Global trade: Relaxation of supply chain situation not expected until 2023

November 2021 – Empty warehouses, angry customers, exploding freight rates: the coronavirus pandemic has exposed the vulnerabilities of existing supply chains – and our dependence on them. Companies are having to adapt to new market rules and a move away from the just-in-time concept. Yet the market economy will survive this crisis too.

paper ships

Every crisis has its winners: In the coronavirus pandemic, these quite clearly include the logistics sector and, in particular, the shipping industry. Freight rates for transporting containers by sea are now more than three times the average for the past ten years. The most important reason for the extreme price rise with respect to freight rates is the change in people’s consumption behavior during the pandemic. As it was not possible to spend money on travel, concerts, and restaurant visits, individuals turned to fitness equipment, garden furniture, and new sofas instead. The boom in demand associated with this took shipping lines by surprise, especially since they were – and indeed still are – simultaneously having to do battle on another front: slow loading and unloading processes in ports due to coronavirus restrictions, missing container boxes, and bottlenecks with respect to the transportation of goods to the hinterland.

There are delays and hold-ups in many areas. but especially on the world’s oceans – which culminated in the symbolic image of the giant container ship Ever Given getting stuck in the Suez Canal in the spring of 2021. Two thirds of German industrial companies have meanwhile admitted to having huge difficulties with material procurement according to a survey carried out by the ifo Institute a few weeks ago.

cranes

Fundamentally, market forces are working

The question is: will the market ensure that the situation will calm down again soon? “Fundamentally, market forces are working. But they are having a hard time of it in their battle against the effects of the pandemic, which are fraught with uncertainty,” says Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank. In his words, unfortunately this time the situation is “a perfect storm.” Following an initial state of shock, an entirely unexpected pandemic is causing people worldwide to switch their consumption patterns from services to goods as a reaction to the shutdowns. Yet the coronavirus crisis itself is leading to huge problems in the production and transport of goods.

“The icing on the cake is that states have also thought up massive spending programs that are fueling demand on their side,” says de la Rubia. However, a look at past crises and die-hard market forces offers the economy some comfort. “It’s a familiar mechanism: When demand exceeds supply, prices rise. Higher prices mean better profit opportunities for companies, who expand their production accordingly. Supply increases and prices lower again.”

container ship

Reasons for the increase in transport prices for shipping containers

Yet at first glance, reality does not always comply with this ideal textbook world: The perfect example of this are freight rates for container shipping, which have virtually exploded in recent months. Prices for the transportation of containers are increasing to such an extent primarily because shipping lines cannot expand their capacity overnight. “While the order books are filling up for new steel giants with a capacity of more than 20,000 standard containers, it will take up to 36 months for the shipyards in South Korea and China to process these orders,” says de la Rubia.

On the other hand, there are initial indications of the impact of market forces. Prices for wood have declined by almost two thirds since their record value in May 2021. Iron ore can also now be procured on the global market much more cheaply than in the summer of this year. Even with respect to freight rates, there are cautious signs of normalization; while the increase in prices is slowing down, prices are nevertheless settling at a very high level. Nevertheless, the situation remains complicated, particularly as infection rates in Europe are increasing again and the first countries are again introducing significant restrictions. China’s zero Covid strategy, which is repeatedly leading to closure of container terminals, is likewise putting a strain on global supply chains for the time being.

„In essence, no other system is as well suited to coping with these challenges as the market economy, which allows for flexibility on the part of companies and private households.“

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank

Triad of open markets, vaccination offensives, and corporate flexibility

All of this sounds like a complicated knot that will be almost impossible to undo. However, there is no reason for over-the-top concern: Cyrus de la Rubia says that “In essence, no other system is as well suited to coping with these challenges as the market economy, which allows for flexibility on the part of companies and private households.” But, he says, it won’t happen without politics: “Governments also need to play their part to enable these market forces to take effect.”

However, it is unlikely that these problems will be quickly alleviated in the short term. Like de la Rubia, an increasing number of market observers are expecting the bottlenecks to persist until 2023. “If the bottlenecks remain, the argument that it wouldn’t be worth a company’s while to adjust production processes and rethink supply chains becomes invalid. Companies need to set aside temporary arrangements and learn to do business in the new circumstances.”

Cyrus de la Rubia believes that the key to solving the supply chain problems lies in vaccination. In his view, vaccination rates need to be increased in Europe and the USA, without forgetting that vaccine dose supplies for developing and emerging nations also need to be massively ramped up. “If we continue to be miserly in this regard, the situation will become even more expensive,” he says. In addition, in his words, governments from all countries need to keep borders open and resist the attempt to tackle temporary shortages in certain materials using protectionist measures, as has been discussed at times in the EU with respect to wood as a construction material.