The pandemic has underlined the critical importance of the global supply chain, in meeting critical PPE and medical needs, as well as satisfying consumer demand and the challenges in keeping goods moving efficiently along it.
The pandemic is creating new challenges for supply chains, as it keeps them working under unrelenting pressure, bringing to light previously unseen and unacknowledged vulnerabilities.
The ability of ports and supporting infrastructure to work at full capacity has been undermined by staff shortages due to quarantines and COVID-safe work practices.
The pandemic has accelerated and magnified problems that already existed in the supply chain, such as the pay and working conditions of critical workers, like HGV drivers.
Demand for vessel space and sea freight costs soared on every trade route as the grounded passenger aircraft fleet removed over 50% of air freight capacity at a stroke and to make a bad situation worse the amount of sea freight capacity available, was cut further due to containers and the vessels that carry them, being out of position.
Hopes remain that cost pressures will lessen, as consumer spending shifts from products back to holidays, eating out and other services. And while freight rates are very likely to remain higher than before the crisis, they will not remain at the current levels.
2020 – The COVID outbreak’s supply chain impact
- Brexit seen as a major trauma to European logistics platforms.
- The first quarter lockdown in China, prompted carriers to swiftly withdraw vessels.
- As global lockdowns followed the carriers made further massive cuts to sea freight capacity.
- The global passenger aircraft fleet is grounded, removing over 50% of belly-hold capacity.
- Massive and unexpected demand for freight space returns mid-year as consumers buy products, as they are denied access to services.
- Shipping lines start to return vessels, but they are now vastly off schedule.
- Reacting to critical global PPE demand, airlines convert aircraft (Preighters) to carry cargo.
- Ocean capacity is massively constrained, leading some lines to cancel longer term contracts and push shippers and importers to the FAK (Freight All Kind) spot market.
- Ocean and air freight rates continue escalating to first quarter levels up >1000%.
- Vessel schedules are even less reliable, adding to congestion at ports and extending transit times, which means empty containers are not returned to the areas of manufacture creating further delays.
2021 – Where we are now
- Freight rates have remained firm, despite some expectation of them softening post-Chinese New Year and into early Q4.
- Airlines have remained busy, even without passenger support and air cargo rates have increased significantly as their sole source of income.
- Lockdowns affect manufacturing and lead times, with infrastructure congested.
- Extended ocean transits and shortage of equipment effectively cuts capacity by 25%.
- Reliability of carriers is totally lost with just 30% vessels on schedule and transits massively extended.
- Global port congestion disrupts vessel arrivals and departures and handicaps the return of empty containers.
- Inland road haulage and port-linked rail services in the UK, Europe and North America become congested .
- Shortages of HGV drivers creates additional issues at destination and adds to congestion resulting in storage, detention and demurrage costs.
- Airlines still operating predominantly on cargo income and pricing at record levels entering peak season.
- Freight rates on all modes remain historically high, creating a ‘pay to play’ environment, with carriers focusing on the most profitable lanes and markets.
- Power shortages and periodic power cuts in China, adds pressure in key manufacturing regions.
2022 – Looking to the future
- As passenger travel opens up globally expectations would be for pricing to soften, as passenger income returns and belly-hold space adds to freight market capacity.
- Many carriers are very bullish about 2022 and will not currently offer any form of pricing for 2022 contracts which will unwind over the final quarter.
- Limited numbers of new-build vessels are scheduled to enter service before the end of 2022, so capacity is likely to remain restricted.
- Inflation may soften consumer demand, reducing pressure on global logistics, in all stages of the supply chain, including manufacturing.
- Carriers will continue pushing for longer term two year contracts and either decline to offer 12 month contracts, or refer customers to the FAK/spot market.
- Confident shipping lines, eager to continue growing the ‘bottom line’ and airlines keen to recoup losses will maximise revenues from cargo movements.
The pandemic-linked supply chain challenges described above, that have driven up prices and slowed the global economic recovery, will lessen over time. But any recovery will be fragile and easily undone by unforeseen events, like the shortage of HGV drivers in the UK and China’s drive for zero COVID cases.
By 2023 (possibly late 2022) the COVID-19 situation should be under control and consumer demand steady, providing stability in global shipping, operations and costing.
The capacity of the global container fleet could potentially grow by 20%, as new vessels are delivered and schedule reliability will have returned, but how much tonnage the the 9 major shipping lines decide to withdraw or retire from the market, will dictate what volume, if any, is actually added.
Political and global events, not yet apparent, may have a huge influence on global supply chains, on all modes and in all regions of the world.
Local and global issues are intertwined, due to the fragile state of ocean and air freight markets, demonstrating just how unpredictable the movement of your goods has become.
The shipping lines are expected to declare in excess of $150 BILLION pre-tax profits in the current financial year and it is unlikely they will want to give that up, considering what they have experienced and learned over the last 18 months on market dynamics and influences. They are in control of events and consequently their own success.
It is widely accepted that the current supply chain challenges and high freight rates, across all modes, will continue into next year without much compromise.
Managing supply chains is no longer a back-office function, largely ignored and taken for granted, because business survival depends on a a high-functioning supply chain run by professionals with the experience and critical support of dependable partners.
Metro will always provide you with the best alternatives and options, supported by a proactive team, leading-edge technology and open communication. Supply chain solutions that are designed around you, your situation and needs.
For further information and to discuss your ongoing requirements please contact Elliot Carlile or Grant Liddell.