The ‘shipping pinch’ that could steal Christmas
Shortages, delays, soaring prices… a domino effect that began in China two years ago has upended global supply chains, writes
The first thing we noticed was the loo paper running out. But that wasn’t where it began. It began, like all of this, in China. It was February 2020, just after Chinese New Year, and Beijing announced an unprecedented shutdown of society. On the orders of Xi Jinping, the grand merry-go-round of millions of trucks, containers, ships and planes simply stopped.
The knock-on effect was immediate. Containers and goods quickly began to pile up, creating vast logjams at factories, ports and warehouses. Cold-storage containers stuck in China failed to show up in Brazil, where meat began to go bad for lack of refrigeration space.
As lockdowns spread across the world, so did shipping mismatches. Just as Chinese factories reopened, retailers cancelled orders in Europe and the US, leaving empty containers at anchor around their ports rather than chugging back to Asia to get more goods. Then, in the spring of this year, as Western countries reopened after vaccination campaigns, a third wave hit Asia.
After nearly two years, global supply chains are in an almighty mess. For most people, the problem is manifesting as shortages: queues for petrol, warnings of Christmas toy shortages, a shortage of workers and an endless wait to buy a new car or motorbike. Yet for most products there is, in fact, no global shortage.
Production of goods is higher this year than it has ever been, and the World Trade Organisation expects a bumper year for trade. The problem is not the amount of stuff – it’s moving it around. As Sam Lowe, fellow at the Centre for European Reform, puts it: “Everything is just in the wrong place.”
I’M A CONTAINER…GET ME OUT OF HERE!
Outside the port of Liverpool, a container ship is circling. Around and around it goes, tracked by radar, as it waits its turn to dock at the overwhelmed port. With backlogs as they are at the moment, this can go on for 10 days.
Forty miles away, via a computer screen in Shropshire, the ship is being anxiously watched. It contains products destined for factories owned by the Needham Group, a small but innovative British company headquartered in Whitchurch. The company makes sophisticated inks and laser technologies to label products for its customers. It buys chemicals from Europe for its inks, electronic components from Asia for its lasers and makes half of its sales in the UK and half abroad, across four continents.
But rather than developing new products or finding new customers, Aled Ellis, its chief executive, is spending an awful lot of time worrying about his supply chain. He has doubled the man hours spent on the task to three full-time employees out of 70 staff in total. They are trying to predict when goods will arrive, arrange drivers to pick them up and keep a lid on skyrocketing costs.
The price of some materials has shot up by between 12 and 20 per cent, but it’s space in the container they are shipped in that is really creating the strain: it has gone from $3,000 (about £2,200) to about $8,000. He is having to pass on some of the costs to customers: “We simply can’t absorb them because they’re too high.”
In a Kent factory, another small British company is stuck in another supply chain traffic jam. Nimisha Raja usually delivers her dried fruit crisps to supermarkets once a week. At the moment, however, she cannot even book a time to drop off her goods. “We’ve been trying to get a delivery slot for two and-a-half weeks now,” she says. She has a backlog of six deliveries sitting in storage. Fortunately, freeze-dried orange slices have a long shelf life.
WHAT THE TRUCK?
The shortage of HGV drivers is everywhere. It’s the reason why containers are piling up at ports uncollected. It’s the cause of petrol queues and factory delivery delays, which have reached “extreme levels” across the US and Europe, according to Goldman Sachs.
However, the UK driver shortage is particularly acute, estimated to be about 100,000. Hauliers have been short of drivers for years, having failed to make the job attractive enough to recruit young people. Drivers work an unforgiving schedule away from their families for days or weeks at a time, often sleeping in their cabs, cooking on a camping stove and urinating in buckets. Official data shows that the average UK wage for a lorry driver has not risen in real terms for 10 years.
The pandemic, and an unfortunately timed set of tax changes, exacerbated the shortage. Thousands of drivers in their 50s retired, eastern Europeans headed back home and post-brexit limits on immigration made it difficult for the industry to lure them back.
The industry is scrambling to respond. Recruiters are on poaching missions, waving around cheques of £1,000 to £4,000 just for switching jobs. Not everyone can afford to join the fray, however. While small suppliers and public services lose out, the ultra-efficient supermarkets and Amazon warehouses are winning the battle. “It’s a war for talent, which is a phrase that was once used for investment bankers,” says Tim Morris, chief executive of the UK Major Ports Group. “Now, it’s truckers.”
This isn’t just a British phenomenon, however. Europe is estimated to be short of 400,000 drivers and the US lacking 80,000 or so. Across the world, traffic is backed up all the way inland, on road and rail. Containers that would usually be collected in three or four days are sitting around for 10.
The worst shipping queues are not in the UK, but outside the ports of Los Angeles, Shanghai and Shenzhen, where 60 to 70 ships are waiting due to driver shortages, Covid checks, typhoons and successive rounds of lockdown. Rotterdam has at least a dozen ships stuck outside.
Part of the problem is the vast size of the latest generation of ships. They can be a quarter of a mile long and carry 20,000 containers, making them so big that only a few ports have the necessary deep water and 150ft cranes needed to unload them.
The situation has been exacerbated by one-off shocks, such as the
‘It’s a war for talent, a phrase that was once used for bankers. Now, it’s truckers’
‘I’ve never known anything like it. Sometimes I look at the figures and think: is this real?’
stranding of the Ever Given supercontainer ship in the middle of the Suez Canal in March. The vessel, one of a new generation of mega-ships, ran aground in high winds and then slowly wedged itself across the canal where it was stuck for six days, causing a 200-ship traffic jam.
In normal circumstances, at least some of the strain might be taken by air cargo, which can deliver less bulky, high-value goods far quicker. But the shutdown of most of the global aviation industry has choked off that capacity, too. This year, 30,000 cargo-only planes have passed through Heathrow, 10 times more than usual. Yet goods volumes are still lower than in 2019, because of the missing cargo capacity provided by passenger planes. The industry doesn’t expect passenger travel to return to normal for at least three years.
SHIPPING OUT LIKE BANDITS
While factories, airlines and ports are suffering, however, shippers are experiencing an extraordinary boom. Maersk, the world’s biggest container shipping company, recorded pre-tax profits of $6.8billion for the first half of this year, eight times what it made in the same period last year. Overall, shipping share prices are up 20 to 30 per cent since January.
The bumper profits for shippers have naturally attracted the rage of others in the supply chain. “Shipping lines have a special exemption from normal competition rules,” says James Hookham, deputy chief executive of the Freight Transport Association. “You’ve got record prices. The service quality is completely unpredictable, quality has collapsed and the best estimates of the profits that shipping lines will make will exceed $100billion.” In the US, president Joe Biden is introducing a bill to crack down on fees and is reviewing competition law in the sector.
Others think it’s a bad idea to start messing with incentives at just the moment when we need companies to lay on more capacity. “Capping shipping prices would be a disaster,” says Simon Wolfson, chief executive of the retailer Next. “The ships will turn around faster if there’s incentive.”
For its part, the shipping industry has pointed out that we are in a period of exceptional demand. “Supply chains simply cannot efficiently handle this extreme demand surge,” says John Butler, chief of the World Shipping Council. In other words, we are all buying too much stuff.
DEMAND WHIPLASH
Which brings us back to loo paper. Last spring, as the pandemic took hold in the Western world, behaviour changed. Instead of going out, people stayed in and began hoarding. They hoarded toiletries and food, but the most important thing being hoarded was cash. In the UK, households went from saving less than a tenth of their income in the first three months of last year to saving more than a quarter in the next three months. Demand plunged, and companies everywhere slashed costs to survive.
At the same time, our government, like many others around the world, unleashed the most spectacular emergency rescue package the country had ever seen. It spent the equivalent of 15 per cent of UK GDP on paying wages, delaying taxes and giving out loans and grants. The result was spectacular. After a few months of sitting at home saving money, people started spending.
No one could spend money on the usual treats, such as holidays, restaurants or season tickets. So instead of buying services, they bought goods, like new dishwashers, deckchairs, computers, toys and cars. The US imported 50 per cent more Lego than usual. John Lewis reported a nearly threefold increase in trampoline sales. Bicycles sold out across the UK.
Yet this was only the start. In the spring of this year, buoyed by successful vaccine rollouts, ongoing government support and the sense that the bad times were nearly over, demand across developed countries surged. Suddenly, all the companies forced to cut capacity a year before couldn’t source products fast enough. Shoe imports to the US soared. L’oreal, the cosmetics company, had sales grow by a fifth in the first half of this year. Sales at Sonos, the sound system company, grew 50 per cent over the same period.
The demand whiplash left supply chains reeling. And nowhere has felt the effect more than the car industry.
CRAZY CARS
Umesh Samani is a one-man-band car salesman in Stoke-on-trent. Usually, he stocks about 30 premium secondhand cars – lightly used Porsches, BMWS and Audis. But at the moment, he only has about 17 on the forecourt. Another dealership in the industry association he runs, the IMDA, has just seven of its usual 40-car stock.
“It’s a very, very crazy situation,” he says. “I’ve never known anything like it.” Cars usually start depreciating as soon as they roll off the production line. But at the moment, Mr Samani is selling vehicles for £5,000 to £10,000 more than they were worth a year ago. September was his best month for sales in 24 years. “Sometimes I have to look at the figures and think, ‘is this for real?’ ” he says.
The used car market is booming because no one can get hold of new cars. Vehicles don’t travel on container ships, so they aren’t caught up in the same traffic jam as other goods. Instead, the car shortage can be traced to the semiconductor factories of Taiwan and Korea. For car makers, these sophisticated electronic chips are a relatively small but increasingly critical component of their vehicles. Yet in the past few years, when times were lean, they simply didn’t order enough of them. Due to their complexity, tooling up production to meet demand will take months.
Robert Forrester, the chief executive of Vertu Motors, says that lead times on new cars have gone from a few days to five months. In May, he ordered a new Mini for his 17-year-old daughter’s birthday. It arrived last Sunday, a month late.
“This is going to take a while to unwind,” he says, predicting it will be fixed by June at the earliest.
THE PINCH THAT STOLE CHRISTMAS
The turmoil has prompted businesses and policymakers the world over to start asking whether global supply chains have simply become too fragile. In the UK, there is extra reason to question the model of just-in-time deliveries as Brexit has added a layer of paperwork and complication to trade with Europe.
Ms Raja, who runs Nim’s Fruit Crisps, used to export half her products to the continent. Now, because of the customs burden and uncertainty frightening off her European customers, “export has pretty much stopped”. She has found British buyers instead, who are in turn substituting away from European suppliers, and recently managed to source 10 tonnes of limes from Spain for the first time since Brexit, but she had to pay 30 per cent more than usual for them.
Problems up and down the supply chain have prompted a rethink of business as usual. “Everything takes a lot longer. You have to plan ahead now,” she says. That also means “that dreaded word, stockpiling”. She is keeping £100,000 of stock at the moment.
Ms Raja isn’t the only one who has decided that keeping a bit more stock on hand to fill orders would be prudent. Those businesses that can get hold of extra supplies are determined not to be caught out again. Mr Morris, of UK Major Ports Group, said that he thought global supply chains were here to stay, but with a bit more of a cushion built in to absorb problems, like greater storage space at ports. “Have we gone too far to very, very tight situations?” he muses.
All of this means one thing for consumers: higher costs. What isn’t known is how high the costs will go and how long they’ll last. The labour shortages in trucking are affecting a huge range of industries. Vertu, Nim’s Fruit Crisps and the Needham Group all have vacancies equal to about 10 per cent of their workforces. As a result, they are raising salaries and expanding training and apprenticeship schemes.
The question is whether the acute shortages caused by our voracious post-covid shopping habits will fade over the next six months, or whether they point to a structural change in our economy that has permanently raised prices.
As for shipping costs, they seem to have peaked for now, and fallen a little in the past fortnight. Eye-watering prices may finally be dampening demand. But we are still vulnerable to shocks in Asia, where zero-covid policies and severe lockdowns continue to plague factories and ports. As a rule, it takes about a month for those shocks to feed through into European shipping problems.
That means we don’t yet know if the shipping pinch will steal Christmas. Optimists think that the worst will be over by then – or at least by Chinese New Year at the start of February. Pessimists suggest it could go on until the latter half of next year. At that point, new ships commissioned at the top of the market will start to come online – and prices will probably begin to slide.
As for what the Government can do about any of it, the answer is: very little. Ministers are sitting tight, like the rest of us. If there’s one lesson to be drawn from the saga, it’s that turning economies on and off by diktat is a risky business. Put a supply chain into deep freeze, and it might not be quite where you left it when you come back.