Supply chain crisis: Why the worst is behind us, and what this means for investors

Peta Tilse

Cromwell Funds Management

The relative fragility of the global supply chain has been revealed through a ‘perfect storm’ of events ranging from the culmination of COVID-19-induced lockdowns, significant shifts to the patterns of demand, labour shortages, and extreme weather. This is part 1 of a 3-part series on how commercial property plays very nicely into the environment we are in. 

The great dislocation

COVID-19 restrictions have hit the global economy in various ways over the last two years. The start of the pandemic saw a supply shock as activity was deliberately brought to a halt in an effort to stop the spread of the virus. As restrictions were lifted, production was unable to kick off as quickly as it had initially shut down.

China was the first country to shut down as a result of the pandemic in early-2020, and while the manufacturing powerhouse ground to a halt, the rest of the world carried on, thereby causing an initial imbalance between supply (from China) and demand (from the rest of the world).

But it wasn’t long until the virus spread, causing the global economy to grind to a halt. With many casual workers (particularly those in the hospitality and retail sectors) unable to work and put food on the table, trillions of dollars of support and stimulus was spent by governments to keep things moving. As restrictions eventually lifted, production was unable to kick off as quickly as it had initially shut down. Parts, ingredients or skills were missing from many goods or services.

In Australia, many organisations reported weeks-long delivery delays. According to the ACCC, only 10% of container ships arrived in their designated berth windows in 2020 and 2021, the lowest rate on record. (1)

As it became increasingly apparent, governments were using lockdowns as a key tool to fight the spread of the deadly virus. These lockdowns ended up being more prolonged than initially hoped. This caused consumer spending to be reallocated across sectors, shifting towards goods and away from contact-intense services. Overall this behaviour triggered bottlenecks in some places and spare capacity elsewhere. People who transitioned to a remote working environment, for example, spent big on office equipment for their home, while non-discretionary spending such as travel or dining out took a major hit.

Despite experiencing the impact of supply chain disruptions, comparatively, Australia has been spared the worst. Supply chain bottlenecks have been milder in Australia and the neighbouring Asian region compared to the United States, who have borne the brunt of the supply chain issues.

The ground below

The last 12 months, in particular, have been tough for global supply chains. This week marks a year since the Ever Given, a 400-metre, 200,000-tonne container ship compounded an already fragile situation as it ran aground in Egypt’s Suez Canal. The Suez Canal provides the crucial trade link from Asia to Europe (responsible for 12% of global trade), and the Ever Given catastrophe seemed symbolic of the state of the global shipping industry. (2) It took six days to free the ship, with estimates the blockage delayed $10 billion worth of goods every day and held up hundreds of ships over this same time period. (3)(4)

While the Suez Canal blockage undoubtedly caused mass delays and a global ripple effect to trade, especially between Europe and Asia, supply chains were already struggling.

The net effect

Lockdowns, labour shortages and strains on logistics networks have all resulted in unprecedented rises in shipping costs. While global shipping costs remain at all-time highs, they have begun to plateau and are anticipated to begin receding. This, however, will take time, and is likely to mean supply disruptions will not be fully resolved until the back end of 2022 (5). In saying this, the Ukraine / Russia conflict is giving rise to newfound complications which will more than likely impact global supply chains. As the situation continues to unfold, a clearer indication as to the extent of these impacts will become apparent.

It is not simply the imbalance between supply and demand that is causing these issues, there are numerous additional contributing factors. Here, we look at the ports of Los Angeles and Long Beach to explain the complex ecosystem at play.

Sea legs

Southern Californian ports are some of the busiest in the world, accounting for 40% of all container traffic entering the United States. (6)

In early-February 2022, the ports of Los Angeles and Long Beach had 78 container ships queueing at sea to offload goods, down from the January peak of 109. Although ship congestion is easing, it remains severe by historical standards. Prior to the pandemic, it was unusual for ships to wait to unload goods at the port of Los Angeles. Now, container ships are waiting an average of 18 days. (7)

Help wanted

But it’s not just shipping that is disrupting supply chains. Labour shortages due to lockdowns, sickness, huge stimulus, and resilient economic activity has seen some of the lowest-paid finally get a ‘pay rise’.

A massive shortage of workers on wharves and associated land-based transport had ships unable to offload containers. As a result, fresh goods spoiled, exacerbating supply and price issues.

The American Trucking Association estimates that a shortage of 61,500 truck drivers has swelled 30% to 80,000 since the beginning of the pandemic.

Up all night

In mid-October 2021, despite the truck driver shortage, US President Joe Biden announced the Port of Los Angeles would begin operating 24/7. However, an estimated 30% of times available to pick up freight at the port continues to go unused.

Exacerbating capacity concerns further is the impact the Omicron variant has had on dockworkers. Throughout January 2022, approximately 1,700 dockworkers at West Coast ports tested positive for COVID-19, with 80% of these infections from the ports of Los Angeles and Long Beach. This compares to 1,624 infections across the entirety of 2021. (8)

Everything must go

Even without these aforementioned concerns, the sheer volume of shipping containers arriving are causing problems of their own. A twenty-foot equivalent unit (TEU) is the standard size of a shipping container (although forty-foot equivalent units are also common). At its January 2022 peak, there were over 700,000 TEU’s waiting on ships offshore of Los Angeles and Long Beach. (9)

While this number has reduced, there are currently hundreds of thousands of TEU’s on ships waiting to dock. 

They cannot be unloaded until what has already been unloaded is picked up and taken away by an empty truck. A truck would normally bring back an empty container and take on a full one, but when a storage yard is full of containers, there is nowhere to store empty ones. (10)

Effectively, to move 700,000 full containers, there would need to be space for 700,000 empty ones. As it stands, for every available truck, there are 18 containers waiting to be removed from the ports of Los Angeles and Long Beach. (11)

What are the broader implications?

At its simplest, if demand outstrips supply for food, fuel, a car, a trade or a service, you can expect prices to rise for that good or service. The growth in prices from one period to another is inflation. Given the scenario outlined above, it’s easy to see how prices for goods and services have moved, and how inflation is fast becoming a concern for policy makers and investors.

Sectors that have been hit the hardest by bottlenecks have seen the greatest inflationary pressures. This has been most evident and instant in the export of goods. 

Labour supply has been a slower burn as latent capacity is absorbed, but we are now starting to see wages increase. The net effect, though, has seen annual headline inflation in the US hit 40-year highs of 7.5%. (12) We are yet to see this reflected in a significant quantum in Australia.

Conclusion

Similar to the global supply chain issues, Australia has been affected to a lesser extent. This is due, in part, to our lesser reliance on global trade to supply key commodities. In fact, we tend to export most of these goods, and instead have a heavier reliance on importing partially or fully manufactured goods.

Headline inflation now sits at 3.5%, with underlying inflation at 2.6%. This was originally forecast to continue to rise to 3.25% over the next few quarters and expected to decline to 2.75% in 2023 as supply-side problems are resolved and consumption patterns normalise.

However, the war in Ukraine has pushed commodity prices significantly higher, especially for energy. This combined with recent flooding on the east coast of Australia will likely see higher headline inflation in the first half of 2022. Given this scenario, Oxford Economics expect the RBA to continue to look through the supply-driven inflation and accept a higher overshoot from the RBA’s target 2-3% band. It is now likely the cash rate will rise to 1.25% by year’s end.

Did you like this wire? 

I am Cromwell's Head of Retail Funds Management and will be publishing regularly on Livewire. Look out for my next wire on different asset classes in inflationary environments. Hit follow for first access to my insights or click the fund card below to fund out more about the Cromwell Direct Property Fund. You can also find out more information at our website. 


Managed Fund
Cromwell Direct Property Fund
Australian Property
........
Sources: [1] https://www.accc.gov.au/media-release/global-container-trade-disruptions-leave-australian-businesses-vulnerable [2] https://www.bbc.com/news/business-56559073 [3] https://www.cnbc.com/2021/03/25/suez-canal-blockage-is-delaying-an-estimated-400-million-an-hour-in-goods.html [4] https://www.nytimes.com/2021/03/31/business/suez-canal-ship-costs.html [5] BIS [6] https://edition.cnn.com/2021/10/20/business/la-long-beach-port-congestion-problem-national-impact/index.html [7] https://www.wsj.com/articles/container-ship-backup-at-southern-california-ports-is-receding-11644523945 [8] https://gcaptain.com/january-covid-cases-west-coast-longshore-workers-top-2021-total/ [9] https://www.freightwaves.com/news/its-official-96-container-ships-waiting-to-dock-in-southern-california-ports [10] https://www.propmodo.com/is-the-supply-chain-disruption-a-real-estate-problem/ [11] https://www.bloomberg.com/news/articles/2021-11-05/port-snarls-show-cargo-ships-trying-to-avoid-the-big-bottlenecks? [12] https://www.afr.com/wealth/personal-finance/the-wide-ranging-effects-of-us-inflation-20220209-p59v3e Livewire gives readers access to information and educational content provided by financial services professionals and companies (”Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

1 fund mentioned

Peta Tilse
Head of Retail Funds Management
Cromwell Funds Management

Peta is a Financial Services professional with over 25 years’ experience and a passion for helping Australian consumers make sense of investment markets and opportunities. As a top performing institutional portfolio manager and investment...

Expertise

No areas of expertise

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.