surge of business, closure of the Suez Canal for a week, and a gas pipeline shutdown on the U.S. East Coast. Put it all together and you have a recipe for massive price increases and shipping delays of a month or more in some trade lanes.
Each mode of transport is faced with its own challenges. Here is a summary of some of the key issues facing each:
Air Freight
While domestic airline travel in the U.S. is currently surging, international flight schedules remain at levels far, far below pre-COVID levels. That is especially so of trans-Pacific and trans-Atlantic flights. All those grounded passenger flights mean drastically reduced capacity for belly cargo and intense demand for the little space that remains.
The demand for limited space is further magnified by the diversion of ocean freight to the air cargo by chip makers, auto parts suppliers and the like who are facing factory shutdowns due to lack of parts. They need inventory and do not care what it costs. Add to that, dramatically reduced airline staffing levels and an inability to re-hire and train flight crews quickly. The result is air freight rates that are running 300-400 percent above historical levels and backlogs of 10-14 days in many airports. Many carriers will only accept Priority Air bookings and no longer accept General or Economy cargo.
Ocean Freight
As with air freight, ocean shippers face their own unique set of challenges. Rates are 300-400% of “normal” and many ports have a wait of 3-6 weeks for the next available sailing. Booking a vessel this week for next week’s sailing is a thing of the past, at least for now.
By far, the biggest challenge in ocean freight is a worldwide shortage of containers. Typically, the worldwide supply of 20′ and 40′ containers is more than adequate to meet demand. Not now. Not only is there record demand for bookings, but the ports have also reduced staffing in many markets and cannot keep up with the frantic arrival of containers. This leads to massive numbers of ships stuck anchored offshore awaiting their turn to berth, which only ties up even more containers. Once unloaded, containers pile up in ports at a frantic rate as terminal operators and trucking companies struggle to keep up.
The situation has become so dire recently, that many steamship lines are refusing to offer inland delivery to cities such as Chicago, Memphis, and Denver. They simply want to return their empties from the East and West coasts so they can quickly go back and reload. The carriers are unwilling to have their containers further tied up in massive inland rail and trucking logjams. This only further compounds the strain on domestic trucking capacity and the crushing pressure on the ports.
Other factors to be addressed include reduced sailing schedules, which is initially counter-intuitive. Why reduce schedules in the face of record demand? Quite simply, the steamship lines cannot afford to have their vessels idly anchored offshore for weeks at a time, waiting to be unloaded. They are sometimes skipping congested ports like Los Angeles and Oakland in their rotations, or occasionally eliminating the sailings all together, rather than pay for idle crews, fuel, and other operating costs.
Ironically, long-term contracts rates are now problematic as well. Many high-volume shippers with heavily discounted ocean rates are being told “sorry, no space available”. The reality is, the market is rapidly devolving into an auction- based marketplace, with space auctioned off to the highest bidder. Why would the steamship lines want to fill a contract order for a heavily discounted $2,500 container, when they can sell the same container for $12-$15,000 on the spot market?
Lastly, the impact of the Suez Canal closure last month, while seemingly brief, continues to reverberate. It made a mess of global sailing schedules that were already in disarray.
Ground Freight
Trucking and rail freight are not immune the current market meltdown as well. As the unprecedented demand for air and ocean shipping continue, America’s truck and rail network is struggling to keep up. There are quite simply far more shipments than the system can absorb.
Over the past year, truck carriers have faced a severe driver shortage, reduced office, sold off equipment and eliminated warehouse workers. Now the economy is boomeranging back, and they cannot replace those assets quickly enough. Transcontinental truckloads that once went for $5,000-$6,000 18 months ago, are now pushing $10,000 in some markets. It’s a seller’s market and truckers are cherry-picking the loads they will accept and shunning cheap freight.
Capacity has been further constrained lately by the recent demand for the expedited delivery of massive quantities of refrigerated COVID vaccine via our domestic ground network. Fortunately, that situation is improving slightly. Extreme demand led to a shortage of refrigerated trailer’s for produce and other temperature-controlled commodities. This crunch only further added to pricing pressure.
Finally, the recent spike in diesel fuel prices and the shutdown of the East Coast’s Colonial Pipeline by our Russian comrades only made a bad situation worse.
The Bottom Line
Whether air, ocean or ground, rates are at unprecedented levels of 300-400% of “normal” in many markets. Capacity is extremely constrained across the board and many carriers are increasingly selective about what bookings they will accept, putting even more pressure on pricing. It is creating what is essentially a perpetual “peak season” surcharge.
When Will the Situation Get Better?
At this point, everyone’s crystal ball is pretty hazy when it comes to forecasting when things will return to “normal”. With the start of the holiday shipping season only 90 days away, industry consensus is that it is going to get worse before it gets better, as demand for inventory replenishment only spikes further. With places like India and Brazil still suffering horribly from COVID, it’s hard to predict when air and ocean traffic will return to pre-COVID levels. By all accounts, most industry experts do not expect an equilibrium to be restored until Q1 of 2022 at the earliest. Until then, fasten your seatbelts.
What Can My Business Do to Weather the Storm?
Ship Early
Should you hold off on shipping and wait a few weeks for rates to come down? In a word, NO! Industry analysts and anecdotal evidence suggest that there is still extreme pressure on pricing. Rates are widely expected to increase further in 2021 as the holidays approach. Allow much longer lead times and ship as early as you practically can.
Educate Your Customers
It is critical that you communicate with your customers and educate them about market conditions. If they do not follow industry trends closely, you are going to come off looking like the bad guy. In addition to this Market Update, there are dozens of recent articles addressing the state of the global logistics meltdown.
Adjust Your Budget & Expectations
Adjust your budget and expectations. We constantly hear “but that same shipment only cost X a few months ago!” The pandemic has brought sweeping changes around the globe, and the cost of freight is no exception. Trying to run your business based on last year’s budget and pricing is a recipe for failure. Rates are changing weekly, and you need to adapt your pricing to your customers or be prepared to absorb the additional expense.
Be Flexible and Get Creative
Do you really need all that inventory sent via air freight? Consider splitting the shipment and sending a minimum amount via air freight, with the balance to follow via ocean. Send a shipment from Vietnam to Denver via Houston? Yes, it may be faster! Consider offering your customers the option of Standard or Expedited shipping, with a commensurate premium for expediting. Our team of experts can help offer creative, unconventional solutions.
Don’t Shoot the Messenger
We all hate being the bearer of bad news. Your friendly, neighborhood freight forwarder is no exception. It is a very tough, challenging market for all of us. Our team struggles with rapidly changing rates, carriers who won’t provide quotes in a timely manner, and phantom bookings that are delayed days or even weeks by the steamship lines without warning. Our promise is to always be fully transparent and to do our best to educate you about current pricing, market conditions and your range options.
We are Here to Support You!
Hopefully, the next edition of our Logistics Market Update can provide you with some more positive news and reports of an improved outlook. Until then, our team remains at your disposal to help you navigate these choppy waters. Like all storms, this too shall pass!
Questions: team@airandsurface.com or +1 714-573-1207.
Paige Cotcamp
President
Air & Surface Logistics
www.airandsurface.com