Global Supply Chains Face ‘Hangover’ as Excess Demand Softens

Date: Tuesday, December 20, 2022
Source: Bloomberg

It’s not even the morning of New Year’s Day and already there’s talk in supply-chain circles of the 2023 hangover.

“There’s a reliability hangover,” Bill Seward, the new president of supply-chain solutions at United Parcel Service, said in an interview. He was referring to lingering headaches from more than two years of shipping congestion, delivery disruptions and component shortages around the world.

“Many, many companies still feel chagrined and burned by what happened with regard to accessibility,” he said.

While ports may be opening a bit and transportation rates may be coming down, there’s still plenty of angst. “A lot of senior execs feel very kind of battered by the last two years with regard to reliability and there’s a heavy emphasis on the ability to de-risk and to be able to flex in different ways,” Seward said.

For instance, UPS is seeing reshoring trends shift demand for its services to markets like Mexico, and the courier company is trying to adapt with the changes.

“Costs of manufacturing and those things are definitely not coming down the way they’d like,” he said. “So you’re seeing shifts in terms of where manufacturing will happen and we’re seeing it in our business. We are definitely seeing this shift to different geographies.”

Seward was among several contacts who spoke or emailed in recent days with some views on the year-ahead outlook.

Soft First Half

Heath Zarin, the founder and CEO of EV Cargo, said he expects next year to be the opposite of 2022, when robust demand in the first half gave way to a slowdown in the second. That’s reduced the disruptions, he said, but added a greater sense of caution.

“We think the best-case scenario for 2023, is kind of a mirror inverse of the tale of two halves that we saw in 2022,” he said. “Our expectation is the first half is going to be much of the same — continued economic softness or weakness, which is then going to manifest itself in supply chains that are  working better but overall there’s just less economic activity. The earliest that we’re seeing a pickup is in the second half of the year.”

In addition, Zarin expects a return to a high level of mergers and acquisitions in supply-chain services, citing Deutsche Bahn’s move to explore selling its DB Schenker logistics unit.

“The pace of consolidation in the industry, both vertically and horizontally, is something which has been accelerated by Covid, and that will definitely carry ahead,” he said.

Trade-Finance Trouble

Chris Rogers, an independent analyst and author of the Pauncefote & Hay supply-chain blog, is another believer in a 2023 that plays out in two phases.

“Elevated inventories still need to be unwound. Wage inflation will overtake logistics and commodity prices as a driver of supply-chain costs. High interest rates will spell trouble for trade finance,” he said.

“Later in the year, we have a hope of normality and may get some evidence of whether three years of flux and the trade war will actually change anyone’s strategies,” Rogers said.

Tech Revolution

Another trend that won’t slow down: tech upgrades that are sweeping across the remaining analog corners of global trade to both improve efficiency and decarbonize.

Julie Gerdeman, the CEO of Everstream Analytics, says “we’re well along the path of supply-chain transformation.”

“The pandemic increased the cadence, variety and intensity which overwhelmed an already-burdened system,” she said. “The earlier companies engage and leverage technology, the more impact and improvement they can realize in logistics and value chains.”

Sharp Reversal

Still, global trade growth next year will likely slow to 1.1%, from the 6.1% increase this year and matching the increase in 2019 during a worldwide industrial recession, according to HSBC, one of the world’s biggest providers of trade financing.

HSBC economist James Pomeroy said it’ll be key to watch how consumer demand responds to elevated rates of inflation, as well as the switch back to travel and leisure spending after a couple of solid years for merchandise purchases.

That rebalancing should continue to reduce inflationary pressures next year, particularly from freight costs and parts shortages.

“It looks likely to me that we’re going into a year next year where, in the goods side of the economy, the question isn’t going to be about inflation, it’s going to be about deflation,” he said.

With weaker goods demand and high levels of inventories, the quick return to supply-and-demand balance risks overshooting.

“This has never happened before in terms of this huge shock in one direction being revered in the other direction so quickly, how big are these discounts — are we going to see 5%-10% off a lot of these goods prices?” Pomeroy said. “I don’t think that’s a scenario that we can rule out.”

Getting ‘Floored’

Peter Sand, chief analyst of Xeneta, said 2023 will see global shipping container volumes fall as the cost-of-living crisis takes its toll on consumers. “Rates will get floored,” he said because cargo carrying capacity is growing steady through the second quarter of 2024.

“The disrupted supply chains should be able to unwind fully throughout the year – at first on the ocean, later hinterland will follow,” said Sand, who added that labor strikes and China’s outbreaks of Covid infections pose risks to the outlook.

Said Oren Klachkin, the lead US economist at Oxford Economics: “2023 will be a better year, but supply chains will still cause headaches” and “the speed at which supply-side snarls are fixed will be key for how quickly inflation comes down.”


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