Banking Situation and Impact on Supply Chain Management
RedStone Resource
May 5, 2023
Inside This Edition
Oil Prices Fall Sharply on Economic Risk, Impact on Transportation
Oil prices were falling at the time of writing, falling to $68.16 a barrel (for West Texas Intermediate). This is down 15.1% year-to-date and was 23% lower than last year at this time.
Air Cargo Price Indexes Continue to Soften
The index for inbound international air freight services came in at 173.7, down 4% in March from February’s levels and down 36.1% from levels a year ago. However, the price index is just now back in an average range from levels shown in the decade prior to the pandemic.
Rail Volumes Remain Mixed, Some Pockets Remain Strong While Intermodal Lags
Top line rail carload volumes according to the AAR were up 0.6% YTD through the end of April. That was driven heavily by movement of coal, farm products (excluding grain), metallic ores, automotive, nonmetallic ores, and petroleum.
ECONOMIC BRIEFING
Banking Situation and Impact on Supply Chain Management
The banking sector had started to tighten credit standards prior to the handful of bank failures that the market experienced in March. In the wake of those failures, conditions continue to tighten for credit and borrowing. Federal data shows that approximately 44.8% of banks were tightening standards for large and middle market industrial firms early in Q1. Other sectors are also experiencing tightening standards similar to these rates. And this was prior to the failure of several banks in March as mentioned.
Surveys of manufacturers show that they are becoming more sensitive to carrying excessive inventory (and we can speculate that cost of capital risk is one of the reasons to lean inventories). Companies will begin walking a fine line between trimming the cost of capital by reducing inventories and running into stock outs of certain materials since many pockets of consumption and spending remains strong. For instance, some pockets of construction are still facing project delays because of stock outs of electrical and electronic equipment. As orders for those products are fulfilled, and projects go from being stalled to suddenly going into a robust production schedule, the risk of a run-on inventories of products used in the final finishing of structures increases. These fits and spurts of activity make it difficult to judge demand, and inventory management can become a challenge in this environment.
Oil Prices Fall Sharply on Economic Risk, Impact on Transportation
Oil prices were falling at the time of writing, falling to $68.16 a barrel (for West Texas Intermediate). This is down 15.1% year-to-date and was 23% lower than last year at this time. Fear of economic recession and weaker demand forecasts are currently outweighing low inventories. Petroleum inventories are sitting at the bottom of the 5-year average and OPEC+ continues to signal that it will trim output by 1.13 million barrels per day starting this month.
Diesel prices are down 24.5% according to AAA versus rates from a year ago and corresponding Fuel surcharges were also down by roughly 20%. Approximately 41% of the price for a gallon of diesel is driven by crude oil prices. The question is how this impacts the truckload sector. Volumes for the trucking sector have returned to pre-pandemic levels, but diesel prices are still running approximately 27% higher than they were in 2019. That will keep some financial operating pressure on the trucking sector and could keep freight rates historically higher than one might expect.
TRANSPORTATION BRIEFING
Air Cargo Price Indexes Continue to Soften
The Bureau of Labor Statistics conducts a monthly survey of a broad set of users of air cargo services, and it produces a price index from those surveys. The index for inbound international air freight services came in at 173.7, down 4% in March from February’s levels and down 36.1% from levels a year ago. However, the price index is just now back in an average range from levels shown in the decade prior to the pandemic.
The outbound price index for international air freight was still much higher than levels prior to the pandemic, but they were down 3.5% vs. February prices and were 3.1% lower than levels from a year ago.
Among trade lanes between the US and Asia and Europe, all were weaker as one would expect except for the US to Europe, it was up 3.7% vs. a year ago. As the US continues to send freight to Europe to help support the war in Ukraine, it has kept prices elevated vs. last year.
Rail Volumes Remain Mixed, Some Pockets Remain Strong While Intermodal Lags
Rail volumes show that products are still moving in the supply chain, but in pockets. Top line rail carload volumes according to the AAR were up 0.6% YTD through the end of April. That was driven heavily by movement of coal, farm products (excluding grain), metallic ores, automotive, nonmetallic ores, and petroleum.
The real challenge is that intermodal remains very weak, volumes are down 10.9% YTD vs. last year. Total North American intermodal activity was down 10.3% with Canada down 10.2% and Mexico down 1.4%. Other segments of rail in Canada were up across the board (except petroleum) and Mexico showed strength in all segments except farm products (excluding grains) and non-metallic minerals. Coal was down, but Mexico is not a strong shipper of those products.
