A study by Morgan Stanley consultants indicates that there is way too much inventory in retail outlets. They believe it’s an overshoot of almost 20%. That means that inventory needs to be liquidated by these firms, and also that they will slow down reordering.
The implication for transportation is less demand for it. That’s consistent with the downturns on prices we see for goods movement in both ocean shipping and domestic trucking.
Too much inventory can be good for retailers like TJMaxx and Ross that can help liquidate inventory of more upscale retailers. They will have good supplies of products to move at a discount.
It is interesting to see how directly supply chain and logistics activity correlates with inventory levels. While it’s not always the case, right now the connection is direct.
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.