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Supply chain disruptions

2020 was a year of volatility. Global prices and indices moved down and up like anything. Trends are yet to normalize. Oil futures went down to negative for a short time, and now reverting to normalcy. The story of coal and RLNG is no different. Global food price index is showing a V-shaped pattern with prices in December higher than at the start of COVID-19 outbreak. The shipping business is not isolated from this either. In early days of the pandemic, 40 cubic feet containers spot prices moved down to as low as $1 and now the price is hovering at 1.5 times to 4 times the normal rates in different parts of the world. That is increasing the imported goods’ prices; and not every product in the value chain is available.

Today, ports are congested, and there is shortage of containers. The problem is more in the Far East where container prices have increased by 3-4 times. In the case of the West – the US and Europe—the price increase is 1.5-2 times. In early days of COVID, the demand of exports to US and Europe from China plummeted. Shipping lines switched off some vessels. Empty containers were stuck in the West due to lack of manpower and chassis.

The recovery was fast in China in the second half of 2020. But there were not enough containers. Higher demand pushed prices up. Shipping lines restarted idle vessels; but the opening up of economies and ports vary across the world. For example, in Pakistan, the lockdown was lifted much earlier than in many other countries. Chinese industries opened up earlier than others. Thus, shipping lines started skipping ports where activities were minimal. That has also contributed in creating the backlog. The production is soaring in the East (mainly China) while containers are empty in the West. The repositioning couldn’t take place in time. This has created a domino effect.

Many businesses have predefined contracts of shipping for a certain time. But these cargos are delayed. Those who need urgent deliveries are paying top dollars for spot cargoes. Some are using air routes. Others are waiting. The overall supply chain is disrupted. This is affecting Pakistan adversely too. The problem is higher in imports –since raw materials and goods are mostly supplied from the Far East – cargoes’ spot prices in some cases moved up 6-10 times. Textile, auto and steel industries are affected the most. In case of exports, the problem is less. Majority of exports to the US and Europe – cargo prices up by 1.5-2 times, and the delays are less. But due to port congestions in Pakistan (due to backlog), the shipments are delayed.

Auto makers are finding it hard. One compact SUVs car assembler is saying that their shipping contract is revising in January. The new rates are increasing the CKD imports prices inclusive of freight – the impact on a unit of car is around Rs100,000 or 2 percent. Another automaker, who is big in smaller cars, is moving to air shipping for importing certain parts as regular cargoes are simply not available. The other auto assemblers are facing similar problems. None of them has decided to increase the price yet. One leading player has said that PKR appreciation lately is giving them room to absorb the shock. The prices may not increase; but the deliveries would be delayed. This will fuel ‘own premium’ for instant deliveries.

Textile players are somehow cushioned in exports; but imports of synthetic yarn, specialized chemicals and other materials are facing delays and cost overruns. Lower the value per ton of product higher is the impact on product pricing due to higher shipping charges. Thus, the impact of textile goods is higher. PSF prices in Pakistan are up by 10-15 percent due to expensive cargoes from China. Even local manufacturer is milking it.

No industry is as such isolated from this disruption. Be it cement, steel or any other. Some are facing delays in exports, others are finding imported parts expensive. The problem of higher shipment charges is confined to goods transport in containers. Imports of energy and food items – such as wheat and palm oil, are mainly in bulk vessels. There is no crisis in it. But choked ports are still delaying shipments.

The problem is in supply disruption of many bulk vessels products. In the start, food and energy commodities’ prices plummeted due to demand and production interruption which is because of lockdowns and lack of demand. The palm oil

price graph in 2020 is like

the Nike logo. Price is

up by 40 percent from its

low in May – today the price is highest since 2013. Coal price graph is also like the Nike logo. And the list goes on.

In short, almost all the commodities’ and goods’ prices have moved up significantly in the second half of 2020 for one reason or the other. Production disruption and shipping bottlenecks are to blame. The question is how long this trend will continue and its impact on inflation and balance of payments for a country like Pakistan.

Certainly, the supply side price shock is eating away the margins of producers and sellers. The higher prices are going to strain the freight charges of imports. But if the trend reverses in a few months, not many product prices would increase proportionately.

The buzz is that supply chain normalcy will take place by April for shipping and by June for other commodities. A full cycle has to complete. In shipping, higher demand from China and lower supply of containers/vessels is creating problems. The demand will be lower after the Chinese new year, and by the time the Chinese demand is up, the vessels/containers supply will be normalized.

For palm oil and other food commodities, this year’s production would be higher and prices would come up to normal levels once new crops/productions supplies come. There is no other economic reason for this disruption; but COVID-19. The above analysis is premised on the assumption that no new wave of virus will cause any further disruptions.

Ali Khizar, "Supply chain disruptions," Business Recorder. 2021-01-03.
Keywords: Economics , Economic growth , Palm oil , Coal price , PKR

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