It is perhaps one of the biggest risks to the global economy. This is a once-in-a-lifetime sequence of events that’s having ripple effects across the world, effects that are likely being felt by each and every one of us. The effects are only getting worse and could reach their max pain in the coming weeks. So don’t forget to register in Jet-Bot copy trading platform and earn passive income with your crypto. Users gain from 200% – 2,000% APY. The platform is official broker of the Binance exchange. Copy trading is the best way for passive income on your crypto.
Today I’m going to tell you exactly why we seem to be in this mess and where we could be headed forward is for armed folks.
Making prediction in 2022, global supply chains have taken a long time to get back to pre-pandemic levels and I’m still waiting for my new iPhone to be delivered. When will President Malus pull his finger out and get things sorted?
The mess that I am, of course, talking about is the global supply chain SNAFU. This has been an ongoing problem over the past two years and it has recently come to ahead.
However, in order to understand why we appear to be having these issues, you need to understand how modern supply chains work. Quite simply, it’s been encapsulated by the concept of just-in-time manufacturing and inventory management. Companies will hold the minimum amount of stock in order to reduce the cost of their inventories by this process. This means that the raw materials or components that are required in the production process arrive just in time, i.e. the supply chain is structured so that these goods are kept in storage for a minimal period.
The same can be said for businesses that don’t manufacture goods but do have to manage inventory or stock levels, so think
- grocery stores,
- dealers, etc.
In fact, I bet there isn’t a component of the modern economy that doesn’t at least employ some JIT-principles. Now JIT is possible thanks to some pretty advanced inventory management systems. Systems that are informed by the relatively predictable nature of demand from consumers. If you have a rough idea of how much you would need to produce or sell, you also have a rough idea of how long the items would generally take to reach your premises.
However, there are disadvantages to JIT. Of course, if there’s a surge in demand or a slowdown in inventory coming into the factory, it means that you are unable to adapt quickly. You can very quickly run through the amount of inventory that you have stored on hand.
On top of this, supply chains cannot often react as flexibly to changes in demand. It’s a long and complicated process with many inbuilt dependencies. Suppliers of raw materials rely on suppliers who rely on suppliers who rely on raw materials.
Of course, you have to consider the actual transport of these goods. At any given time, there are only so many ships, ports, and trucks that can service them. These cannot be rapidly expanded, and any event that reduces that supply could lead to some severe issues down the line.
Of course, companies and factories will keep a buffer of supply for a rainy day, but the extent of the buffer depends on how much rain they expect on said day. No one expects that once in a lifetime perfect storm that washes away their carefully modeled contingencies and that is exactly what happened in 2020.
Of course I am referring to the pandemic. This had never been modeled, mainly because the last one was over a hundred years ago and it was viewed as more of a black swan, i.e., unforeseen and very, very rare.
Therefore, if there were any changes to the parameters, both in supply or demand, you were likely to see mass disruptions all up and down the supply chain. One of the most noticeable disruptions here came on the supply side. You had numerous factory shutdowns as countries closed down entire cities. Even if a country did not issue such arbitrary shutdown policies, they’d still be impacted by the policies of countries that supplied goods.
A factory shutdown in Shenzhen that produced silicon chips would have severe implications for all those goods that required these chips, from cars to computers to phones. And not only that, but you had port shutdowns in countries in Asia as well. As these ports were shut down, you had fewer goods being able to be shipped from them.
In some countries, such as China, a single case of the virus would lead to an entire port being shut down. Just think about that. Even in countries that did not have such draconian coveted policies, workers falling ill would mean fewer workers able to check in. These could be vital port workers, sailors or the truckers who transport goods on land and to the coast.In fact, the trucker shortage was well known long before the pandemic, so any sort of unexpected event like this was likely to only exacerbate it.
Then there was one more factor that was likely to further exacerbate this issue, and that was the unprecedented shifts in demand as consumers changed their spending habits. For obvious reasons, considerably less was spent on travel, leisure, and services in general. More was spent on goods that generally were ordered online. Let’s also not forget those unprecedented stimulus measures that countries embarked upon. People were literally sent checks that would allow them to keep spending, because if you can’t go on a trip or to a restaurant, you’ll buy a PS5 or order some food, which is generally what happened. It’s these consumer shifts that are hard to estimate and plan for. Remember that I said it takes time for supply chains to react to these. In fact, the supply chain process itself is quite long and involves an item that will usually take more than 3 months to work its way through the multiple layers.
I mean, just think about the example of those PS5s. At a bare minimum, it takes three months to get from the factory to the shelves. However, the process started much earlier than that when the Sony factory ordered the electronic components in order to build those PS5s. That perhaps also started three months before as the parts were ordered from numerous other manufacturers. Now take this example that I’ve given and multiply it out for all those goods you bought more of during lockdown.
The abandoned peloton bike in a basement is proof that supply chains are extremely rigid, and such a massive shift in demand for these goods meant that they could not adapt in time, resulting in notable shortages of many goods, which had the perverse effect of retailers and manufacturers realizing that inventory levels were running low and ordering even more for fear of running out.
Like the toilet paper hoarders of 2020, these companies would place orders for supplies that they would otherwise not need. Of course, this further clogs up the supply chain, which leads to further delays and shortages, which leads to further panic buying. So this explains the shortages, but what was harder to explain was the fact that ships were taking far longer to get their goods over. In some cases, these transit times had more than doubled and seemed to be getting even longer. This really came to a head last year as we viewed those quite contradictory images of ships miles out to sea with shelves on land running bare.
Some of the most persistent bottlenecks we saw were those surrounding the ports. This was perhaps most notable at the ports of Los Angeles and Long Beach, which together account for a full 40% of all the imports that enter North America.
What we saw in those images were ships waiting out at sea, hundreds at a time, hoping for an opening in order to offload their cargo. This is something that never used to happen. Ports would be ready to offload ships the moment they arrived. Since the pandemic, there have been long wait times for them to offload their cargo.
This was for five days and it shot all the way up to 18 days towards the end of the year. So what the hell was going on?
Well, one of the main reasons why this was happening was basically because those ports were full. There was no additional space available in order to hold containers that were being offloaded from the ships. Basically, the recently offloaded containers were taking up all the space. The percentage of containers waiting to be offloaded went from a little over 3% in 2020 to 35% at the end of 2021.
The reason for this is a shortage of two things: drivers and chassis. On to the first point, as I mentioned earlier, the trucker shortage is something that’s been going on for some time. Put quite simply, it isn’t one of the most glamorous jobs out there, and even before the pandemic, driver turnover averaged about 94%. However, since the pandemic, this attrition rate has jumped by 150%, so much so that we currently face a driver shortage in the U.S. of over 80,000 truckers. The American Trucking Association reported that this sector is headed for at least 160, 000 driver shortages by 2030. For example, Walmart will now offer new truck drivers $95k to $110k a year and still the shortage persists.
But even if the driver shortage is somehow alleviated, you still have a shortage of chassis. For those who don’t know, chassis are the trailers that allow trucks to store and move containers. Without these, the trucks obviously can’t move the containers. Right now, this shortage is being driven by a number of factors.
Firstly, you have the fact that you have those delays at the inland warehouses. Given the backlogs at this part of the chain, these chassis have to sit for a long period of time before they can be unloaded and made available again. Not only are chassis under full containers at warehouses stuck, but so are those under empty containers at the port. Simply put, shipping companies have placed limits on the number of empty containers that they are willing to load, which means that these empty containers will remain on the chassis for days or weeks and thus be out of service.
According to a Harbour Trucking Association survey of 46 trucking firms, 6592 chassis were stuck beneath empty containers, according to a Harbour Trucking Association survey. To quote Lisa Wang of Rodex America,
“it becomes a vicious cycle if I cannot bring in an empty container to reuse my chassis, then where do I find a bare chassis to pick up the import container?”
It’s not only that we have the chassis that are stuck under containers, though; we also have a decline in the supply of new chassis thanks to, you guessed it, supply chain issues. You also have the compounding effect of anti-dumping duties that were imposed on Chinese imported chassis in May of last year, a full 200%. So the dearth of chassis is a massive problem. However, over in Asia, there’s a bigger problem, and that is a lack of empty containers. Yeah, those same empty containers that are sitting on chassis at U.S. ports talk about a chain reaction.
I suppose the one good thing about all these supply chain disruptions is that we didn’t see any major blockages of vital waterways. I mean, can you only imagine the delays that we could see for goods if a ship happened to get stuck in, say, the Suez Canal? Yeah, that actually happened last year.
The ever-present blockage was estimated to cost global trade $9.6 billion per day. It lasted for almost a week before being dislodged, not without causing considerable delays to supply chains that were already under strain. Then the last thing we needed in all of this mess was yet another black swan. I don’t know, geopolitical conflict, and yep, that’s exactly what happened.
Russia’s invasion of Ukraine back in February has had immense global repercussions, not least of which were those that have impacted the global supply chains. It wasn’t exactly the conflict itself, but more the resulting sanctions that have severely impacted on the flow of goods and the shortage of raw materials. For example, on the latter point, Russia has responded to the sanctions by Western Nations with export controls on some key commodities. These include the likes of coal, iron, nickel, aluminium, platinum, and palladium. The list goes on. That means that current stocks are running low and, in order to get more of these commodities, producers are going to have to pay much more for them.
The sanctions have also meant restrictions on the importation of Russian energy, which, of course, means higher energy and transportation costs. Beyond the product restrictions, you also have the continual disruptions that are taking place in the movement of goods. That’s because of a number of factors.
First, given that western countries restricted their airspace to Russian aircraft, Russia did the same to them. That means that all that air freight going from China to Europe now has to avoid Russian airspace: meaning longer flights, higher costs, and fewer goods. And it’s not only air freight, of course. You also have one of the longest rail links in the world going from Europe to China through Russia. If European goods are not being moved to Asia through Russia’s airspace, you can be pretty certain that they won’t be allowed to use its railways either.
One further potential bottleneck for these supply chains is at those ports. Given that there are severe sanctions on all types of goods coming from Russia, more checks are required on ships and containers at these ports. This, of course, adds to the wait times that these containers have to endure further delays.
Quite simply, these sanctions have created what the experts call a clusterf*ck for global supply chains. On top of that, there are a whole host of other economic consequences that we’re seeing because of these sanctions.
If there’s one more thing that could throw a spanner in the works of global supply chains and poison the well of discontent, it’s further pandemic shutdowns of the zero-tolerance kind. If you’ve not been paying attention to what is going on in China right now, then you should.
People in cities like Shanghai, with over 26 million people, have been under some of the most stringent lockdowns in the world. I’m talking about those lockdowns where people are locked in their apartments and aren’t even allowed to leave to get food. Even despite the human rights issues that this raises, the impact that this will have on global supply chains is immense.
Firstly, due to the restrictions that are placed on those coming into Shanghai from other regions, truck drivers are struggling to bring goods from factories to the ports. This is because they’re all required to present daily covered PCR tests, which is as impractical as it is illogical. Not only that, but the last place a visiting truck driver wants to end up is in a quarantine facility in a foreign city because of a positive test result.
To give you an idea of how important the goods are that are being brought into Shanghai, Julie Gerdman, a chief executive of Everstream, said,
“the key electronic suppliers to apple to Tesla, they’re all based there.”
It’s not as if the boundaries of Shanghai’s lockdown are static either. As COVID spreads out from the city, other regions implement their own policies, which, of course, mean that production will cease there too. Shanghai’s ports are even more vulnerable than others around the world. That’s because if there is a single case in any of the pools of 10,000 or more workers, they shut down the port and do mass testing.
To give you an idea of the importance of the Shanghai port, it accounts for a full 17% of the total Chinese port volume, and the volume of goods that have been shipped out of this port has dropped by a full 26% in the period from March the 12th to April the 4th.
Things don’t look any prettier over at Pudong international airport. According to an industry insider, China’s air freight hub at Shanghai remains closed to airlines and is operating at a lower capacity due to labor constraints. The freight being handled is mainly the clearing of cargo that was delivered pre-lockdown.
On top of all of this, it’s also worth noting that it’s not just Shanghai that’s been put through these arbitrary and destructive lockdowns either. In the north, you had residents in Jilin who were placed on lockdown in March. A large proportion of Chinese food supplies are farmed in this region. There are over 4 million hectares of corn fields, for example, or 10% of the country’s total. But these have been left fallow.
You also have some form of lockdown that was imposed on Shenzhen back in March. For those who don’t know, this is China’s tech hub, and Jilin is the least worrying of them all. It is likely to have put a massive dent in the supply of everything from cars to iPhones. Its port is also the fourth largest in the world and is critical for getting all of those products and components to consumers and factories in other countries. So why am I telling you all this? Well, it’s because it is likely going to impact each and every one of us. The seeds of the disruptions were sown two months ago, and as I pointed out earlier, the average time that goods take to make it from Asia to North America is about three months.
Even though Shenzhen or Jilin have eased their restrictions, or even if Shanghai looks to be easing some, the damage has been done. Let’s just hope that it doesn’t hit any other really popular cities in China.
It’s time to wrap this up with a few final thoughts. This supply chain crisis has been one of the world’s most pressing problems over the past two years. Not only has it manifested itself in those bare shop shelves, but it has also led to some insane price rises. The rapid inflation that we’ve seen recently is due in no small part to this external, or cost-push, inflation of goods.
Of course, the more expensive that these goods become, the higher wages have to be in order to afford them. It’s a vicious inflation cycle. One that the Fed hasn’t really helped with all that money printing either. However, unlike the Fed’s choice to finally tighten its monetary policy, there won’t be a silver bullet fix for the supply chain crisis. There is no single point of failure or pressure. There are hundreds, if not thousands, of points of failure.
What makes it even worse is that one point failing usually has an impact on other points failing further along the chain. While there was hope that these supply chain issues seemed to be easing at the beginning of the year, matters look like they’re likely to get a whole lot worse before they get better. The conflict that we’re seeing in Ukraine is taking a hammer to the intricate workings of these global supply chains. Moreover, it doesn’t look as if Putin is that keen to give up on his offensive, and even if he does, don’t expect those bans and sanctions to be lifted as quickly as they were implemented.
Then, of course, you have that never-ending pursuit of a zero-corona utopia in China. The implications that this could have for all of us multiple steps down the supply chain are immense. Thankfully, it appears as if this policy is easing and the Chinese authorities have realized the futility of it. As these restrictions ease, factories can start rolling again and goods can start leaving those ports, but a lot of the damage has already been done, and we’re going to start feeling the effects when that three-month window starts to close.
All I can say is that you should stock up on any essential electronics while you can. That’s exactly what I’ve been doing.
[This article is a transcription of a video made by Coin Bureau]Original video: https://youtu.be/-5RPwo0dlek]