Continued demand growth and cost inflation will see companies increase prices and adapt their supply chains in the second quarter, new analysis shows.
“The seeds of the challenges faced by global supply chains during the first quarter of 2021 were sown in the second half of 2020 and are unlikely to unwind before the end of the second quarter of 2021,” Christopher Rogers, supply chain analyst for Panjiva, an S&P Global Market Intelligence firm, said. “Global trade activity has continued to be robust, although there is a clear two-speed recovery in progress. ”
Global exports climbed 13.2 percent year-over-year in January, largely due to strength in exports from China. Exports from the U.S. and European Union fell 0.7 percent and 8.9 percent, respectively. A similar pattern occurred in February, with exports from 17 countries up 21.2 percent, or 6.2 percent excluding China. Shipments from the U.S. were down 5.7 percent.
Rogers says that what happens next for global trade will hinge on the rate of vaccination rollouts globally, coupled with shifts in consumer spending to services from goods and whether companies adapt their supply chain strategies accordingly. He expects that the hangover of port congestion and challenges from the Suez Canal blockage would probably “continue to disrupt logistics networks for much of the remainder of the quarter.”
That will mean companies need to make a decision on whether to ship early for the peak season. That carries some risk, especially for seasonal retailers in the fashion and toy industries where customer tastes could redirect and end up out of sync with corporate planning.
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“The upward pressure on supply chain costs, including logistics and commodities caused by elevated demand and largely fixed supply, has continued throughout the first quarter of 2021 with little sign of abating. Most forward markets indicate a steady drift down in the remainder of 2021, though that would still leave costs well above longer-term averages,” Rogers said.
He noted that on the logistics side, costs for annual contract round have seen spot container rates increase by 26.2 percent year-to-date in 2021, according to S&P Global Platts data. And challenges such as the Suez Canal blockage are shocks that long-term contracts can do little to obviate, Rogers said. Separately, seven industrial commodities plus freight have seen their costs rise 23.0 percent year-to-date, but jumped 40.9 percent in the first quarter through March 25 versus the fourth quarter of 2020.
While the jump in costs may take several months to work its way through supply chains and appear as higher consumer prices, the speed at which that occurs will depend on long-term corporate decision-making and the time required to ship products, as well as the prevalence of hedged and contracted prices.
Rogers noted that a review of first-quarter corporate earnings calls indicates that firms have spent recent months focused on higher costs, disrupted logistics operations, parts shortages and the continued pandemic drag on demand. A global analysis of over 7,000 companies showed that 23.8 percent mentioned freight issues on their calls, up from 18.0 percent in the fourth quarter of 2020. The number discussing logistics and supply chain issues rose to 37.6 percent and 50.2 percent, respectively. While there are signs of price increases being planned, few companies actually discussed either short- or long-term reactions to the challenges. A total of 28.0 percent mentioned the phrase “price increase” during the first quarter.
Rogers said longer-term options for companies reviewing their supply chains include diversifying suppliers, using close-to-market vendors, retaining higher levels of inventory and signing “more resilient supply and logistics contracts.”
Panjiva’s data shows that U.S. seaborne imports of containerized freight per day have reached 101,250 20-foot equivalent units in the first half of March, representing the highest since at least 2017, Rogers said. “That would suggest clearing of congestion as well as demand are factors at play,” he added.
What could become problematic is the rate of coronavirus vaccinations overseas. Rogers sees an increase in what he calls “medical protectionism,” as the European Commission is evaluating proposals to tighten rules governing exports of Covid-19 vaccines. Rogers believes that global vaccine distribution will extend beyond the end of the year. “Herd immunity levels even in the more advanced countries are unlikely to be achieved by the end of the second quarter,” he said.
On the U.S. trade policy front, Rogers expects continued tariffs on imports from China under the section 201 program, as well as the Biden administration leaving the phase one trade deal in place. In the recent meeting between trade officials from China and the U.S. in Alaska, coalition-building seemed to be the focus as trade policies took a back seat, the analyst said. In addition, there are consultations on possible section 301 tariffs linked to digital services taxes that could be implemented by six countries, including the U.K.
“While U.S.-China strategic confrontation is the most significant area of uncertainty for global supply chain planning, it is far from being the only geopolitical risk for supply chains,” Rogers said. Friction between the E.U. and the U.K. has worsened since the start of the year, especially in connection to border controls and potential “medical protectionism.”
In the U.S., the Biden administration will need to decide in the second quarter whether it wants, or is able, to extend Trade Promotion Authority. How the U.S. handles initial disputes under the U.S.-Mexico-Canada Agreement will provide signs of the administration’s “attitude toward compromise with its neighbors.”