The impact of the COVID pandemic has shone a spotlight on the global supply chain and the challenges in keeping goods moving efficiently along it, with disruption likely to continue well into 2022 and some expectation that its impact may be felt into 2023.

Supply chains are something that most people never think about until something goes wrong and the pandemic has created significant challenges for supply chains, putting them under intense pressure and exposing vulnerabilities.

The ability of ports to work at full capacity has been undermined by staff shortages and COVID-safe working and the pandemic has accelerated and magnified problems that already existed in the supply chain, such as the pay and working conditions of critical workers, including HGV drivers.

This unprecedented situation is causing prices to rise at one of the fastest rates in a decade, contributing to inflation on a global scale.

ORIGIN

Last year when consumers were locked down, no longer able to spend money on theatres, gyms, eating out and services, they turned online and began to binge on home-office, clothing, electronics and other products.

Having taken their vessels out of service, when China locked down, the shipping lines were caught out by the unexpected demand for space, especially with empty containers and vessels out of position. And the situation was exacerbated by the shortage of supply chain workers owing to COVID, which is when ports, inland terminals and warehouses started to get congested.

Freight costs on the busiest and most important routes have soared because of disruption, with the grounded passenger aircraft fleet removing >50% of air freight capacity and a massive reduction in sea freight capacity, due to containers and the vessels that carry them, being out of position.

IMPACT

Usually operational, natural and labour interruptions to global shipping are overcome without lasting impact, but with supply chain infrastructure under so much pressure, even the slightest issue is having a disproportionate impact, with disruption rippling out much farther and longer than normal.

Lockdowns have been imposed across Asia, with China’s zero-COVID strategy threatening further lockdowns, with traffic building up on the Yangtze as pilots quarantine and factories in China’s primary manufacturing regions now facing prolonged power shortages and cuts.

Laden container ships are anchored, waiting for berths, outside ports in North America, Asia and Europe (79 were waiting outside Los Angeles/Long Beach last week) with schedule reliability sinking to all-time low and vessels skipping the busiest ports, with the UK risking relegation to feeder status.

Containers may be sitting in ports or warehouses unopened for a week or two, blocking terminals and unavailable for reuse, which is why some lines have begun to restrict free time and enforce demurrage contracts and an emergency dwell surcharge is being imposed by the ports of Los Angeles/Long Beach.

The problem is compounded by the HGV crisis and shortage of truck drivers available for container transport, with bookings made weeks in advance and containers still waiting to be picked up.

With limited capacity and sustained high demand, supply and demand has pushed freight rates to levels never seen before, and as additional costs are passed on to consumers, inflation will grow.

FUTURE

Freight rates have remained firm, despite some expectation of them softening post-Chinese New Year and into early Q4, in big part due to the extended ocean transits and shortage of equipment which has effectively cut available capacity by 25%.

Most airlines have remained busy, even without passenger support, and rate levels for air cargo have increased significantly as their sole source of income. Air passenger travel is gradually reopening and with it more bellyful capacity will become available on long-haul routes, including the critical trans-Atlantic and Asian routes.

Many carriers are very bullish about 2022 and will not currently offer any form of pricing for 2022 contracts, although this may begin to unwind over the final quarter.

While the new vessel order book is at a high, there are very few new build vessels entering service over the next 15 months to the end of 2022, so capacity is likely to remain restricted.

It should also be noted that much of this new capacity could reignite the current global port disruption, because many ports do not have the infrastructure, cranes, equipment or capability to handle Ultra Large Container Ships (ULCS) vessels that carry in excess of 20,000 containers.

The shipping lines, will remain eager to continue growing their ‘bottom line’ and the nine lines that control over 90% of global trade have become very adept at managing their capacity, which means they will enter the post-pandemic era in a much stronger position and the airlines will be keen to recoup losses from COVID lockdowns, which means they will want to maximise revenues from cargo movements.

Sea and air freight will eventually come back into balance, but for now the pandemic’s consequences will be measured in shipping costs, prices, inflation and in delays.

The surge of consumer spending that began during the lockdown last year had been expected to continue, but with the government imposing new taxes and interest rates likely to rise in the short-term, they may put a damper on demand and relieve pressure on global supply chains, sooner rather than later