Since the pandemic, the end-to-end supply chain has been in a constant state of disruption. Although it has calmed down since the height of the pandemic, disruption is simply the new norm. Since logistics is dependent on a system of systems, it is a sum of its parts, and as disruptions occur, the system is only as strong as its weakest link. Thus, proactive organization must remain vigilant and resilient to changing conditions.
Geopolitics, Drought, and Potential Strikes Threaten Container Shipping
Container shipping has been in a constant state of flux since the pandemic. Container ships were lined up along the ports of Los Angeles and Long Beach, signifying heightened delays, disruptions, and price increases during the pandemic. As the pandemic slowed down, a ship got stuck in the Suez Canal and China went on lockdown over Zero COVID policies. Since then, disruptions have carried on. The Panama Canal experienced drought conditions, causing capacity rates to sink by 50%, creating delays, diversions, and price increases for quicker service.
For East Coast bound container ships from Asia, they could divert from the Panama Canal to the Suez Canal. However, Iran-backed Houthi rebels started attacking ships in the Suez Canal, causing ships to divert around the southern tip of Africa, adding 10 days to ships going to the East Coast or Europe from Asia. To add fuel to the fire, pirates make the trip around the southern tip of Africa more perilous in addition to the added cost, fuel, and time. Additionally, China has become aggressive and has been threatening the Philippines, Taiwan, and others passing through the South China Seas. This tension puts almost $3.5 trillion dollars that passes through the South China Seas annually at risk.
Impacts on Container Shipping
Overall, due to these disruptions, vessel capacity is constrained. For example, according to the Journal of Commerce, commercially idle tonnage represented an average of 0.7% of the total global container shipping fleet in the first half of 2024, which is a low not seen since the pandemic. Rates have also increased significantly, adding to the inflation story. For example, the rates from Shanghai to New York have gone up by 300-400% since December 2023
Further complicating container shipping are labor negotiations and potential strikes in the U.S. East Coast and Gulf ports, Canada, and Germany. Given the current state of disruptions, U.S. companies are re-routing goods through the West Coast ports to avoid the Iran-backed Houthi attacks and the potential strikes and using rail to transport the goods across the country. Large companies such as Amazon and Walmart are also taking control of their supply chains, and manufacturers are transitioning to regional supply chains to mitigate these risks.
Airfreight and Parcel Package Shipping Picking Up the Slack
E-commerce continues its upward trajectory with estimates at $6.4 trillion globally in 2024, impacting air freight and last-mile delivery. According to the International Air Transport Association, air freight demand is expected to increase by 4.5% in 2024, although revenue is expected to decline as international trade stagnates and shippers use expanding passenger flight capacity. Air freight has experienced increases due to geopolitical concerns with sea transport. Companies will continue to look for reliable alternatives for time-sensitive deliveries. They are also looking to regional carriers to diversify and ensure reliable deliveries.
Volatility in Trucks and Rail; Yet High Potential with Reshoring
Demand and supply got out of alignment during the pandemic and have not returned. During the pandemic, there was a large appetite for product deliveries, and so motor and rail capacity expanded, and rates increased. As consumers switched to services, an overcapacity situation resulted, and rates fell. Additionally, many freight brokers and asset-based carriers exited the business. In rail, in addition to the drop off in volume, there were financial pressures, labor shortages, and safety concerns. Yet as reshoring increases demand, the tables are likely to flip again. Secure long-term contracts with key transportation providers and diversify your base to thrive during these volatile and turbulent times.
By Lisa Anderson, Founder and President, LMA Consulting Group
Originally published in Adhesive & Sealants Industry, September, 2024.