Supply chain crisis: Why the worst is behind us, and what this means for investors

Sea legs

Southern Californian ports are some of the busiest in the world, accounting for 40% of all container traffic entering the United States. (6)

In early-February 2022, the ports of Los Angeles and Long Beach had 78 container ships queueing at sea to offload goods, down from the January peak of 109. Although ship congestion is easing, it remains severe by historical standards. Prior to the pandemic, it was unusual for ships to wait to unload goods at the port of Los Angeles. Now, container ships are waiting an average of 18 days. (7)

Help wanted

But it’s not just shipping that is disrupting supply chains. Labour shortages due to lockdowns, sickness, huge stimulus, and resilient economic activity has seen some of the lowest-paid finally get a ‘pay rise’.

A massive shortage of workers on wharves and associated land-based transport had ships unable to offload containers. As a result, fresh goods spoiled, exacerbating supply and price issues.

The American Trucking Association estimates that a shortage of 61,500 truck drivers has swelled 30% to 80,000 since the beginning of the pandemic.

Up all night

In mid-October 2021, despite the truck driver shortage, US President Joe Biden announced the Port of Los Angeles would begin operating 24/7. However, an estimated 30% of times available to pick up freight at the port continues to go unused.

Exacerbating capacity concerns further is the impact the Omicron variant has had on dockworkers. Throughout January 2022, approximately 1,700 dockworkers at West Coast ports tested positive for COVID-19, with 80% of these infections from the ports of Los Angeles and Long Beach. This compares to 1,624 infections across the entirety of 2021. (8)

Everything must go

Even without these aforementioned concerns, the sheer volume of shipping containers arriving are causing problems of their own. A twenty-foot equivalent unit (TEU) is the standard size of a shipping container (although forty-foot equivalent units are also common). At its January 2022 peak, there were over 700,000 TEU’s waiting on ships offshore of Los Angeles and Long Beach. (9)

While this number has reduced, there are currently hundreds of thousands of TEU’s on ships waiting to dock. 

They cannot be unloaded until what has already been unloaded is picked up and taken away by an empty truck. A truck would normally bring back an empty container and take on a full one, but when a storage yard is full of containers, there is nowhere to store empty ones. (10)

Effectively, to move 700,000 full containers, there would need to be space for 700,000 empty ones. As it stands, for every available truck, there are 18 containers waiting to be removed from the ports of Los Angeles and Long Beach. (11)

What are the broader implications?

At its simplest, if demand outstrips supply for food, fuel, a car, a trade or a service, you can expect prices to rise for that good or service. The growth in prices from one period to another is inflation. Given the scenario outlined above, it’s easy to see how prices for goods and services have moved, and how inflation is fast becoming a concern for policy makers and investors.

Sectors that have been hit the hardest by bottlenecks have seen the greatest inflationary pressures. This has been most evident and instant in the export of goods. 

Labour supply has been a slower burn as latent capacity is absorbed, but we are now starting to see wages increase. The net effect, though, has seen annual headline inflation in the US hit 40-year highs of 7.5%. (12) We are yet to see this reflected in a significant quantum in Australia.

Conclusion

Similar to the global supply chain issues, Australia has been affected to a lesser extent. This is due, in part, to our lesser reliance on global trade to supply key commodities. In fact, we tend to export most of these goods, and instead have a heavier reliance on importing partially or fully manufactured goods.

Headline inflation now sits at 3.5%, with underlying inflation at 2.6%. This was originally forecast to continue to rise to 3.25% over the next few quarters and expected to decline to 2.75% in 2023 as supply-side problems are resolved and consumption patterns normalise.

However, the war in Ukraine has pushed commodity prices significantly higher, especially for energy. This combined with recent flooding on the east coast of Australia will likely see higher headline inflation in the first half of 2022. Given this scenario, Oxford Economics expect the RBA to continue to look through the supply-driven inflation and accept a higher overshoot from the RBA’s target 2-3% band. It is now likely the cash rate will rise to 1.25% by year’s end.

Did you like this wire? 

I am Cromwell's Head of Retail Funds Management and will be publishing regularly on Livewire. Look out for my next wire on different asset classes in inflationary environments. Hit follow for first access to my insights or click the fund card below to fund out more about the Cromwell Direct Property Fund. You can also find out more information at our website. 

Managed Fund

Cromwell Direct Property Fund

Australian Property

View