The Nightmare Before Christmas
Twas the nightmare before Christmas, around Halloween, the ports were congested and filled Evergreen.
Will our Christmas gifts come by December 25th? The scramble to make that happen is the nightmare before Christmas and the international supply chain is our Jack Skellington
To discover what’s really going on in the shipping industry, and to get answers beyond “because Covid”, we can delve into the activities of the world’s largest logistics companies and their support networks.
The fragility of the current situation is based on the fact that the shipping industry is an oligopoly that rides on thin margins to price competitors out of the market. The key to profitably in this industry is extremely high volume. Peter Sands from BIMCO (Baltic and International Maritime Council) put it as follows: “Years of low freight rates resulting in rigorous cost-cutting by carriers have left them in a great position to maximize profits now that the market has turned.”
In the early stages of Covid, as the world went into lockdown, warehouses and logistic companies were operating at all-time lows and consumers were stockpiling essential goods. Things were sleepy and shipping volumes declined. Then federal governments around the world started to roll out fiscal and monetary stimulus in an attempt to save their respective economies. In the case of the U.S. government, $400 billion of fiscal spending was allocated towards checks for the middle and lower American classes. With most service-based businesses at a standstill, consumers shifted towards goods. The import demand in consumer goods caused international shipping prices to soar as inventories were depleted. Inventory/sales in the U.S. now are the lowest since 2008 as the price to ship a container is at an all-time high.
In March, The Suez Canal incident brought an unprecedented level of attention to the shipping industry. When Evergreen’s 1,300-foot ship Ever Given was forced sideways in the canal by strong winds, trade between Europe, the Gulf, East Africa, the Indian Ocean, and South East Asia was frozen for six days. This mishap brought 370 ships carrying $10 billion worth of goods to a literal standstill.
Not long after this incident, the world was introduced to the Delta variant which resulted in the closure of major Chinese and Taiwanese ports, resulting in a fivefold increase in the price to ship a container.
As consumer demand remains strong heading into the holiday season, monetary policy remains very dovish (with some Fed members believing inflation is still transitory) and supply-side issues remain. The Port of Long Beach and Port of Los Angeles are operating at all-time high capacities. While these two ports account for 40% of the nation’s container traffic, they are remarkably inefficient. The World Bank ranks them 328 and 333 respectively on their Port Performance Index. The U.S. does not have a port in the top 50.
During J.B. Hunt’s Q3 earnings call, CEO John Roberts III described how irregular demand patterns and congestion at the ports are responsible for jeopardizing a timely, present-laden Christmas holiday.
He explained that running the Los Angeles and Long Beach ports 24/7 may alleviate supply chain bottlenecks at the ports, but it will likely kick the can down the road and create bottlenecks in other parts of the supply chain such as trucking. To prepare for this, J.B. Hunt purchased over 700 new trucks this quarter – a record for the company. Roberts said he knows of individual companies that are chartering their own ships and making other efforts to take more control of their supply chains.
Part of the reason the U.S. ports lag in speed and efficiency is their operating hours. Most ports around the world operate 24/7. U.S. Port operators have been reluctant to do this in the past because union contracts require higher hourly rates for night and weekend labor. The Biden-Harris Supply Chain Task Force recently announced that they are working with unions to get ports running 24/7. But…
According to former Lt. Gov. of New York Betsy McCaughey, “Increased hours won’t fix the bottlenecks. The added hours will boost cargo movement by less than 10 percent or an estimated 3,500 containers a week. The real problem is the unions’ tooth-and-nail opposition to labor-saving equipment. Cranes in automated ports operate at least twice as fast as cranes in outdated U.S. ports.” Unions won’t have it any other way. The International Longshoremen’s Association contract, which extends to 2024, blocks the use of automation technology. Willie Adams, president of the International Longshore and Warehouse Union, which represents West Coast workers, says automated cargo handling equipment will not be tolerated.
Looking forward, it’s notable that the Fed’s Beige Book featured the word “shortage” fewer times in October than it did in August, which may indicate “peak shortage”. A recent customer survey taken by J.B. Hunt indicated that consumers will resort to gift cards this year which may ease the December jam and defer new orders throughout the winter.
“Tender lumplings everywhere
Life's no fun without a good scare
That's our job, but we're not mean
In our town of Halloween
In this town, don't we love it now?
Everybody is waiting for the next surprise”
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