It appears that many of the ships waiting offshore in Shanghai are not waiting to unload, but to get new cargo. shipments out of China seem to be plummeting.
It’s leading to blanked or rescheduled sailings.
Perhaps the avalanche of post-COVID goods for the US and the EU has stopped. Perhaps we have enough inventory here and in Europe. If so, we should soon see the queues of waiting ships at US ports drop to more normal levels, and the same with Europe.
It’s getting to look more likely that a recession might appear in the US, and I think the same will happen in Europe. the Ukraine instability is bound to cause consumers to cut back and try to spend less and save more. In both places, that is likely to induce a recessionary trend. Consumer spending is a major part of economic activity in these countries.
R$at3es for container shipping from Asia to the US and Europe are still high. How long will it take for them to plunge down?
US importers are not so worried about cargo waiting offshore to be unloaded. As long as they have enough for their sales or manufacturing, the cargo can sit on a container ship and the principal cost to the shipper is the interest cost. With interest rates at historic lows, that isn’t much.
The graph below from project44, a Chicago, I- based visibility platform, shows the number of TEUs at anchor by month from January through November 2020, on the left. The rise starting in August is significant. Using data from HSBC, which show a 3.2% annual interest rate, using an average container value of $40,000, they calculate almost $50M per month in new delay costs, and cumulative inventory interest costs over $850 million.
The point is that these costs are a lot lower than inventory costs at warehouses. While the cargo is held at sea under riskier conditions, in the warehouse other costs kick in, not the least of which is space required. Insurance charges on the financed inventory also accumulate. And there’s the work, both labor and mechanical, of shuffling the inventory around; it’s very variable given the specific warehouse layout, but can be significant also.
So shippers are using the offshore jam-up rather than wishing it away. Only when the demand for products ratchets up so that the offshore inventory is needed will the stakes change. While we have significant COVID likelihood today, that isn’t likely to change much.
It’s always interesting to look at the overall question of inventory cost in the supply chain. Advantages to shippers can come from unlikely places.
Nordstrom and a number of other retailers are starting to keep more inventory, by buying larger lots and holding some. The fact that retailers are publicizing this means that they are starting to recognize that inventory shortage is a substantial issue. With sources of supply bottlenecked, stuff can’t be moved to the US as quickly.
Does it make sense to place larger orders earlier? Devotees of the bullwhip effect will say that’s counterproductive. Perhaps, in the long run with perfect coordination with suppliers. But when you have near-disaster conditions in the supply chain for, say, clothing manufactured in Vietnam, and ocean carriers blanking just about every other sailing, you need to take some action. That may mean committing to larger purchases and saving some of it against future demand rather than trying to sell it all at once.
We’ll see if the policy works, and how quickly it damps out. Especially if the ocean supply chain begins to normalize. Inventory is expensive, and the expense is both highly visible and easily tracked, unlike the lost business due to shortages on the floor.