Ending of UAW Strike and Impact of Resuming Auto Production
RedStone Resource
November 1, 2023
Inside This Edition
Can Q2 2024 Provide the Great Inventory Reset?
The overbuilding of inventories coming in the wake of the global supply chain crisis led to the upstream portion of the global supply chain slowing dramatically. Everything from raw materials to labor, energy, and inbound freight into the manufacturing supply chain was weaker because downstream orders were being fulfilled with existing inventories. But there is evidence that inventory backlogs could be cleared by early next year.
Global Diesel Supplies and Russian Export Drop
Russian President Vladimir Putin had ordered a halt to Russian diesel exports early in October on fears that the country could run short of supply. After reopening shipments of high-sulfur content diesel and bunker fuels, officials are still worried about global diesel supplies. Russian exports of total diesel are hitting 17-month lows and the US other primary producers may be called upon to help fill gaps in supply.
Petroleum and Autos Still Carrying Rail Sector
The Association of American Railroads showed that petroleum shipments and the movement of vehicles and parts were still lifting total carload volumes 0.3% higher than levels YTD in 2022. Petroleum shipments (which were a big portion of Q3 GDP growth) were up 10.8% YTD vs. 2022.
ECONOMIC BRIEFING
Ending of UAW Strike and Impact of Resuming Auto Production
All three of the UAW contract automakers in the US have reached a tentative agreement with the union. This tentative agreement must still be ratified by workers, but the deal for all three is supposed to garner support by workers. The bigger question is how quickly normal supply chain movement will take place as a result of the ending of a 60-day disruption in product flows.
The recovery is not instantaneous. Supply chains and the flow of parts must resume. Some inventories currently in stock will allow for some more rapid startup but delays and parts shortages in the near term are likely to be expected as one of the largest global supply chains restarts. Nearly 45% of the suppliers in the automotive supply chain were forced to furlough workers as a result of the strike. Getting workers back on the job, getting assembly lines supplied and restarted could take up to two weeks by some estimates.
One of the factors of a recovering supply chain is that some freight networks will also have to adjust and create some additional capacity in certain transit lanes (especially trucking). Capacity that has been chasing interim opportunities (to keep cash flows intact) are likely dislocated now, and those carriers will have to get capacity reallocated to meet new OEM demand as products once again flow off automaker assembly lines.
Can Q2 2024 Provide the Great Inventory Reset?
Those that have followed us since last fall know that excessive business inventory levels have hurt global supply chain and manufacturing demand for much of 2023. The overbuilding of inventories coming in the wake of the global supply chain crisis led to the upstream portion of the global supply chain slowing dramatically. Everything from raw materials to labor, energy, and inbound freight into the manufacturing supply chain was weaker because downstream orders were being fulfilled with existing inventories. But there is evidence that inventory backlogs could be cleared by early next year.
If current consumption patterns continue and weaker inbound freight and manufacturing volumes continue at the current pace, there will be a draw-down in inventories this fall sufficient to restart global activity. As supply chains move back into a continuous replenishment cycle, that will help reset global activity and the proverbial “tide that lifts all ships” will increase new order activity. This cycle was last seen in the 2014-2016 period, and one of the strongest freight and supply chain environments in decades was experienced in 2018. If consumer spending continues to be strong, government demand for defense goods, and construction activity spurred by private spending and the CHIPs Act, Inflation Reduction Act, and Infrastructure Bill hit their spending stride in 2024; compounding supply chain activity could accelerate faster and larger than expected. In any event, supply chain flexibility could be an important factor for 2024.
TRANSPORTATION BRIEFING
Global Diesel Supplies and Russian Export Drop
Russian President Vladimir Putin had ordered a halt to Russian diesel exports early in October on fears that the country could run short of supply. After reopening shipments of high-sulfur content diesel and bunker fuels, officials are still worried about global diesel supplies. Russian exports of total diesel are hitting 17-month lows and the US other primary producers may be called upon to help fill gaps in supply. Refineries in Russia are going through “extended maintenance” and may further reduce the amount of diesel being sent to certain importers. Whether geopolitical in nature or a function of tight supply, diesel prices in some countries are likely to remain elevated in the coming months.
The EU was concerned enough about the drop in diesel supplies that they convened an emergency session to discuss it. Supplies throughout Europe could be tighter than expected, and the US as mentioned may be called upon to accelerate production and export more refined fuels – especially low-sulfur diesel used in trucking and rail sectors. The winter months are critical throughout areas of Europe since diesel generators are used often to replace natural gas electricity generation when NG supplies are low. Recent pipeline damage in the Baltic Sea has disrupted the flow of some energy commodities and places the winter months at some level of risk for big areas of Europe.
At the moment, weaker US demand is keeping domestic diesel prices from elevating at a faster rate. Current prices are still 90 cents a gallon lower than they were a year ago. Current forecasts still show US diesel prices continuing at current prices, but geopolitical tensions can change that outlook quickly.
Petroleum and Autos Still Carrying Rail Sector
The Association of American Railroads showed that petroleum shipments and the movement of vehicles and parts were still lifting total carload volumes 0.3% higher than levels YTD in 2022. Petroleum shipments (which were a big portion of Q3 GDP growth) were up 10.8% YTD vs. 2022. The movement of autos and parts were up 13.3% vs the same time frame. The ripple effect from the UAW strike is expected to still show up in the rail traffic data before the end of the year.
Other categories remain weaker. Intermodal shipments are down 7.4% vs the same period from a year ago. The National Retail Federation still expects November and December TEU activity to pick up and exceed 2022 volumes. The NRF expects nearly 2 million TEUs for each month to hit US shores in those two months.
Seasonal grain shipments are also weaker than last year. This is surprising given the low water levels on the Mississippi and some grain/agricultural shipments that may have temporarily moved from barge to rail/road transportation. Water levels fluctuate and heavy rains throughout the southeast may help to push water volumes below St. Louis higher, allowing for heavier barges and greater volumes of barges moving on the river.