US Reshoring and Nearshoring Trends to Accelerate?
RedStone Resource
May 24, 2022
Inside This Edition
Raw Material Shortages Having Bigger Impact Than Expected
Global metal supplies have been falling for months. Metals prices used in manufacturing and construction have surged with nickel leading the way after an investor was forced to meet a margin call, nickel prices rose 300% in a single day and currently are trading 60.8% higher year-over-year.
China Lockdowns Roil Global Supply Chain - Again
Key business and production zones around Beijing, Shanghai, Shenzhen, Guangdong and other areas are being impacted by the lockdown. China maintains a zero COVID case policy and despite officially reported infections numbering less than 10,000, the county has lockdowns that could last two weeks or more.
US Reshoring and Nearshoring Trends to Accelerate?
One of the big shapers of the US supply chain in the coming quarters is a focus on reshoring and near shoring manufacturing activity. Spending on manufacturing construction in January (the latest available) was 31.4% higher than it was a year ago, and it had grown by 31% in the prior month.
ECONOMIC BRIEFING
Oil Prices Fall on COVID Risk in China
US West Texas Intermediate prices surged at one point in the first week of March to $130 a barrel in market trading but has since slipped back to $96 a barrel. This market continues to face significant volatility. The big driver of this drop in prices is an outbreak of COVID in China and the subsequent drop in demand that is expected as a result. Just as quickly as the price has fallen, it can go back up given the volatility in global activity. Again, concerns about impact of the COVID outbreak in China is disrupting the outlook for the global economy.
For transportation operators, retail diesel prices are still hovering near all-time highs. In 2008 when diesel prices were this high, the industry lost nearly 4,000 trucking firms, many of which were in firm sizes between 5 and 45 trucks. In this size category, companies get added back into the mix very quickly, the cost of entry into the industry is very small. But with higher insurance, labor, and operating costs, this super-surge in diesel prices will push many of them into significant financial concerns. Keeping access to multiple carriers and ensuring flexibility during this time will remain important.
Raw Material Shortages Having Bigger Impact Than Expected
Global metal supplies have been falling for months, and speculation about the impact of eliminating Russian exports has started to push prices higher. Metals prices used in manufacturing and construction have surged with nickel leading the way after an investor was forced to meet a margin call, nickel prices rose 300% in a single day and currently are trading 60.8% higher year-over-year.
Despite easing from their highs, a similar inflationary pattern also continued across copper, lead, aluminum, zinc, titanium, platinum and many other materials that are used in construction and manufacturing. One of the ripple effects is that it makes supply chain activity volatile, and the impacts on freight capacity ebb and flow through this volatility.
In the latest Producer Price Index from January, metals and metal products are 18.6% higher than they were a year ago and 46.4% higher than they were in 2019. Iron and steel products used in manufacturing and construction were 67.8% higher year-over-year and are 75.0% higher vs. 2019 levels.
Despite Russian metal exports accounting for less than 3-4% of total global market share overall (some estimates show some Russian metal production accounting for 15-20% of total global output – but not all of it exported), it is taking longer for global producers to fill this reduction in metal supplies. By the second half of 2022, this supply should be filled by alternate suppliers, depending on how the conflict is resolved and how long sanctions remain in place.
TRANSPORTATION BRIEFING
China Lockdowns Roil Global Supply Chain - Again
Just when we thought the world was coming out from under the pressures of COVID, we have an estimated 37 million people under a virus-induced lockdown across key manufacturing sectors. Early in the week of March 14th, China was reporting outbreaks in 21 provinces. Key business and production zones around Beijing, Shanghai, Shenzhen, Guangdong and other areas were impacted by the lockdown. China maintains a zero COVID case policy and despite officially reported infections numbering less than 10,000, the county has lockdowns that could last two weeks or more.
The impact on the supply chain is already being felt. Major port operations are being slowed and the number of ships waiting to dock and unload freight grew from just 24 to more than 79 in just a short period of time. Many multi-national firms are seeing their supply chains being disrupted again and shipments out of the country are delayed.
The only good news is that this is allowing the US port system to get unclogged, backlogs processed, and freight firms will wait for the “next wave” to hit the country in the next 6-10 weeks. The Omicron variant is making its way through the country (and is easily spread) and if China continues its zero-case policy, it could take a heavy toll on production in the entire country.
US Reshoring and Nearshoring Trends to Accelerate?
One of the big shapers of the US supply chain in the coming quarters is a focus on reshoring and near shoring manufacturing activity. Reshoring is the process of manufacturing production returning to the US and near shoring is locating US sourcing closer to US consumption, namely in Mexico or Canada.
Spending on manufacturing construction in January (the latest available) was 31.4% higher than it was a year ago, and it had grown by 31% in the prior month.
The actual dollars being spent on construction activity in the manufacturing sector hit the highest level all-time in January, reaching an annualized rate of $93.2 billion. Many analysts believe that this figure could be even higher but raw material and labor shortages are keeping many of them from starting new projects.
This could start to have a mild impact on US distribution patterns. The total volume of freight moving in the US will likely increase and import / export volumes are also expected to remain stable at the same time. It will take years for this trend to have a material affect on the total volumes currently being traded with the US, but growth rates may moderate slightly during the process.
