Cover Story: Supply chain disruption unlikely to end anytime soon

This article first appeared in The Edge Malaysia Weekly, on July 11, 2022 - July 17, 2022.
Cover Story: Supply chain disruption unlikely to end anytime soon
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OVER the past two years, the surge in consumer demand and Covid-19 lockdown measures have wreaked havoc on major ports around the world, resulting in long queues of ships waiting to unload their goods and a shortage of shipping containers. Port Klang, comprising Westports and Northport, was not spared the impact of the global supply chain disruption.

Westports saw congestion at its container yard as imported containers were left unattended during the various iterations of the Movement Control Order. The crisis also prompted carriers to introduce blank sailings, where ships skip a port, throwing vessel schedules off.

The situation was exacerbated by the devastating floods of December 2021, which incapacitated Port Klang and parts of the Klang Valley. Westports reported lower productivity as fewer workers were able to get to work because of travel difficulties.

The confluence of these issues resulted in Westports’ container throughput slipping 1% year on year to 10.4 million TEUs (20ft equivalent units) in 2021. Container throughput at Westports was down 10% y-o-y in 1Q2022, reaching 2.39 million TEUs versus 2.66 million TEUs handled in 1Q2021.

Westports Holdings Bhd CEO Eddie Lee Mun Tat says 1Q2022’s dip in container volumes reflected the high inflation, rising energy and food prices and the disruption to an already stretched global supply chain as a result of the Russia-Ukraine conflict. And while bottlenecks have eased at key ports in Asia, the problem is far from over in other parts of the world, particularly the US.

“Operations at Westports have been back to normal since last month (as Malaysia started to ease Covid-19 restrictions). Today, if a vessel comes in, it does not have to wait anymore. However, about 80% to 90% of vessels are still arriving at Westports out of their designated berthing windows due to bottlenecks at US and China ports. That remains a concern,” Lee tells The Edge.

Still, Westports is currently better off than its counterparts in Europe and the US because worker shortage does not affect its operations, as it did not let go of any of its 5,797 employees during the pandemic.

Elsewhere, Lee points out that the Shanghai port congestion has improved as China started to ease its strict Covid-19 restrictions on June 1 after two months of lockdown. Data by London-based online valuation and data provider VesselsValue shows that average waiting times for container vessels in Shanghai peaked at 69 hours at the height of the Omicron wave in late April. Waiting times have since dropped to last year’s levels and are currently at about 34 hours and falling.

The situation is also improving at major US West Coast ports like Los Angeles and Long Beach, although only slightly, he says. “Average waiting times for vessels at US ports have fallen to about 10 days from more than 30 days last year.”

According to Lee, there are several factors why the US is still struggling with port congestion. First, although many expected the tariffs that former US president Donald Trump imposed on US$350 billion worth of Chinese imports to hit demand for Chinese consumer goods, US consumers continue to buy from China.

“Second, most of the cargo handled at Los Angeles and Long Beach ports is containerised goods coming into the country, which means they must be discharged at the two ports. This is unlike ports such as Westports, where 65% of our volume handled is transhipment cargo, while that in Singapore and Port of Tanjung Pelepas is 90% and 80% to 90% respectively. In this regard, transhipment cargo can be discharged at other ports if a particular port faces congestion,” he says.

“Third, if you look at US ports, they have not built new capacity in many years. When there was a sudden surge in cargo volume, they could not cope. Fourth, they face a shortage of manpower and equipment like trailers and empty containers. Unlike Southeast Asia, some of the goods coming to the US involve long-haul trucking or rail and thus, it takes longer to bring the empty containers back.”

Tasco Bhd deputy group CEO Tan Kim Yong concurs. “Although the US West Coast ports are operating, containers sit stacked at the ports due to a shortage of trucks and manpower.”

All eyes on China’s reopening

Supply chain disruptions continue to be a major drag on the world economic recovery. Originally triggered by the global lockdowns for Covid-19, the delays are now being exacerbated by the Russian invasion of Ukraine and China’s zero-Covid policy, says CGS-CIMB Research economist Nazmi Idrus.

He expects supply chain constraints to gradually taper off towards end-2022 due to the balance of three factors. “On the negative side, we believe sanctions on Russia can only get worse at this point, leading to suppliers scrambling for alternatives,” he says in a July 5 economics note.

“On the positive side, the tightening of monetary policy around the world in an effort to slow the rise in inflation will likely result in weakening demand. This will translate to softer trade volumes and a chance for supply to catch up with demand.

“Third, we project China’s post-lockdown ‘revenge spending’ to be temporary, as consumers may maintain a cautious approach given the lack of clarity on its government’s zero-Covid exit strategy and lingering possibility of another wave of infections.”

Nevertheless, experts are of the view that further stress on the global supply chain could materialise as China gradually rolls back Covid-19 restrictions on Shanghai, home to the world’s busiest seaport.

“We have been told that as Shanghai eases restrictions from June 1, there will be a mad rush of things coming out of China. But so far, we have not seen that happening,” says Westports’ Lee.

“The situation is very fluid. Shanghai’s lockdown has led to containers being rerouted to Southeast Asia. Hence, the shortage of cargo containers in the region has eased in the last two to three months,” Tasco’s Tan tells The Edge.

However, China’s reopening may cause another wave of container shortages in the market as it accounts for about a quarter of the world’s container traffic, he warns.

Katrina Ell, senior economist at Moody’s Analytics, says that while most countries are embracing endemic living so that the pandemic is less of a disruptive force to global economic growth, China is sticking with its zero-Covid strategy. This keeps the risk of further aggressive and extended movement controls uncomfortably high.

“As China is a key part of manufacturing in Asia and globally, there is a risk that supply chains will not normalise in the near term. Our baseline scenario is that supply chain stress will ease over the course of 2022, but we are unlikely to see the supply chain return to pre-pandemic levels this calendar year,” she says in an email response to questions from The Edge.

Ell says the assumption that supply chain stress would ease in the first half of 2022 was dealt a blow when Russia invaded Ukraine. “This unfortunate turn of events led to increased disruption of key commodities, as sanctions and physical disruptions to production and transport occurred.”

She says China’s zero-Covid policy is a threat to the expectation that supply chain stress will ease in 2023. “At any moment, policymakers could opt again to lock down large cities [leading] to production and shipping delays.

“While policymakers have indicated a preference towards swift, localised lockdowns, the risk of another spike in supply chain stress from the zero-Covid policy is high. Also, if Russia’s invasion of Ukraine leads to further disruption of key commodities, the supply chain stress will worsen.”

Freight rates moderating, but still above pre-pandemic levels

Meanwhile, significant supply chain disruptions saw shipping and air freight rates hit record highs in 2021. Benefiting from high freight rates are shipping lines, air cargo carriers and freight forwarders, which have reported record profits.

Tan says ocean freight rates have retreated since February, when partial lockdowns in Shanghai started and as demand slowed with US retailers overstocking certain items to reduce shipping uncertainties. Even so, they are still higher than pre-pandemic levels. For example, shipping rates from Port Klang to the US West Coast have dropped to US$8,000 (RM35,424) per FEU (40ft equivalent units) from US$18,000 per FEU in February.

According to Drewry, spot rates from Shanghai to Los Angeles had dropped 21% y-o-y to US$7,556 per FEU as at July 7.

Tan says it is difficult to predict where freight rates will be over the next 12 months with China’s lockdowns playing a major role, although rates are likely to rise once the world’s most populous country reopens. “In the medium to long term, perhaps rates will fall due to more capacity in the market, which brings equilibrium to supply and demand. But whether they will return to pre-pandemic levels, no one knows.”

Similarly, air freight rates have retreated 5% year to date, he notes.

Moody’s Analytics’ Ell notes that freight rates are driven by several factors. For instance, the Baltic Dry Index (BDI) — which measures changes in the freight rates of the dry bulk shipping market — has been on a volatile ride so far in 2022, but overall, it has trended lower. This has been on the back of easing supply chain disruptions globally, but more recently, there have been downward revisions to global growth going into 2023.

“The assumption is that major central banks are aggressively hiking [interest] rates to cool inflation. Global demand will take an increasing hit and this will lead to lower demand for goods transport,” she says.

The BDI had slumped 37% over the past year to 2,043 points on July 6.

Logistics players raise prices to fight rising operating costs

Julian Neo, managing director of DHL Express Malaysia and Brunei, says during the pandemic, one of the biggest hits the company took was the shortage of air freight capacity due to the lack of belly space capacity on commercial flights.

“While we do make time-sensitive shipments across the world via our own fleet of cargo aircraft and partner airlines, a significant number of commercial flights are still needed. This low availability necessitated a transition to unconventional air routes and the purchase of additional belly space. We also needed to ensure as little disruption as possible to transit time during the first MCO in March 2020,” he tells The Edge.

“However, throughout these three years, we have consistently enhanced our infrastructure and adjusted our air network to provide customers with the widest coverage and most efficient shipping options.”

Last year, DHL Express introduced a direct Hong Kong-Penang route five times a week. “An Airbus A300, with 54 tonnes of cargo space, is dedicated to serve Penang, where electronic components and parts make up the bulk of goods flown. This not only adds capacity but also shortens transit times to and from the state,” says Neo.

Today, air freight capacity continues to be an elusive commodity as airlines and forwarders reduce or cancel flights, he says. “The air freight market remains volatile. On the one hand, we see high demand and, in turn, high volumes, and limited handling capacity due to Covid-19 and infrastructural issues on the other.

“We have also observed a trend in recent years where e-commerce players take transport into their own hands and reduce their dependence on third-party providers. This does not necessarily crowd the logistics space as the sector serves distinct market segments that are mutually exclusive.

“The constantly changing trade landscape demonstrates the untapped potential that is still available, as new verticals emerge and current ones evolve. Additionally, beyond the bread and butter of simply moving goods from point A to point B, industry players — as enablers of growth — are increasingly expected to add value.”

Neo says that while air freight capacity has been improving, it remains constrained, especially considering the ongoing robust demand. “The prospect of further lockdowns, air travel restrictions and resurgence of Covid-19 cases mean a return to normalcy is still some way off.”

Against this backdrop, air freight rates will continue to be on an upward trajectory, and this is projected to endure due to geopolitical tensions, jet fuel price hikes, and continued service disruptions due to lockdowns imposed to manage Covid-19 cases.

“DHL Express adjusts its rates on an annual basis. For 2022, our price increase in Malaysia averaged at 4.9%. This increase takes into account local and international inflation and currency dynamics, which affect all businesses, as well as administrative costs related to regulatory and security measures. Depending on local conditions, price adjustments will vary from country to country, and will apply to all customers where contracts allow,” says Neo.

“The adjustment also allows the company to further invest in infrastructure networks and strengthen its resilience against crises and provide the needed capacity growth due to growing customer demands,” he adds, noting that the company is investing about €750 million (RM3.4 billion) to bolster its ground infrastructure and air network in Asia-Pacific between 2020 and 2022.

Tiong Nam Logistics Holdings Bhd, the country’s largest total logistics solutions provider — which posted record revenue of RM691 million for its financial year ended March 31 (FY2022), up 15% from FY2021 — has also increased its service rates by 15% since last month to partially account for higher operating costs.

“Our key cost item of fuel is subsidised by the government, so we have been largely cushioned from the impact of global inflation. However, we are incurring higher wages in line with overall inflation and to support business expansions,” says Tiong Nam managing director Ong Yoong Nyock.

“For the rest of the year, we will maintain a conservative approach to price adjustments,” he adds.


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