Disruption Deja Vu?

The global supply chain finds itself in a similar position to COVID: it has been disrupted. Specifically, two critical trade routes – the Panama and Suez Canal are experiencing challenges.?? Last year’s El Nino and resulting lack of rainfall limited the water available to operate the locks and has made transiting the Panama Canal problematic and slow.? And while this is expected to resolve fully by October, it will take some time for vessel capacity to recover.

The Suez Canal is more of a concern.? As recently as this past week we have bad actors attacking, and now sinking vessels.?? For the last six months this diminished the volume through the Suez considerably; transits through the Suez are down over 60% or more and vessels have been forced to navigate around the horn of Africa adding two weeks to transit times and a month to round trips.?? This is lost capacity.

The net impact is twofold.?? First, availability is very limited and tight in the short term (the next 6 to 8 weeks).? In fact, vessel capacity is so tight that most routes out of Asia are fully booked through July. We are also seeing port departure delays in Asia, which is further limiting capacity.??

Second, capacity shortfalls in ocean freight almost always lead to price increases.? Container costs have gone up dramatically across major trade lanes (see table above).??? Long term contracts are being ignored as ocean carriers are focused on price increases (and profits) in the spot market; most lanes have observed a doubling or tripling of container prices.?? Future pricing is a huge question mark.? We believe the current price inflation is dependent on how long the disruptions last.??? Analysis from Sea-Intelligence, which uses pandemic rate performance as a guide, predicted rates on Asia-Europe could pass the $20,000 per 40ft mark.??? We suspect this is on the high side of estimates – but we would not be surprised if this level is reached.

What is unknowable and objectively worthy of consideration is whether tariffs (either current or projected) are driving some increased and early bookings.?? Or whether a prediction of a strong North Atlantic hurricane season is driving some early bookings.?? Or whether shippers are planning for a port disruption with expected dockworker strike at several West Coast ports.? During COVID, shippers were less geo-sensitive – unaware of these impacts.? It is possible that has changed.?? It is also possible is that steamship lines are holding back capacity to improve profits in the short term.?? This too is very unknowable – but should be considered.????

So What Do We Recommend??

1. We recommend that our customers increase replenishment lead times settings by no less than two weeks and preferably one month for all products known to be imported from Asia.? ?This simply sets lead times to reality – a best practice.
2. Further, it would be advisable for our customers to increase their inventory coverage for critical starter and raw materials by at least two weeks.? ?We believe adding an incremental buffer of inventory to manage the increased supply uncertainty is a prudent approach.?? We suggest against any significant over-commitment of inventory at this time.? Material supply availability is not a current concern.?
3. As vessel availability is a current challenge – it would be wise to provide suppliers (like Actylis) with a forecast of mid-term (next 2-6 months) needs.?? This will allow suppliers to leverage longer term (and much lower) freight rates instead of operating in the spot market.??
4. Finally, there should be a plan to transition to reduced lead times and inventories when the disruption evaporates.

If the Covid experience offers any guide, this disruption will last longer than anyone wants or expects.??? As the problem appears isolated to ocean freight and vessel availability with some resulting port backlogs, we suspect it will take at least six more months to bring more ocean freight capacity on stream and realize container cost improvements.? ?

Why six months??? The Panama Canal is expected to normalize by October. ??Any seasonal loading will have cleared over that horizon,? and domestic politics in the US and the potential for more tariffs will be more certain.? We would also expect the potential for a dock worker strike will have hopefully resolved during this time.? ?So, while it is hard to estimate a true end to the disruption with the situation in the Suez so fluid – supply chains eventually adjust and heal.?? At this time, our best estimate is that the global supply chain will continue to face headwinds until at least February of ’25.

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