Some data points may suggest that things are getting better but that is only in relative terms—supply chain pressures are still at historic highs.
There seems to be nothing new about this new year. We have an even worse wave of Covid-19 sweeping the globe, with governments reimposing restrictions, flights being canceled, and health infrastructure coming under pressure. Yet what is new is a realization that inflation isn’t transitory and that there is a need to raise interest rates—which the U.S. Federal Reserve will do, faster than previously thought.
However, another issue that has spilled over into 2022 is that of supply chain disturbances. Some data points may suggest that things are getting better but that is only in relative terms—supply chain pressures are still at historic highs.
The case of Hong Kong provides a good example. Bloomberg recently covered the country’s plight: new restrictions on general mobility in Hong Kong will negatively affect the services sector while flights continue being canceled and cargo capacity is impacted as the cost of logistics surges an expected 40 percent in the next three weeks. Many companies have shifted to air cargo as shipping remains problematic which is costing them dearly—these costs will certainly be transferred to the consumers at some point, contributing to the overall rising trend in inflation. Businesses are expecting a rise in delivery times and an increase in costs by 30 percent.
It isn’t only Hong Kong facing such problems; the issue is global. The disruptions in supply chains have understandably affected the food business as well. KFC has recently confessed to reducing its menu as the famous food outlet faces problems procuring certain items due to coronavirus outbreaks in different meat processing plants. Many other industries are facing a similar fate. Semiconductors, part and parcel of our life, is another one. According to a recent report, chip shortages will continue this year as well because of the Omicron variant. Mark Rossano from Primary Vision Network has discussed these issues in detail, revealing how lead times for chips are higher once again.
Global shipping rates also remain on the higher side with some moderate reduction. In fact, the Baltic Dry Index and China Containerized Freight Index (CCFI) have started to inch up and a continued trend in this direction might be worrisome. This is especially concerning given the rise in inflation. The Shanghai Containerized Freight Index was up 76 percent in the last week of December 2021 as compared to 2020. The number of container ships waiting at Los Angeles ports is still near its peak. Xeneta, in their latest outlook for 2022, highlighted that contracts for 2022 will be “at record-high levels.”
Due to shifts in global consumption patterns and subsequent changes in trade, the whole schedule of shipping containers, that are responsible for moving more than 1.9 billion tonnes annually, was disturbed and now a typical container spends more than 20 percent of its time in transit compared to pre-pandemic levels. As explained above, this has resulted in an increase in shipping rates to the tune of 80 percent on a year to year basis—according to one estimate, a 10 percent uptick in rates can lessen industrial production by 1 percent.
A very interesting barometer, the Global Supply Chain Pressure Index (GSCPI), also points towards the higher side. On the other hand, vaccine mandates may provide another hiatus in streamlining supply chains disruptions as an estimate says that such a mandate will lead to 22,000 Canadian workers leaving there jobs.
Many industry insiders and business leaders share the view that the current supply chain disruptions, that started because of Covid-19, will take time to improve. Almost everyone expects it to carry on for the rest of the current year. It may take well longer for supplies to run smoothly. The issue is not that the contemporary conditions are better but the fact of how bad the circumstances were. Manufacturing, transport, shipping, etc. all are long term process that can’t be restarted or realigned to function at an optimum level: the back-log needs to be cleared, the issue of manpower (people who are responsible for different checks and regulations and documentations as containers come and go) still persists and might get worse due to Omicron, inventory to sale ratio is still skewed, and once again the current coronavirus wave makes future planning a real challenge. These and other issues will persist. On top of which we must not forget that rising inflation across the globe will continue to raise shipping rates as well create further complications for global supply chains.
Osama Rizvi is an economic and energy analyst at Primary Vision Network.
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