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How LA Traffic Became a Global Headache

How LA Traffic Became a Global Headache

Thursday, 7 October, 2021 - 11:00

The world of logistics and manufacturing is in a state of disarray. A record number of ships are stuck outside Los Angeles and Long Beach, Calif. Shortages of everything from vessels to truck drivers and raw materials abound. With freight rates soaring, the ocean-shipping industry is beginning to look like a cartel. In short, the days of quick, cheap deliveries will soon become a distant memory.


Some of the problems stem from Covid-19, no doubt. Staggered shutdowns and reopenings along the global supply chain have created bottlenecks and mismatches. The cost of shipping a 40-foot box on the Shanghai-to-Los Angeles route is so much higher than going the opposite direction that companies are willing to send containers back empty — in other words, it’s more lucrative to get in another eastbound trip than wait for containers to get filled. Meanwhile, journey times by sea have doubled because of the backlog, causing alternatives like air freight to get more expensive. Sea freight spot prices are expected to rise and congestion to worsen.


Even if pre-pandemic levels of activity resume with rising vaccination rates, the road ahead will not be smooth. The disruptions over the past year-and-a-half have exposed the enduring challenges facing the logistics and manufacturing sectors and the divided nature of global trade.


For starters, demand isn’t where supply is. In the US, consumers and businesses are sucking in goods, while inventories in industries from textiles to machinery are running low. Yet there isn’t much scope for American factories to produce more. Manufacturing capacity utilization was already at 76.7% in August, higher than the average between 2015 and 2019 and just slightly below the highest level of the past two decades (79.4% in January 2006), according to Oxford Economics. Foreign goods account for 15% of domestic manufacturing gross output, and in certain subsectors, the dependence is even larger. On top of that, shortages of trucks, drivers, shipping vessels and other types of manpower needed along the supply chain are only adding to the backlog.


Then there’s the supply side. In Asia, many countries – notably China – are still stuck in a vicious cycle of lockdowns, unprepared and unwilling to live with the endemic nature of Covid-19. A power shortage on the mainland is threatening manufacturing and industrial production activity – especially for non-essential, everyday goods like toys and textiles that American consumers want but aren’t priorities for Beijing. The heaps of shipments stuck at ports in the US also bode ill for China’s small and medium-size manufacturers running on tight balance sheets. As one home-appliance maker told state-affiliated media, "We had to stop taking new orders because we do not want to risk defaulting if the goods cannot be delivered on time, which, given the current situation, is very likely to happen.”


One solution is more shipping vessels and containers. But while orders are up, those take years to build. Moving supply closer to demand is another big ask: Business investment in the US has been weak. Even as companies start to invest, those efforts will bear little fruit by next year. As the last half-decade has shown, moving factories closer, or onshoring, and supply chain recalibration don’t happen overnight — or ever, in some cases. And while two of the biggest shipping lines have capped some rates, the longer-term contract rates remain elevated and are rising. For now, there isn’t an immediate, one size-fits-all way to solve the blockages.


The upshot is that the discrepancies across supply chains will lead to rising prices and costs, particularly in developed markets where demand originates. As JPMorgan Chase & Co. analysts noted, “It appears that the [developed markets] via either thinner margins or higher retail prices, eventually will have to bear the brunt of the cost increases,” noting that it’s unclear whether this will hit demand. Meanwhile, the differences in freight rates means that shippers could start prioritizing certain routes because they’re more profitable. Such diversions would only make things worse.


The once-banal world of trade and logistics is now anything but. If you haven't already started, probably best to put in those holiday shopping orders now.


Bloomberg


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