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Logistics making inflation worries more than transitory

ICIS, Uncategorised
By Jeremy Pafford on 15-Jun-2021

How bad are things on the logistics front?

A COVID-19 outbreak at the Port of Yantian in China is causing container ships to back up or to be diverted as services and deliveries are delayed. The port is critical to exports from China’s Pearl River Delta, a major manufacturing center in the world’s major manufacturing country. The situation has some warning in June that orders for Christmas will be delayed, while others say the ripple effects on trade will be “worse than the Suez blockage”.

Meanwhile, US big-box retailer Home Depot has taken matters into its own hands, securing its own container ship that, starting in July, will make runs back and forth between overseas suppliers and North American ports. The move was made because of the challenges in securing ocean shipping as well as the escalation of shipping rates, as shown below in the chart from Freightos.

Moving goods through the supply chain from source to destination remains a challenge because of myriad logistics, production and demand issues at various points in between, and seemingly when one situation resolves, another emerges. That is resulting in higher costs across the board, helping fuel inflation.

The natural demand snapback from economies emerging from pandemic restrictions was always going to pull prices for goods and services higher – the laws of supply and demand take center stage in that scenario. What was not expected was the level of disjointedness that would rattle global logistics networks and make meeting that pent-up demand so challenging.

Decrease the ability to create supply without a decrease in demand and the laws of supply and demand are usurped by the law of “how high can prices go?”.

Until we can get the kinks in supply chain logistics worked out, the snarls in the supply chain will not smooth out and elevated pricing will roll through to consumers at rates already exceeding expectations. Thus, while the US Federal Reserve calls the current inflationary environment transitory, we should not readily dismiss current price conditions as temporary.

Fixing the global logistics situation will cost money either in the form of more ships, more containers, more workers, more investment in supply chain resiliency, etc. Those costs will be passed through to consumers in the form of higher prices. Even if logistics networks decide to simply “wait out” the pandemic in hopes of returning to pre-COVID shipping norms, such a return would not happen overnight and likely would keep shipping rates high or higher than today’s numbers for a good amount of time.

Barring a global economic downturn, inflation fueled by elevated logistics and raw material costs looks to be the norm for 2021 and a major question for companies making their fiscal year 2022 plans. Chemical and polymer markets continue to exemplify this, with many sellers enjoying banner years and buyers seeing their 2021 procurement budgets in tatters amid hopes their sales teams can make up for the higher-than-expected cost of goods sold. ICIS and Chemical Data analysts do see calmer times come 2022, but with prices for major raw materials such as polypropylene (PP), polyvinyl chloride (PVC) and acrylic acid at higher price floors than before the pandemic began.

That is how bad things are on the logistics front.

Disclaimer: The views in this blogpost should in no shape or form be taken as actual forecasts and are my personal views only.