The end of the supply chain crisis is easing inflation

Less than a year ago, all eyes were on the disruption of the global supply chain. Ports were under pressure, transportation costs were skyrocketing and essential consumer goods were in short supply. These bottlenecks caused enormous stress in the economy and skyrocketing inflation. Today things are very, very different.

Overcapacity in ocean freight, trucking and other critical parts of the supply chain puts downward pressure on prices, clears supply chain backlogs and contributes to the fall in inflation.

Retailers, manufacturers and policy makers welcome the “loosening up” of the various components. The New York Fed’s Global Supply Chain Pressure Index (GSCPI), designed to monitor global supply chain stress, is arguably the best aggregate measure of the current state of the logistics industry, pointing to a dramatic change in recent years. year.

The index has fallen sharply to pre-pandemic stress levels over the past 18 months. The GSCPI integrates several commonly used metrics to assess supply chain stress. For example, global transportation costs are measured with data from the Baltic Dry Index (BDI) and the Harpex index, and US Bureau of Labor Statistics air freight cost indices. The GSCPI also uses various supply chain-related components from Purchasing Managers’ Index (PMI) surveys, targeting manufacturing companies in seven interconnected economies, including China, the Eurozone, Japan, South Korea, Taiwan, the United Kingdom and the United States. States.

There are indications that the crisis is over. Every part of the global supply chain has improved: sea freight, the price of sea containers, barge transport, air freight, freight forwarding and storage capacity – they all show improvement. Let’s look at each of these components individually.

Collapse of shipping costs from China to the US

Do you remember the maritime transport crisis? Shipping costs have been a major concern for companies that rely on the trade route between China and the US. The lockdown in the US during the pandemic created a huge demand for goods (as many services were not offered or limited) and consumers were left with money on government stimulus measures. The excess demand led to an increase in shipping costs. The cost of shipping a container from China to the west coast of the US has quadrupled to over $20,000 in the first nine months of 2021. According to Freightos, a well-known player in international shipping, the cost of shipping a container on the China-US route has plummeted to less than $1,200. Current ocean freight prices indicate a profound change in supply chain dynamics that favor manufacturers and retailers, not shippers.

The turn of the tide for the ocean freight industry is reflected in the stock market performance of listed shipping companies. AP Moller Maersk, the Danish logistics giant operating in 130 countries, benefited significantly from the increase in prices throughout the supply chain, especially the increase in shipping costs. The stock price outperformed the S&P 500 by more than 100 percent between the first quarter of 2020 and the end of 2021. Since then, the stock has fallen more than 50 percent from its all-time high, returning virtually all of its relative performance.

Reduce the price of shipping containers

Together with the demand for shipping in 2021, the price of a seaworthy metal shipping container skyrocketed. Pre-pandemic, a 40′ high cube container, the type commonly seen on giant tankers, could be purchased for around $2,000. Prices peaked around $6,000 in 2021. Today, prices have fallen below $2,000.

Over the past year, global shipping container production has dropped significantly as demand for goods fell. Containers are piling up in the major ports. According to Drewry, a maritime research firm, the production of 20 foot equivalent units (TEU) – the industry standard size for a container – is fell by 71 percent between the first quarter of 2022 and the same period this year.

For the time being, there is no shortage of available sea containers.

Inland shipping Transport Prices Convenience

Along with other forms of transportation, the shipping costs of barges skyrocketed. One way to track barge shipping prices is through the USDA’s weekly GTR report.

The Grain Transport Report (GTR) provides the latest insights into market developments affecting grain shippers who use trucks, railcars, barges and seagoing vessels to ship their products to market. According to the latest weekly report, barge movements have decreased by 57% compared to the same period last year.

Fall in the cost of air freight

Air freight is another part of the supply chain that is in the middle of standardization. Lately, the cost of air freight has come down significantly. This can be attributed to both supply and demand factors. As with international shipping, the demand for air cargo has fallen due to the decline in the overall demand for goods. The increase in supply can be explained by the change in available capacity in the belly space of passenger jets as airlines intensify their flight schedules to meet the renewed demand for travel. Air cargo supplies were severely curtailed as international travel ground to a halt during the pandemic.

One way to measure the cost of air freight is through the Drewry East-West Air Freight Index. The index has halved from its late-2021 high. A normalization in jet fuel prices due to a spike in pandemic demand and the disruptions associated with the Ukraine conflict have also helped lower air freight costs.

Fall in freight rates

Freight rates, a critical part of the supply chain, have also fallen. Again, less demand for goods and increasing inventories, along with a drop in fuel costs, have helped drive down freight rates. According to Internet Truckstop data, rates for hauling flatbed trucks peaked at $3.50 per mile in June 2022, but are now below $2.50.

Internet Truckstop also publishes an index that tracks the new transport demand. Demand peaked in mid-2021, but has since fallen back to pre-pandemic levels. It does not appear that passing-on pricing pressure or additional bottlenecks related to freight transport will become a problem for the logistics sector in the short term.

Improving warehouse capacity

Widespread warehouse shortages contributed to supply chain concerns at the height of the crisis. There was a shortage of space to store inventory, resulting in a huge increase in warehouse space costs. But both capacity and prices are starting to correct.

According to data in the June 2023 Logistics Managers Index (LMI), which includes a warehouse sub-component, capacity has increased dramatically. The last Warehousing Capacity index was 6.8 points higher and a whopping 22.5 points higher than a year ago. Capacity has been restored as stocks have fallen and demand for goods has declined.

The result is a slowdown in prices. Upward pressure on warehouse prices has eased, according to data from the latest LMI index, which is good news for companies trying to control warehouse inventory costs.

LMI Warehouse Price Index

Impact of nearshoring

Nearshoring refers to the business practice of moving critical production components closer to demand. The recent supply chain disruption has led to a change in the way companies develop their supply chain. CEOs and logistics managers cannot afford a repeat of the chaos caused by port congestion, exponential increases in shipping costs, or rail yard delays. To mitigate this risk, US companies are moving production closer to home.

Mexico is clearly benefiting from this trend. The current proximity and free trade agreement between the United States and Mexico, low labor costs in Mexico, fast and secure supply chains, and stable relations have made Mexico an ideal place to add manufacturing capacity.

According to Mexico’s Finance Minister, Rogelio Ramírez de la O, 20 companies have announced more than $13 billion in investments, including $5 billion from Tesla
to build a factory that will eventually produce 1 million electric vehicles per year. Toyota and BMW have also announced investments in Mexico for the next few years.

Nearshoring is also taking place in the semiconductor market. The CHIPS Act, which Congress passed in the summer of 2022, aims to reduce reliance on Asia as the main supplier of computer chips. During the pandemic, a shortage of semiconductor chips caused great pain for many US industries, especially automakers. Currently, the US has no production capacity for advanced logic chips. The CHIPs Act’s $52.7 billion investment in domestic semiconductor manufacturing will help address this problem.

While the nearshoring trend is still small compared to global shipping of goods, it should help reduce risks for certain companies when it comes to acquiring critical manufacturing components, along with the CHIPS Act, potentially reducing the negative impact on the economy is mitigated in the event of another global supply chain crisis.

In conclusion, the current state of the global supply chain indicates that the worst is behind us. The logistics landscape looks very different a year ago0. Whether it’s the fall in global shipping costs, fewer delays in key ports, the fall in freight rates or the drop in air freight costs – every segment of the global supply chain has improved.

The same forces that contributed to escalating consumer prices are now generating deflationary pressures, easing central banks, governments and consumers. If you view the global supply chain as a source of continued inflationary pressure, you should probably look elsewhere.