What led to the global supply chain crisis?

The world is going through an unprecedented supply chain crisis that started with Covid lockdown back in 2020 and will certainly be carried forward well into 2022. During the past few months, the cost of shipping has skyrocketed and the entire shipping industry is being tested on multiple fronts.?

As COVID-19 hit last year, there were widespread shutdowns in ports alongside other industries across the globe. This was the first in a series of shocks that hit the shipping industry. The recoveries from the shutdowns differed from country to country. Most of the companies ate through their inventory and safety stock during the lockdown and recovery period. By the end of 2020, the consumer demand rose back vigorously, which the supply chains were not ready for. The consumers were spending more than ever, which has overwhelmed the ports across the world.

The Ever Given getting grounded in the Suez Canal further added to the chaos. About 12% of global trade, around one million barrels of oil and roughly 8% of liquefied natural gas pass through the canal each day. The Suez Canal blockage didn’t just affect the global shipping industry or the Egyptian economy - countless businesses, from domestic transport providers to retailers, supermarkets and manufacturers were also impacted. Once the congestion at Suez was resolved, the stranded ships called on the European ports all at once, causing long waiting lines and delays.

The people that lease containers often have to deal with a peculiar problem. Due to unbalanced trade between countries, when they ship a consignment to the US or Europe from Asian countries, they don’t have enough goods to ship back to Asia. They are forced to ship the container back empty. That’s an added cost. And when exports vastly outstrip imports, they have a large number of containers piling up in one place and a deficit in another location creating what is called the container imbalance. This imbalance has increased exponentially in the last year.

This month, the closing down of a terminal at Ningbo-Zhoushan Port south of Shanghai has aggravated the problem. This was after a dock worker had tested positive for Covid. Zhoushan port is the world’s largest cargo port and the third biggest container port. Its closing resulted in crowding at other Chinese ports. It has created new problems for people ferrying cargo between the US, China, and other parts of the world.

Another major reason contributing to this is the underdeveloped ports, many ports across the globe are not even prepared to handle the latest ships and the frequency at which ships are arriving. Ships across ports in the United States have to remain anchored for days to get unloaded. This has led to the ripple effect on other arms of the supply chain like Warehouses, Roads, Railways and has crippled them as well. It led to containers piling up at a single place and resulted in the shortage of containers

The net result is that shipping costs went up. This week, Drewry’s composite World Container index reached $9,817.72 per 40ft container, 351% higher than the same week in 2020. This is the 19th consecutive week of increases. The manufacturers can only absorb so much of the increase, at one point they start transferring the cost to customers, causing inflation.

These prices are only bound to increase as retailers in the West start building up the inventory for the holidays. With upwards of 80% of all goods trade transported by sea, freight-cost surges are threatening to boost the price of everything from toys, furniture and car parts to coffee, sugar and anchovies, compounding concerns in global markets already bracing for accelerating inflation.