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The Stressed Logistics Chain

Commentary: When it rains, it pours. As North America struggles with disruptions in supply chains and clogged seaports of entry, heavy rains earlier this month has caused Canada to suspend rail service to the Port of Vancouver, the country’s major port of this type on its west coast. This rail suspension occurred while there were more than 60 container vessels lined up offshore  to be unloaded. Major disruptions are being felt in the agricultural, coal, and mineral sectors, which are adding to the misery of delayed shipments and stretched supply chains.

   The Vancouver situation is a microcosm of what is happening throughout shipping and logistics chains. The United Nations Trade and Development Agency (UNCTAD) is stating that prices of consumer goods will significantly rise in 2022 until shipping delays are resolved and efficiencies are restored at seaports. These issues have resulted in skyrocketing freight rates that UNCTAD says could result in global import price levels rising by 11 percent and consumer price levels by 1.5 percent within the next couple of years. These rate increases will cause overall production costs to rise, which will ultimately be paid for by consumers.

To address these issues, the agency calls for nations to improve and expand their port infrastructure, which it estimates could reduce shipping charges by approximately 4.1 percent. It also estimates that overall costs would be reduced by 3.7 percent by more efficient trade measures, and 4.4 percent by better shipping logistics. UNCTAD urges for better communication and coordination between players in the maritime shipping industry to deal with the crisis.

   On the heels of the United Nations report comes the World Trade Organization’s (WTO) own assessment of the stress in the logistics chain. The WTO recently reported a steep decline in its “Goods Trade Barometer,” after an increase in this economic indicator in mid-2020, when the pandemic appeared to be ebbing. This barometer provides real-time data on the rise and fall of merchandise trade by following recent trends. Between August and October of this year, this indicator fell by more than 10 points. The WTO says, “Recent supply shocks, including port gridlock arising from surging import demand in the first half of the year and disrupted production of widely traded goods such as automobiles and semiconductors, have contributed to the barometer's decline.”

This organization, to which most of the world’s nations belong, is warning that production and supply chain disruptions will slow down global merchandise trade and decrease import demand. It points to falling exports as evidence that these factors are already occurring. The most drastic decline has occurred in the automotive sector, mostly due to the shortage of computer chips that are incorporated into automotive production. As recent as August 2021, the WTO was predicting a rise in global merchandise trade of 10.8 percent. However, the organization is now predicting a slowdown in trade growth through the latter part of 2021, which has caused it to forecast a growth of 4.7 percent for the upcoming year.

Here locally, more and more companies are scrambling to find warehouse space to shore up inventory levels in an attempt to hedge their risk against supply chain disruptions. The problem is that many companies want to rent extra space, but they want to rent it on a short-term basis, such as a one- or two-year lease. The industrial space market is currently a hot one, as consumer demand has spiked during 2021, and very few landlords will consider a lease shorter than three to five years.

A particularly ironic situation also is occurring locally. I have talked to a couple of companies in the automotive industry that are searching for overflow space for excess inventory. However, their inventory issue is not one based necessarily on trying to shore up inventory levels to meet demand. Rather, their problem stems from having pre-ordered material from their suppliers who continue to deliver it at agreed-on times. The computer chip shortage in the automotive industry has caused many of the bigger players to tell their suppliers to stop delivering products to them. This results in materials being delivered with no idea when they will be used by the manufacturers. One friend of mine in the industry, who is experiencing this problem, told me that he is carrying four times the level of inventory he normally would because deliveries keep coming, and he is worried that he will run out of space. Like others, he is looking around for space that he can lease on a short-term basis, because he does not want to get stuck with a long-term, additional lease once the market stabilizes.

All of these issues are promising to make 2022 a more expensive year for consumers such as you and I. Higher prices will eventually dampen demand, which will help lead markets to what is considered more normal levels. At least until well into 2022, plan for higher prices and budget accordingly.