The global supply chain is something that most people don't tend to think too much about until something goes wrong. Yet at the same time, it plays a far more critical role in all of our lives than many think.
The Impact on Energy Demand
If the supply chain is disrupted and goods are not flowing to market at high speed, doesn’t this imply lower demand for refined fuels?
Yes, but it’s not necessarily a bearish trend that would limit pricing.
Demand from the end consumer for more goods is boosting prices of oil, metals, and other manufacturing materials. But the delivery system is broken.
Therefore, today’s supply-chain woes are a symptom of a phenomenon that suggests refined product prices are likely to stay elevated – that is, the consumer wants more stuff.
According to one recent study, roughly 57% of all companies believe that the way they manage their own supply chain is one of the major contributing factors to their competitive advantage. They acknowledge that not only is it an important part of their ability to offer superior service to their customers, but it also directly impacts the quality of their products and services, too.
Once you also consider the fact that the market value of the global supply chain is anticipated to grow from $15.8 billion in 2019 to a massive $37.4 billion by 2027 according to the same source outlined above, you can begin to get a better idea of just how crucial this all is.
Yet at the same time, the global supply chain is currently in jeopardy - especially as far as things like transportation are concerned. This is due thanks in large part to the still ongoing COVID-19 pandemic. Another recent study indicated that 18% of businesses said that delays in cross- boarder land transportation had a "major impact" on their ability to operate normally. A further 16% said these issues led to a "serious impact," while 5% said that there was a "catastrophic impact" on their organization.
Delays in land, sea and air transportation essentially create a ripple effect in the worst possible way. They almost immediately lead to a delay in acquiring critical supplies, which in turn delays the amount of time it takes to get essential products and services into the hands of consumers. Sadly, this is an issue that appears like it will only get worse before it gets better - especially as we head into the holiday season where purchasing activity will be higher than ever.
To get a better idea of just what an impact major delays are having, look no farther than the current situation with the Port of Los Angeles and Long Beach. According to a recent study, on October 19, 2021, there were 100 ships behind schedule in terms of entering and unloading at the port. Beyond that, an additional 45 ships were anticipated to arrive at the port in the coming days.
Similar issues are cropping up with UPS, FedEx and other shippers - leading to a significant concern among consumers everywhere. It's also not an issue that is uncommon with ports across the country - they're running out of space and containers are backing up daily.
The issue in this particular case is not only that ports are running out of space, but cargo needs to be unloaded via truck. A lack of resources, coupled with a heavy backlog, have led to additional delays across the board. Additionally, carriers will be charged a fine per day after a certain amount of time has been allowed to pass, charges that will almost certainly be passed on to consumers in some way, shape or form.
Fixing the Problem Isn’t Bad, but the Timing Could Be
What happens if the extraordinary demand for goods retreats just as the supply-chain issues are fixed?
One result is the engine that is driving economic growth – the consumer – stalls, and no longer is “pulling” goods along the supply chain.
The economy is left with inventories it doesn’t need, with nowhere to go, even through the goods can now be delivered.
Such a glut would affect multiple commodities, including energy (transportation fuels), industrial metals, and petrochemicals.
Things have gotten to the point where these problems have already had a profound impact on the way people plan to handle their holiday shopping this year. One survey indicated that about half of all people plan to have all of their Christmas and other holiday shopping done by Cyber Monday - a date that has historically begun the shopping season, not ended it.
A separate survey indicated that some are being even more cautious. Roughly 5% of people indicated that they had already completed their shopping according to the same resource outlined above. 12% of people said that they were trying to get their shopping finished by as soon as Halloween.
All of this further compounds issues that are already being experienced across the industry. If businesses are having a difficult time getting the crucial supplies they need to produce products, it only delays getting those items to consumers. If demand spikes due to perceived issues with transportation and the supply chain, it takes a bad problem and makes it even worse. It's creating a ripple effect in the worst possible way - and one that will likely be felt in virtually every industry well into the new year.
One example of how all this is playing out has to do with Apple's new iPhone 13 model smartphone, released in September of 2021. Due to a global chip shortage, coupled with the aforementioned supply chain issues, the tech giant has indicated that they are cutting production by literally millions of units. While you can certainly place an order for an iPhone 13 right now, the odds are high that you won't get that device until the end of the year - if not into 2022. The same chip shortage issues are also impacting the company's ability to sell everything from iPads to their newly announced Mac computers.
Equally complicating things are backups at ports around the country. Shippers and similar organizations can communicate with consumers and attempt to manage expectations all they want - but when crucial cargo is sitting in a port for weeks or even months, there is no way to know exactly when the situation will resolve itself. In addition to hurting the ability of those businesses to get the items in question, it also leads to a dramatic increase in the amount they pay for shipping and transportation - costs that will almost certainly be passed along to consumers in due time.
Worker Shortages Compound the Effect
AEGIS Clients in oil-and-gas production note worker availability is a huge problem. The shortage affects them directly, but also their services vendors, resulting in higher costs.
If labor is scarce, it inflates prices all along the chain
The additional expense also endangers margins that were budgeted for more “normal” conditions.
AEGIS hedging strategies can address the uncertainty in budgets by making commodity-linked revenues and costs more predictable.
Finally, worker shortages in the transportation industry are also having a profound impact on the problem. Not only are there not enough workers to fill available positions - a labor gap that many industries are experiencing - those that remain are being asked to essentially work around the clock to make ends meet. It may help relieve a bit of the stress this holiday season, but it will likely do little to address the problem long-term.
In the end, the global supply chain issues don't just impact the transportation industry - there are few who have not felt the impact at this point. Time will tell whether things are able to stabilize once the labor gap is addressed and as vaccines continue to roll out across the world. One thing is for sure - if you're planning on buying gifts online for friends and loved ones this holiday season, it's in your best interest to begin sooner rather than later.
Worried about how supply chain woes could affect your cashflows?
Reach out to an AEGIS Advisor to learn more today at firstname.lastname@example.org