Disrupted supply chains threaten global recovery

Source: Lloyd’s Loading List
Date: 23rd November 2021

Containerized freight costs are expected to remain high, and are likely to lead to increased consumer pricing, particularly on goods with complicated integrated supply chains.

In its 2021 Review of Maritime Transport, the UN Conference on Trade and Development warned that while maritime trade had weathered the storm of 2020, the emerging recovery was “inherently fragile”.

“The pandemic’s impacts and legacies are likely to linger and the future shape and contours of the next normal for the world economy remain uncertain,” Unctad said.

The recovery was also being hampered by supply chain bottlenecks, it added.

“The rebound in trade, combined with pandemic-induced restrictions in logistics operations, has led to shortages in equipment and containers, along with less reliable services, congested ports, and longer delays and dwell times,” Unctad said.

“For shipping, on the other hand, soaring freight rates, surcharges, and fees have bolstered profitability.”

While the immediate future would be shaped by the path of the pandemic and a worldwide vaccine rollout, the longer-term outlook was being reshaped by “structural megatrends” that transcended the pandemic and its immediate effect.

“Eventually, the logistical hurdles caused by large swings in demand could dissipate as global trade patterns normalize,” the report said.

“However, the pandemic has also accelerated megatrends that in the longer-term could transform the maritime transport landscape.”

By exposing the vulnerabilities of existing supply chains, the pandemic had focused on the need to build resilience.

“The pandemic emphasized the importance of ensuring continuity in supply chains and the need for them to become more resilient, responsive, and agile,” Unctad said.

Moreover, discussions over the future of globalization had led to calls to take a fresh look at the role of extended supply chains and reliance on distant suppliers.

But while some argued that reshoring and nearshoring would accelerate, resulting in a major reconfiguration of supply chains, Unctad said an outright end to globalization was unlikely.

“It may be fairly straightforward to restore labor-intensive and low-value production, but it is more complex to move production and switch suppliers for mid-and high-value-added manufacturing,” the report said.

“Instead, enterprises are likely to blend local and global sourcing, modifying their strategies according to product and geography, with a blend of reshoring, diversification, replication, and regionalization.”

A more urgent concern, however, was the high cost of containerized freight, which if sustained would “significantly increase” both import and consumer prices, Unctad said.

Globally, import price levels could increase by 11% as a result of higher freight costs, with small island developing states that depend on maritime transport the hardest hit.

There would also be a downstream impact on consumer prices.

“If container freight rates remain at their current high levels, then in 2023 global consumer prices are projected to be 1.5% higher than they would have been without the freight rate surge,” the report said.

“The impact is expected to be more significant for smaller economies that depend heavily on imported goods for much of their consumption needs.”

Some goods would be affected more than others by rising freight costs.

“Most exposed are goods manufactured through integrated supply chains,” Unctad said.

“Globalised production processes entail greater use of shipping, with intermediate goods often crossing borders multiple times within and between regions. This is the case, for example, for East Asian goods destined for important markets in North America and Europe.”

For computers, and electronic and optical products, for example, the consumer price uplift induced by the freight rate surge could be as much as 11%.

But lower value goods could also be hit, with furnishing, textiles, and garments likely to see a 10% increase in consumer prices.

While the impact of this would be felt most keenly in smaller economies that rely on these goods, even in major economies lingering high freight costs and disruption to maritime transport threatened to undermine economic recovery, Unctad said.

“In the US and the euro area, for example, a 10% increase in container freight rates could lead to a cumulative contraction in industrial production of around 1%.”

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