With the exception of the Financial Crisis in 2008/9 chemical supply chains have enjoyed a relatively benign environment for the past 20 to 25 years.
Since the end of the Cold War the world has experienced economic globalization, based on interconnected economies supporting the cross border movement of goods, services, and technologies. The relative stability meant that investment decisions, supply chain network designs, logistics supplier selection, working capital optimization, and sourcing decisions have been made with a degree of confidence and trust.
Much focus was spent on standardizing work processes, supported by ‘lean’ principles and system solutions to reduce manual effort. In the process organizations were trimmed and experience and expertise lost. Off-shoring eliminated jobs, and hollowed out manufacturing regions and the middle class in the West.
As long as raw materials and indirect supplies were stable, logistics infrastructure reliable, and international freight costs more than affordable there was little incentive to be constantly looking over our shoulder for the next ‘aha’ moment. Lulled into a (false?) sense of security supply chains were refined and tweaked and run tight. Events such as floods in Thailand, the earthquake in Fukushima, and the SARS pandemic in 2002/3 came and went creating short-term shock waves, but without causing major disruption to the global order. Even the impact of the annexation of the Crimean peninsular in 2014 had limited impact on the operation of established supply chains
But a constellation of events has changed all that:
1. Free trade agreements and economic liberalization have been replaced by nationalism, protectionism, trade wars, and tariffs. For example, the United States withdrew from The Trans-Pacific Partnership, started a trade war with China, renegotiated NAFTA as USMCA, imposed tariffs on steel and aluminum followed by retaliatory tariffs from the EU, and the UK left the EU following the BREXIT referendum.
2. With multinational supply chains beginning to creak as a result of trade wars and tariffs, COVID-19 pandemic restrictions imposed in early 2020 caused them to implode. Chinese lockdowns interrupted the supply of products to the West. Container ships were unable to berth. Supply chain organizations scrambled to find alternatives which in many cases were not there.
3. When China lifted restrictions and products started to move to Northwest Europe and the United States this coincided with the pandemic causing lockdowns in destination countries. Ports became congested as containers could not be discharged, and a shortage of empty containers stifled export shipments. Another scramble for supply chain organizations.
4. In the meantime container lines, after many years of pricing wars in the fight for market share, had through a series of alliances got their act together to manage capacity, and started to lay up vessels, blank sailings, and cancel port calls. Freight rates in 2020 and 2021 rose dramatically, vessel charter rates reached eye-watering daily rates, and companies such as MSC, enjoying windfall profits, bought every vessel which could carry a container. Paying 8 or 10 times the historical rate was no guarantee that a container would not be rolled. Container lines are now trying to lock in high freight rates with long term contracts with major shippers…in particular Maersk claim to have more than 60% of their volume contracted. At the same time they are trying to reduce the consolidated volumes from freight forwarders, and for lower volume shippers they will have to pay spot rates. Shpper owned containers, and tank containers are not a target market for many lines, especially when it involves hazardous products.
5. If that wasn’t enough, the war in Ukraine is endangering food and energy security, interrupting supplies of components to key industries, and eliminating the alternative land bridge for containers between China and Europe which will put further pressure on freight rates as more than a million containers look for capacity. With approximately 50% of Europe’s diesel sourced from Russia this could also present the next challenge for European supply chains dependent on road transport.
Supply chain people must be feeling like Hercules trying to eliminate the Hydra…whack-a-mole on steroids.
Unfortunately, short-term prospects are not encouraging. Splash 24 is reporting that, as a result of the new Covid outbreaks in China, there will be further delays of shipments out of southern China, and this will have a whiplash effect on terminals in Europe and North America, and reverse much of the progress made in clearing port congestion.
Kuehne+Nagel’s digital platform, ‘seaexplorer’ has developed a Global Disruption Indicator which tracks TEU waiting days (TWD). For Hong Kong and Shenzhen alone the current waiting time is three times higher than it was two months ago. Increased congestion is inevitable.
BlackRock CEO Larry Fink was recently quoted in Seeking Alpha. “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades. We had already seen connectivity between nations, companies and even people strained by two years of the pandemic. It has left many communities and people feeling isolated and looking inward.”
Atlanta Fed President Raphael Bostic: “The tragic war in eastern Europe will further momentum toward reorienting production and supply networks away from pure cost minimization and toward resilience and risk tolerance. Supply chain disruptions caused by the coronavirus pandemic prompted business leaders to start diversifying supplier locations and firms, increasing inventories, and bringing production closer to final markets to maximize reliability.”
The Logical Group spoke to a major freight forwarder active during the worst of the Covid-related congestion and supply interruptions in late 2020, early 2021. Despite significant investments in digital solutions they reported that it was down to the agility and expertise of their people that kept their customers, many of them in the chemical industry, operating and maintaining a degree of reliability of supply
In these circumstances, and facing the likely challenges of readjusting global supply chains, the demand and competition for supply chain talent is likely to heat up.
By Paul Gooch. Paul Gooch is Managing Director of The Logical Group GmbH and a non-Executive Director of Borderless
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