"Why can't you get more capacity? Why have the costs gone through the roof? Why can't I trust your lead-times? Why don’t you give clearer answers?"…. These are just some of the (heated, shall we say) questions that logistics and supply-chain managers are confronted with daily from sales, production, leadership, and marketing functions across businesses engaged in international supply chains and transportation. Whilst the questions may seem simple the answer is anything but in terms of the historical context but also the very nature of the industry and interplay of factors that affect pricing, capacity, and service.
Within BDP we try to explain it through the following 5 lenses:
Environment - Refers to the business environment that the customers and suppliers operate within, factors in components such as government policy, societal pressure, and technological development impact on both the customers of our customers (influencing demand) but also the very carriers that operate to service demand, for instance:
- Economic factors such as inflation have a significant impact on the demand for goods (the more something costs the less likely you will buy), the level of inflation in oil prices due to political and industry actions have direct impacts on the cost of bunker fuel and freight by association
- Societal considerations such as ethical sourcing and sustainable sourcing have impacts on demand in the long run
- Government intervention through tariffs or direct intervention in the freight market (as we have seen recent indications from FMC) seek to influence localisation/pricing rationalisation
Demand - This is heavily influenced by economic growth, competition within suppliers, and customer sentiment. Throughout the COVID pandemic demand changed dramatically and unpredictably as consumers moved from buying services and leisure activities to goods such as TVs and home improvement items. This rapid shift in demand creating a ripple (or bullwhip) throughout the supply chain as companies sought to expedite and over-order tremendous volumes through a global network sized to manage predictable GDP following demand patterns. With few viable substitutes to ocean shipping (air market also hit by increased demand and short capacity as hold cargo impacted by fewer consumer flights) this of course became one of the sole largest constituents to increased pricing.
Infrastructure - Of course, price is an outcome of the demand-supply equation, but a large impact on supply is infrastructure, we can have as many container ships as we want but if they cannot offload then cargo does not move. We have seen throughout 2020 / 2021 the infrastructural challenges within the industry, whether that be capacity constraints at ports such as LA, the impacts of canal blockages, port closures due to COVID and interland/warehousing capacity constraints driving down the number of turns that a container can achieve in a year… since containers are reusable equipment that service global trade, turns are just as important as vessel capacities, if not more.
Supply - We have a finite supply of vessels and finite ability to turn equipment. Supply takes years to increase when there is no slack in the system (which there is not right now) therefore, the fact that we have greater supply than demand means rates will remain high until equilibrium returns.
Competition - In a consolidated industry (where the remaining participants have been burnt during previous price war periods) don’t expect competition to drive rates down, buy market share; the transparency to the competition strategies and lack of diversity ensures that we will not see competition playing any significant role in the current situation.
Put simply, the market is out of whack, demand remains high unless inflation/consumer demand changes dramatically. Our global infrastructure for trade is slowing and impeding the very assets we need to turn quickly, it's not going to be any time soon that we see more capacity to help things along to and we don’t see any crazy competitive move that may drive some of the rates down… next question, please.
