Global Supply Chain Congestion Risk Rising Again
RedStone Resource
January 17, 2024
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Inside This Edition
Conditions Make Demand Planning Critical in 2024
The supply chain pressures index is inching higher, currency fluctuations are accelerating, the cost of capital for carrying inventories is still high, and economic uncertainty is keeping purchasing managers off-balance. On the bright side, the global inventory overstock situation that has impacted the freight economy over the past 18 months has been largely eliminated.
Oil Prices Continue to Remain Low Despite Middle East Risk
Another significant bulk tanker firm has indefinitely postponed shipments through the Red Sea amid strikes from Houthi Rebels against shipping in the region. For now, oil prices remain low on the back of a strong US dollar, sufficient US oil supplies, and lower global demand. At the time of writing, oil prices have averaged between $72 and $75 a barrel over the past four weeks despite the Middle East volatility (a fair average).
Cass Shipments Index Still Shows Weakness on a Seasonal Basis
Found in the December index, shipment volumes were down 7.2% year-over-year. And it is likely no surprise that shipments have consistently been down year-over-year since February of this year. The near-term trend was also negative, shipment activity was down 1.6% month-over-month but would have been subject to seasonal changes in freight activity. Looking forward, much of the inventory overstock situation that has plagued the global supply chain over the past 18 months has largely been lifted.
Economic Briefing
Global Supply Chain Congestion Risk Rising Again
The latest data from the New York Federal Reserve shows that global supply chain congestion has grown and is marginally above what would be considered “balanced” (more pressure than normal). Recent events in the Middle East, congestion continuing in the Panama Canal, and risks of port congestion in Europe (a combination of weather and back-tracked ships moving out of the Red Sea and around the Cape of Good Hope converging at the same time) are adding to the challenges.
Drewry’s World Container Index has risen by 15% to $3,072 per 40ft container through January 11th, the 10-year average is $2,675 (Drewry noted that it was inflated by the Covid impact between 2020-2022). Some lanes are obviously rising faster than that. Particularly, Asia to Europe trade lanes is rising quickly. The Shanghai to Genoa trade lane is up 25% in the last week and is 85% higher YTD versus the same period in 2023. Shanghai to Rotterdam is also 23% higher. Moving in the opposite direction, all trade lanes to Asia are anemic right now; weekly increases in rates are still running low single-digits and most are still running lower on a year-over-year basis.
Congestion should remain near this “balanced” zone in the Fed index if the tension in the Middle East continues. But again, it is only affecting certain trade lanes, creating an environment in which shippers should be utilizing effective work-a-rounds and relying more on advanced planning to incorporate the longer transit times.
Conditions Make Demand Planning Critical in 2024
There are many articles being written about AI use in 2024 and micro-adoptions of specific applications. Rather than broad adoptions and converting entire organizations to AI-driven technologies, tuck-in applications that provide a specific, niche benefit to aid in operational execution will be a key trend in 2024. And in the supply chain, using a variety of technologies and forecasts (including AI assisted insights) to increase demand planning accuracy is going to be critical because of the complex operating environment the industry will be navigating this year.
The world is going through many economic and geopolitical challenges. The supply chain pressures index is inching higher, currency fluctuations are accelerating, the cost of capital for carrying inventories is still high, and economic uncertainty is keeping purchasing managers off-balance. On the bright side, the global inventory overstock situation that has impacted the freight economy over the past 18 months has been largely eliminated. Backlogs have been removed, inventories are balanced, and inventory management has become leaner.
But with transit times elongating due to various pressures and geopolitical conflict, having a clear picture of demand in the quarters ahead will be critical in maximizing efficiency, customer service, and ensuring a continuous supply chain. Adding more allowance for elongated transit times in order cycle times will be important.
In November of last year, more than 1,000 new AI business applications were launched and a PWC survey found that 73% of companies have already adopted AI at least in a few areas of their business. This will continue and companies will have to decide how, when, where, and how fast they will take on additional AI assistance in creating an optimized supply chain. And at some point, early in the process, focusing on demand planning will be critical.
TRANSPORTATION BRIEFING
Oil Prices Continue to Remain Low Despite Middle East Risk
Another significant bulk tanker firm has indefinitely postponed shipments through the Red Sea amid strikes from Houthi Rebels against shipping in the region. After a tanker was struck on January 15th by an anti-ship missile, several larger global shipping firms also announced their curtailment of using the Suez Canal corridor. To date, approximately 50% of the volume moving through the Red Sea has diverted to the Cape of Good Hope route, which delays the average shipment by at least 9 days. Some estimates suggest that up to 20% of excess capacity has been stripped out of the global maritime market because of the additional transit times required to avoid the Suez Canal and that number will be growing as more companies start to avoid the region.
Chevron issued a warning that if tensions were to continue to rise in the Persian Gulf and Red Sea region, that it could eventually impact oil supply and prices would rise along with it. Recent tensions have built in the Strait of Hormuz after Iran seized a tanker in the region, which is one such event that carries supply risk. Oil is still flowing out of the Persian Gulf, but concerns are growing that an eventual “incident” could impact the flow of oil supplies as a result.
For now, oil prices remain low on the back of a strong US dollar, sufficient US oil supplies, and lower global demand. At the time of writing, oil prices have averaged between $72 and $75 a barrel over the past four weeks despite the Middle East volatility (a fair average). If disruptions were to take place in the critical Strait of Hormuz area, it could choke off supply and prices would surge. But with the US now able to produce a record 13.2 million barrels a day and demand weaker than expected, the US is well supplied…for now. That is preventing “super-spikes” in oil prices as we might have seen in previous Middle East Cycles like this in the past.
Cass Shipments Index Still Shows Weakness on a Seasonal Basis
Cass Systems releases a shipments index based on volumes of 36 million invoices processed in the intercontinental US and it found in the December index that shipment volumes were down 7.2% year-over-year. And it is likely no surprise that shipments have consistently been down year-over-year since February of this year. The near-term trend was also negative, shipment activity was down 1.6% month-over-month but would have been subject to seasonal changes in freight activity (normal slowing during a traditional peak freight cycle).
Looking forward, much of the inventory overstock situation that has plagued the global supply chain over the past 18 months has largely been lifted. Companies have worked to get their inventories back in-line with traditional levels and new sales of products will now restart production up and down the entire supply chain. This may not show up until Q2, but freight volumes and rates should start to surpass 2023 levels in the second half of the year if the economy continues to perform at a modest rate of growth. Most forecasts show the first half of the year with lackluster growth followed by a stronger Q3 and Q4.
