Mark Sievers: Wealth Matters
For the past two years, shortages and increased costs have named “supply chain issues” as the culprit. Certain examples have been obvious, such as too few workers, production plants closed for the pandemic, backups at ports, etc.
Shortages of goods are now contributing to the pressure on inflation. The demand exceeds the supply, so prices increase. As businesses and consumers maneuver in this environment to obtain what they want and at the best price, some details are quite interesting. A recent industry report from the marine shipping industry is informative about the current problems which shippers must overcome before the traffic snarl enables goods to flow more easily.
The impact of the pandemic has increased uncertainties as ocean freight continues to be plagued by several compounding factors: increased demand, limited capacity, blank (empty) sailings, port congestion, labor shortages and Covid-19 outbreaks. Marine carriers are taking advantage of extreme market conditions by setting aside more vessel capacity for spot rates, while handpicking lanes and vessel capacity for contractual agreements, leading to upward pressure on freight rates. The net result is shipping costs will continue to rise.
How has this happened?
Carriers are limiting their capacity. Sustained elevated ocean freight rates continue as carriers struggle to establish regularly scheduled weekly sailings, limiting their ability to provide consistent space. Until schedules smooth and carriers can operate more efficiently, both rates and space will continue to be a “pay to play” scenario, keeping the market rates elevated.
A carrier lane is defined as a particular pathway which has enough traffic that shippers and carriers can rely on availability, full loads without empty space, destinations (ports) which can handle the traffic quickly.
The disrupted flow of goods means carriers continue to operate at suboptimal levels. They have withdrawn lane support for less efficient origin/destination port pairings and moved capacity to other regions. This trend reduces the availability of both carriers and capacity for specific lanes, sustaining elevated rates. An example might be that cargo vessels go to Oakland instead of San Diego because of delays and too little cargo to justify the stop.
Ports and rail facilities in North America are congested to the point of gridlock. The overflow of goods at the ports means each port is limited in the new shipments it can receive. Therefore, ports continue to operate at limited capacity. Incoming containers continue to flood port storage locations, with many ports forced to use off-site locations, yet another cost.
Covid and pandemic-related illnesses continue to hinder productivity at international manufacturing operations and both origin and North American port facilities. A recent example is an outbreak in Shanghai that has slowed activity. Though air and ocean ports at Shanghai remain open, labor shortages limit operations. As companies shift to ship out of alternate ports, backlogs continue to grow with the increased volume.
Generally, global shipping costs continue to increase because North American import demand outpaces available capacity, maintaining record-high levels. A spot rate for a shipping cost is the price for trying to ship on short notice rather than a long-planned schedule. In some cases, ocean spot rates are four times the pre-pandemic rate levels. Now as current contracts end in April, new contracts beginning in May call for updated pricing due to the current market conditions mentioned. Shippers are in a bind as they try to ship quickly when all the available shipping lanes are full.
Certainly, shippers can negotiate with carriers for forecasted volume months ahead of the typical timeframe. Such agreements lead to some certainty about available space and consistent and better prices. But now all parties are demanding payment at the negotiation rather than at the time of shipping. This mismatch in payments and actual shipping services is an area ripe for abuse. As events evolve, skipped shipments and sailings could totally disrupt even these plans.
These characteristics apply not only to marine shipping but also to truck and rail shipping. Expect each of these problems to plague each part of the shipping and delivery industry for some time. The tangle and disruption will not end any time soon. We must all adjust our expectations to delays resulting from these problems. The net result will not only be delays for obtaining goods but upward pressure on inflation at a time when it is already uncomfortably high.
Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from the University of California, Berkeley. Contact him by email at [email protected].
