January 31, 2023

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Shortage - Now shipping rates are dropping

Shortage – Now shipping rates are dropping

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Delays, product shortages and price increases were the result when global supply lines were disrupted during the pandemic. But since this summer, a lot has improved.

Large container ships loaded with all kinds of goods are the most important lifeline of the global economy.

In January, 109 of them were waiting off the coast of California. The container ports in Los Angeles and Long Beach did not have the capacity to offload them fast enough. The result was a maritime traffic jam with far-reaching consequences.

Consumers affected by the lockdown and infection control measures placed large numbers of orders that overwhelmed factories and ports.

Importers had to pay $20,000, just under 200,000 kroner at today’s exchange rate, to send one container from China to the United States. In some cases, it was more than the goods inside were worth. Companies had to work with order lists for everything from bedroom furniture to kitchen equipment, if the goods were to be sourced at all.

The plug came loose

At the end of 2022, the picture is different. There is no queue for giant container ships on the American Pacific coast. The cost of moving a container of goods from China to the United States of America – $2,000. A restaurant that needs a deep fryer can get one quickly and easily.

Since the summer, the main bottleneck in the global supply system has been lifted. The network of factories, railroads, ports, warehouses and shipping centers that bring goods to consumers are operating almost as well as before the pandemic put a damper on the wheels.

– We’re in a very different position than we were in, says Phil Levy, chief economist at Flexport Consulting. The company has supply chains as a special area.

– There has been a definite improvement in the time it takes to move things. If you look at how long it takes to get a shipment from Asia to a destination, the situation has improved dramatically, he continues.

Vanishing bottlenecks have another effect, too. This development is helping to rein in the inflation that has gripped large parts of the world in the past year. So far, the effect is modest, but it can be seen, among other things, in Christmas shopping.

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The store shelves are full

Most desirable Christmas gifts are often in stock. It may also have been lowered a bit. The latest inflation report from the US government showed a decline in prices in categories such as toys, jewelry and children’s clothing.

Store shelves are full everywhere. We don’t see any noticeable shortages of cargo, says CEO Zvi Schreiber of Freightos Group, a digital platform for booking international freight.

Supply chains are no longer a problem, says Timothy Fury. He works for the Institute of American Industry’s Institute for Supply Management statistics group and is associated with transportation company Ryder System.

– He’s been looking better for four or five months. He added that prices have also fallen.

lower demand

The main reason the situation is looking better now is that the demand for commodities is declining.

Figures from the US Department of Commerce show that people’s spending on manufactured goods has fallen over the past three quarters. The reason is high interest rates by the central bank – along with inflation itself. Purchasing power weakens and the desire to shop decreases. The picture is not much different from the situation in Europe and Norway.

The use of money is also changing. People who bought new outdoor furniture, sporting equipment, and electronics during the pandemic will now spend their money on experiences rather than goods. This creates an increased demand for services – restaurant dinners, plane tickets, hotel rooms and entertainment.

The result is that demand for goods falls – and thus, ultimately, price pressure.

closer to normal

In the large container ports of Southern California, it is no longer busy. One reason is that companies have sent shipments to East Coast and Gulf of Mexico ports to avoid delays. The Port of Houston in Texas reports that they handled 18 percent more cargo than last year.

An index measuring freight demand peaked at 115 earlier this year. Now it’s down to 53. That’s below the average for the past five years. Industry experts say demand is now close to normal again.

Ports have also increased their efficiency in many places, and shipping companies have deployed more ships.

In some industries, new producers have also emerged when the main players in the market can no longer deliver. This means more competition, less scarcity, and lower price growth.

More corals in the sea – not least for the automobile industry

When inflation first started rising last year, most economists blamed problems with supply chains. Among them was the head of the US Federal Reserve, Jerome Powell. He explained that the increase in prices is a phenomenon that will improve when it becomes easy and cheap to transport industrial products again.

By the end of 2023, it wasn’t that simple. Especially after the Russian invasion of Ukraine in February, which created chaos in the energy and grain markets. As a result, fuel, gas and food prices rose sharply, sharply aggravating inflation.

Another problem that was not so easy to solve was the chronic shortage of computer chips. That will affect auto production well into 2024, Chancellor Christine Dziczek at the Federal Reserve Bank of Chicago said in a recent report. The situation is better than it was, but shortages are still hampering auto production.

The fact that cars contain more and more computers makes the situation even more difficult. The price of new cars is nearing a record high and is not expected to drop much in the near future. However, used car prices in the United States are declining. It’s expected to drop a little more, but not to pre-pandemic levels.

Chinese Corona Crisis

The Corona virus continues to affect China, which is a giant in global production. Infection numbers are rising, the coronavirus population is protesting, and some infection control measures remain stringent.

Experts note that the risk of disruption is high in important cities such as Beijing, Chengdu, Nanjing and Shanghai.

– Components produced in these regions find their way into almost all the products we rely on from day to day, says Bindiya Vakil, head of consulting firm Resilinc. They assessed the Corona situation in China and its impact on the economy.

However, the country’s scaling back of strict infection control measures may be a sign of improving global trade.

little way to go

Economist Julian DiGiovanni at the Federal Reserve Bank of New York has calculated supply problems and how they affect inflation. It is estimated that they are responsible for 40 percent of the US price increase in the years 2019 to 2021.

– He said in August that if there is no new shock, the disappearing bottlenecks are likely to lead to a sharp drop in inflation in the short term.

The November figures for inflation in the US are optimistic however. They showed annual inflation of 7.1 percent, lower than analysts’ assumption of 7.3 percent. It is significantly lower than the June inflation peak of 9.1 per cent.

Soon after, the Fed poured some wormwood into the cup and adjusted the 2023 interest rate path slightly higher. They want to see clearer evidence that inflation is weakening before they pop the champagne corks. This is well below the desired inflation level of 2 percent annually.

The price level for services is also more difficult to control as interest rates increase than the price level for goods. This could mean that 2023 will also be a difficult year, although there is a light at the end of the tunnel.