Were 2021 supply chain challenges the calm before the storm?

by Denys Hobson. Supply chain disruptions and stress levels have spiked to new heights with the invasion on Ukraine. This comes after global supply chains are trying to acclimatise from what they believed was already a bad situation in 2021. The question is, is worst yet to come?

The impact of the Russian invasion of Ukraine has been far reaching – from escalating brent crude prices, suspension of logistics services (to and from both Russia and Ukraine); and various financial sanctions imposed on Russia – to name just a few. We have already seen how the global economy has been affected by this, in fact, the IMF said the sanctions on Russia will not only have a substantial impact on the global economy and financial markets, but significant spill overs to other countries are likely to be realised.

Certainly, at this stage it is too premature to understand what the full impact will be on economies and supply chains, but we should be prepared for increased pressure on air and sea freight capacity, delays in manufacturing and supply of products, as well as inflationary pressures due to escalating costs as a result of fuel and various commodity price increases. While we monitor and try and grapple with the real severity of these action, any business with international ties should start noting the following:

1. Disruptions continue: Post Chinese New Year relief not realised

There is an expectation for increased congestion and capacity challenges easing off post-Chinese New Year. In fact, port congestion has worsened which has had a cascading impact on all trades and sailing schedules. The USA East Coast, Europe, including the Mediterranean, and Far East ports (such as Singapore), have been battling. While there has been a positive reduction in the number of vessels waiting to berth on the USA West Coast (i.e., Los Angeles), the situation remains problematic. We could potentially experience a surge in demand for sea freight capacity – from China to Europe – as shippers avoid using the rail service and revert to sea freight with the current Russia and Ukraine conflict. However, this could result in shipping lines deploying additional capacity on this trade route and vessels operating on the South African trade could be deployed onto the Far East-Europe trade to accommodate for the additional capacity demand.

2. Risk mitigation will be key well into 2022

As we continue to adjust and amend strategies with the progression of the invasion, retailers must adapt and readjust their strategies to stay ahead of any potential impact, as well as better manage capacity and consistency where possible. Below are some key areas to consider for both sea and air freight:

• Capacity: More than 12% of global capacity is tied up outside ports due to port congestion. Thousands of containers have been rolled post the Chinese New Year period and shipping lines are prioritising these shipments. Far fewer blank sailings are planned for March, so we expect to see the situation improve over the coming weeks. Capacity from South America and India remains tight. Capacity pressures have escalated on the European and Mediterranean trade, including the UK, and we continue to see vessels fully booked up to six weeks in advance in some instances. Booking in advance (four to six weeks) remains essential. For air freight, capacity will come under pressure and time will tell how significant the capacity pressures will in fact be. Carriers may decide to deploy capacity from other trades onto the USA-Asia or Asia-Europe trades to compensate for the sudden reduction in market capacity caused by sanctions and flight cancellations. Bumping of cargo could become more frequent in the coming days due to the current challenges and changes taking place.
• Schedules: Schedules will remain erratic and unpredictable on all trade routes. There have already been several vessels phased in and out of trades, which has contributed to shipping delays. The market experienced numerous departure delays, port omissions and direct bookings being transhipped and rolled by several weeks. All of this has severely impacted lead times and in some cases, shipments have been delayed by six weeks. Added to this, is that fact that shipping lines have also amended their routings and port rotations, at short notice. And while air transit times have, until now, remained relatively consistent, the market does anticipate a level of transit time unpredictability.
• Price increases: We continue to see freight rates softening on the Far East trade, which has been welcomed. While we don’t anticipate any significant upswings in freight rates over the next few weeks, we do expect an upward adjustment in the bunker surcharges from April, as global bunker prices continue to increase, but these adjustments are relatively small when considering the base freight rates. It also would not be surprising if additional surcharges are implemented by shipping lines on certain trades because of port congestion, for example. Added to this, we also expect inland trucking rates to increase due to trucking bottlenecks and shortages, especially across America and Europe, as well as rising fuel prices. Similarly, in the air freight segment, while we started to see a general softening of rates in the market, with the increasing global fuel prices and disruptions caused by ongoing Russia-Ukraine conflict, the market is bracing for rate levels to climb. Collection and delivery rates will also increase.

Local supply chain disruptions

As we adapt to the reality of 2022, with the anticipation of the worst coming, having ‘your finger on the pulse’ is going to be important to ensuring your business manages this risk correctly. However, without the right trade partner, one that is well connected across all freight spheres, foresight into the complexities of the disruptions may be compromised and therefore reacting timeously could be jeopardised.

While the world is glued to the impact of this conflict, locally we must remain vigilant, given the All-Truck Driver Forum (ATDF) have been airing grievances and protesting in parts of South Africa – all of which will have an impact on local supply chain demands and challenges with further possible disruptions to the local logistics industry.

Main image credit: Pixabay.com.

Denys Hobson is a logistics and pricing analyst at Investec for Business.

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