Supply chains, broadly defined as an activity performed by an organisation to deliver goods – converted from raw materials or components, to the end consumer as a finished product or service, has been topic widely discussed in recent months, also dictating private sector business activity and economies path forward.

The coronavirus pandemic and disruptions brought about through a wave of infections, some worse than others and giving rise to coronavirus-inflicted mitigation measures, rendered such process deemed to be naturally complex, to worsen, creating logistical nightmares and thus, tormenting businesses. Restrictions on movement and confinement resulted in a shift of retail consumption in favour of goods rather than services, notably supported by the development of e-commerce. Disruptions in relation to capacity limitations worsened an already tense situation.

Vessel delays congested ports and crammed warehouses, adding to the supply cracks caused by a semiconductor crisis and petrochemical shortages. Smaller businesses had to fiercely fight to secure space on container ships to keep both manufacturing and sales moving while experiencing cash flow pressure as they absorb the surging freight rates, significantly higher compared to pre-pandemic levels. At the other end of the spectrum, consumers experienced such supply ruptures through limited product availability and increasing prices, fuelling inflationary pressures. Annual inflation data showed that U.S. consumer prices accelerated by 7 per cent in December, the fastest pace in almost 40 years.

Although such ill scenario is set to persist, at least in the very short-term, the severity of such supply-related issues are now seemingly easing. That said, risks do remain.

Vessel congestion at two major gateways for trade ease

The two major gateways for trade on the western side of the United States; Los Angeles and Long Beach, in 2021 became the focal point of massive supply-chain related disruptions, leaving store shelves empty and intensifying pricing pressures. However, supply bottlenecks have in recent weeks eased, noting progress as backlogs of containers holding goods, previously piling up, dwindled.

Dwell time; the stint a container sits around on average before it gets picked up, has dropped notably since late October and the number of vessels at anchor outside the ports waiting to berth to offload their cargo, dropped.

Such encouraging figures are however only one side to the story, perhaps the more optimistic one, as vessels, previously waiting outside the ports are now spread out across the Pacific Ocean, drifting to avoid traffic jams as experienced beforehand.

While stacks of containers filled with imported goods shrank, stacks of empty ones needing to be shipped back haven’t yet moved by much, creating a headache for truckers who need to offload their empty container prior to picking up a loaded one at the terminals.

China zero-tolerance stresses China’s supply chains

Efforts by Chinese authorities to reduce the spread of the coronavirus pandemic, through increased testing and enforcing quarantine measures, have in recent months led to labour shortages, curbs in the largest port hubs, and port closures across the country, disrupting global ship schedules and supply chains. Ultimately, causing a backlog in some of China’s major ports.

Risk of further disruptions for “epidemic management” is certainly not far-fetched as the world’s second-largest economy pushes ahead with its zero-tolerance Coronavirus strategy. Such moves led to a continued increased demand for air freight. Rates, notably in outbound Asia have indeed spiked, in some instances two-fold, and may further maintain its upward trajectory ahead of the extended Lunar New Year holiday in China, were some shipping firms may suspend their services.

China’s main priority right now is to limit the number of infections ahead of next month’s highly anticipated Winter Olympics.

Contract for port workers at U.S. main ports set to expire

Possibly casting further doubts over a return to normality, or at least as one may perceive as the new norm – involving less supply bottlenecks – are negotiations with port workers whose contracts are set to expire in July 2022 at two crucial trade gateways; the ports of Los Angeles and Long Beach. Predominantly driven by the volume of imports, the named ports have in 2021 set records in the number of containers that moved through.

The previous pact which goes way back to 2015 was only reached after the crucial intervention by the Obama administration following months of discussions and an industrial action that left dozens of vessels anchored outside the ports.

Talks with port workers, typically centred on improved remuneration and operation automation may result in disruptions of some form. This, certainly a scenario one would not long for.

Notwithstanding the above-mentioned risks and lingering supply chain issues, set to persist at least until Q2 2022, a more benevolent scenario is seemingly on the horizon. The coronavirus pandemic, although still an evolving story, particularly following the discovery of the Omicron variant in southern Africa and which has engulfed both Europe and the U.S. with infections, is largely being accepted as a virus that is here to stay. Although a geographical diversification remains, in terms of the percentage of population vaccinated, programmes in the vast majority of economies picked up speed. Findings pointed to vaccinations having helped to reduce the severity of such virus. Self-isolation periods, in response to such developments were largely cut, boding well for manufacturers and ports facing productivity limitations due to outbreaks and quarantine measures imposed.

Continued 24/7 operations in ports located at the West Coast of the United States shall undoubtedly continue to enhance productivity, contributing to an ease in supply chain bottlenecks.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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