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Panjiva Insights: Words become actions, Q2’21 Outlook

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Panjiva Research held a webinar on April 8 “Words become actions: Q2’21 Outlook” including guest speakers Dr. Phil Levy, Chief Economist for Flexport and David Henry Doyle, Head of Government Affairs & Public Policy EMEA for S&P Global. This report covers some of the key points covered augmented with new data points. A replay of the full webinar is available here.

Q: What is the state of the global logistics system right now? Should we be concerned at the macroeconomic level?

The global logistics industry is still working through the surge in demand which started in August 2020 as the North American and European economies emerged from their first stage of lockdowns. U.S. seaborne imports in March reached 97,000 TEUs per day, a record high, Panjiva’s data shows. 

The expansion has been driven in large part by a boom in consumer demand. The prevalence of demand for large consumer durables has meant that a 10.3% rise in U.S. consumer goods imports, discussed in Panjiva’s April 7 research, led to 38.2% rise in consumer discretionary product volumes.

There are also formidable technical challenges that the logistics industry is working through. An increasing proportion of container shipping vessels are of the very- or ultra-large type that take longer for ports to unload while challenges at inland facilities – such as Norfolk Southern’s Calumet facility – are also causing delays. The Suez Canal blockage is just the latest example of the sudden and disruptive events that can beset logistics operations.

Users of freight forwarding services have seen what was described on the call as a “never ending peak” describing logistics traffic similar to the usual holiday peak. Even if transitory, this environment is present when companies are renewing their freight contracts, locking in rates for the next year. Any increase might be further impacted by the false assumption made last year that rates would collapse due to the pandemic.

Audience Poll: How long will it take to clear the congestion in the global shipping sector?

The leading response is that it could take until the end of 2021 to clear current congestion with 40.4% of the total suggesting the peak season could bring a new round of challenges. The significant proportion of responses, 24.6%, indicating that congestion will persist into 2022 would suggest concerns that there’s been a permanent shift in supply chain patterns that the logistics sector may struggle to cope with.

How long will it take to clear the congestion in the global shipping sector? 

Audience poll held on April 8, 2021 during Panjiva Research webinar. Source: Panjiva

Q: How far after the port congestion clears do you expect prices to lower back down?

While spot rates may decline relatively swiftly once immediate congestion issues end the drivers and impact on rates of the extended period of disruption will persist in corporations’ costs. The signing of annual contracts mean that higher shipping costs will continue to drag on earnings through mid-2022 at a minimum. 

Shippers are having to plan weeks in advance, before the ship date in order to deliver their products to market, and that lag time is going to cause issues to persist even if spot rates come back down quickly. Companies are also juggling the impacts of geopolitical decisions, like the continuing section 301 tariffs on China, and all that adds to the calculation that shippers need to make.

Additionally, the container lines appear to have a new-found discipline regarding short-term capacity management so a drop in demand may be met by blank sailings or reduced services. The liners are also making considerable investments in new vessels and will not want to jeopardize the payments for them by engaging in a ruinous price war.

Q: Is supply chain inflation already here? Does it make a difference at the macroeconomic level?

There is plenty of evidence that supply chain inflation is here and is already having an impact on corporate decision making. Global container shipping rates, as already mentioned, have increased by 26% year to date. Panjiva’s basket of seven industrial commodities had increased by 23% year-to-date as at mid-March. The ongoing shortage of semiconductors is affecting a widening range of industries and could result in price increases. 

There’s also evidence in macro-economic data with import price inflation ex food and fuels having increased by 2.9% year over year in February and PPI rates increasing by around 5%. Panjiva’s analysis of over 7,000 companies conference calls held in January and February shows that 28% of firms mentioned “price increases” compared to 20% in Q4’20 and 16% at the same time in 2020.

This effect is natural when you consider the economic effects of falling supply and higher demand, but the nature of inflation in this case makes it harder to measure as many products can be very volatile. These goods, like food and energy, are usually excluded from inflation measures, as it is hard to differentiate between volatility and inflation in the short term.

The key issue may be whether people accept some inflation now as part of the recovery, or if consumers and banks start to price in future inflation expectations, making the increases persistent.

Audience Poll: Do you expect supply chain inflation to follow into consumer price rises, and if so for how long? 

All but 4.2% of respondents expect supply chain inflation to be passed onto consumers to some degree. There is less consensus about whether inflation will prove persistent though with 54.2% stating it will lead to a new round of inflation while 41.7% indicated prices will only go up temporarily.

Do you expect supply chain inflation to follow into consumer price rises, and if so for how long? 

Audience poll held on April 8, 2021 during Panjiva Research webinar. Source: Panjiva

Q: What are governments doing to plan for more resilient logistics operations in the future?

Governments have mostly continued to implement long term plans, like the Trans-European Transport Network, in order to close bottlenecks. That project specifically has target dates of 2030 and 2050 to cover Europe in a comprehensive network, but likely won’t make much a difference in the short term. The pandemic has shown how critical infrastructure can be however, and that has prompted reexaminations of current plans, specifically around how to promote strategic autonomy within states. 

This was accelerated by the pandemic and Brexit, and the EU released a new industrial strategy around this time last year. One of the key components is trying to uphold a level playing field for Europe, ensuring that the rise of China and the inevitable economic conflict that will come with it is managed effectively. 

You can see some of this in reforms to foreign direct investment, carbon border taxes, and digital services taxes that can defend an industrial base that is getting squeezed by new pressures like climate change and increased competition. Countries also may start to exert regulatory influence, with things like GDPR setting standards that are slowly leaking to other nations.

Q: What plans are the Biden administration and the EU putting in place to encourage onshoring? What is happening in the rest of the world?

The focus on onshoring has spawned a variety of plans, as well as growing pains from the limits of the real world. The EU in particular has to overcome some long standing tensions in deciding how to handle onshored production, and which products to promote. Conflicts can arise with the use and export of products as well, particularly with products like vaccines. 

Key components like reciprocity and proportionality are important to nations – but can also sometimes lead unrealistic expectations when countries specialize in different goods. A good example of this is U.S. China trade, where there is no hope of achieving reciprocity on trade in toys or furniture, for example. These shifts in multilateralism, accelerated by the pandemic, are some of the drivers of ongoing debate.

The default position of many politicians is to make everything at home if supplies are threatened abroad. This isn’t realistic at the price points most consumers are willing to pay, and you also have the case of domestic disruptions. A good example of this was the winter storms in Texas that disrupted domestic supply chains. So policy makers need to weigh different considerations, and draw limits on where to focus their efforts which is hard.

Most governments have some sort of industrial policy at this stage, though some are more diffuse than others. For example, U.K. plans have focused on regional development and a freeports project. China’s 14th Five Year Plan is a whole-of-economy plan targeting “science and technology self-reliance” with seven detailed sector plans to emerge this year. 

The ongoing shortage of semiconductors is a spur to other governments expanding existing policies. The “Make in India” policy package used to great effect by the Modi Administration is reportedly being augmented with cash payments worth $1 billion for firms setting up new semiconductor manufacturing facilities. Japan is more R&D focused with the government’s advanced chipmaking project.

Q: Will WTO reform happen and if so under what terms?

We will likely see some sort of reform with the WTO, but is it unknown whether it will be effective in curing the ails of the institution. Likely avenues include repopulating the appellate body and and the resurrection of the dispute settlement mechanism, but meaningful reform may be harder to come by. 

We are at a major crossroads, with the choice between multilateralism and bilateralism as the predominant factor in global trade. There are competing pressures here, especially when considering many countries’ internal politics that would require the resolution of numerous trade problems to find concrete long term solutions. An erosion in governance on the global stage largely exacerbates this and makes it difficult to predict what will happen next.

Q: Have the onshoring / reshoring trends panned out? Will they accelerate or decelerate in the near future given the increased reliance on Asia and particularly China during the pandemic?

The process of onshoring / reshoring with regards to U.S. supply chains is far from played out, though it has already been underway for a long time as a result of the U.S.-China trade war. Companies also continually review their supply chains anyway to maximize shareholder value by reducing costs and minimizing risks. The pandemic and recent Texas storms have shown however that 100% onshoring is by no means a panacea. 

The U.S. import tariffs applied to China as part of the trade war look set to remain in place so will likely continue to be an impetus to reshore, if not to the U.S. then potentially to an allied state. 

States and state-like actors discovered that they have vulnerabilities in places that they had not considered, and less control over their supply chains than previously thought. In the case of systems like the EU, which has spent a considerable amount of time building up a single market system that relies on global trade, this created a moment of realization that there was more work to be done in order to protect against new supply chain risks. 

There is likely a disconnect between political discourse and what companies are considering – in the end it comes down to how companies can provide products at reasonable price points. While reshoring and onshorging can happen if the environment is right, most companies are understandably wary of concentrated production for some of the same reasons politicians desire it.

There’s been a marked shift in U.S. imports of televisions and set top boxes as a result of the section 301 tariffs. Panjiva’s data shows that Chinese suppliers’ share of U.S. imports fell to 37.0% of the total in 2020 from 47.2% in 2017 while shippers from Mexico increased their share to 47.9% from 40.2% over the same period. 

Firms that still have both U.S. seaborne imports from China and Mexican exports to the U.S. include Samsung Electronics and China Electronics Corp. That may have given the firm’s the flexibility to scale up imports from China, which rose by 42.6% year over year in the three months to Feb. 28 while shipments from Mexico and the rest of the world have struggled to recover from pre-pandemic levels.

Mexico overtakes China as main supplier of TVs, set-top boxes 

Chart segments U.S. imports of televisions, monitors and set top boxes by origin on a monthly and three-month average basis. Source: Panjiva

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