What’s happening this month in the industrial sector? Read below, as the GCP team examines recent price movements, economic trends and news, from around North America.
Key Cost Indexes
Please note all 2021 averages were calculated using numbers from May through December, unless otherwise stated. May is when we published our first Industrial Sector Cost Report and started tracking each metric.
1. Ocean Freight Rates – Average GCP Container Cost, U.S. Dollars
|Month||Asia/West Coast||Asia/East Coast||40’ Containers|
- The average Asia/WC rate and Asia/EC rate remain elevated coming into 2022 at 180% over the start of last year.
- On the positive side prices on both lanes remain more than 20% off their peak highs reached in September 2021.
- Taiwan 40’/EC rates are averaging $23,000/$26,000 for the third consecutive month.
2. North American Trucking Rates – Average Cost/Mile, U.S. Dollars
- Load post activity continues at an extraordinary rate, postings are 80% higher YOY.
- In contrast, the volume of carriers looking for loads and posting their trucks on load boards is at its lowest level in four years.
3. Material Pricing – Institute for Supply Management (IMS®) Price Index
|September||69.5 %||23.4 %||7.1 %||+62.4||81.2|
|August||62.8 %||33.3%||3.9 %||+58.9||79.4|
|July||73.8 %||23.8 %||2.4 %||+71.4||85.7|
|June||84.8 %||14.5 %||0.7 %||+84.1||92.1|
|May||77.1 %||21.6 %||1.2 %||+75.9||88.0|
- The December 2021 ISM® Prices Index registered 68.2 percent, a decrease of 14.2 percentage points compared to the November reading of 82.4 percent.
- Raw material prices have now increased for 19 consecutive months.
- This is also the 16th month in a row the index has been above 60 percent, however the first month below 70 percent in over a year.
4. Commodity Pricing – Institute for Supply Management (IMS®) Report on Business
|Prices Up||Prices Up||Prices Down|
|Adhesives and Paint||Natural Gas *6||Aluminum *(2)|
|Aluminum *(19)||Nylon (3)||Crude Oil|
|Capacitors||Ocean Freight (13)||Ethylene|
|Corrugate (15)||Packaging Supplies (13)||Natural Gas*|
|Corrugated Packaging (14)||Printed Circuit Boards (PCBs)||Polyethylene|
|Diesel Fuel (12)||Resin Based Products (11)||Propylene|
|Electrical Components (13)||Resistors||Steel*(2)|
|Freight (14)||Rubber Based Products (5)||Steel Hot Rolled (2)|
|Labor Services||Semiconductors (11)|
|Labor Temporary (8)||Silicone (2)|
|Lubricants||Steel – Galvanized|
|Lumber||Steel Stainless (14)|
|Steel Products (16)|
- The number in brackets after each item indicates the number of consecutive months the commodity has been listed up or down.
- *Indicates those commodities both up and down in price.
5. US Dollar – Against Other Currencies ($1 USD equals the values shown in the chart below)
|Month||Chinese Yuan||Mexican Peso||Euro||Canadian Dollar|
|January 03, 2022||6.356||20.45||0.880||1.270|
- January 03, 2022, represents the first trading day of 2022.
- Chinese Yuan – Overall the U.S. dollar depreciated 1.70% in value against the Yuan in 2021.
- Mexican Peso – Overall the U.S. dollar appreciated 3.33% in value against the Peso in 2021.
- Euro – Overall the U.S. dollar appreciated 8.48% in value against the Euro in 2021.
- Canadian Dollar – Overall the U.S. dollar appreciated 0.07% in value against the CAD in 2021.
- For the fourth consecutive month we will provide an update on the crucial challenges we’ve identified impacting the world of industrial products.
- For this report we have made a couple of changes:
- Point 6 was previously labeled Global Power Crisis. It has been updated to Energy Prices.
- We have removed 2022 Beijing Olympics Preparations and replaced it with Inflation.
1. Material Pricing – Most material prices remain elevated but are down from their highs of 2021.
2. Ocean Freight Rates – Ahead of China’s Lunar New Year (LNY) festival, spot rates out of Asia have started to climb. Average Asia-U.S. West Coast rates have risen 16% and Asia-U.S. East Coast rates increased 6% since the start of 2022.
3. Trucking Costs – Higher freight rates and incremental costs associated with navigating port congestion continue to push load rates higher. Since December 2019, rates have surged 41%.
4. Port Congestions – For 2021 it was calculated around 11% of global containership capacity was taken out due to congestion issues. Normal (pre-Covid) figure is around 2%.
5. Labor Costs/Shortages – As per the U.S. Labor Department’s latest JOLTS report, there is now 1.5 jobs available per unemployed person. Workers are finding themselves with increased leverage and have received an average hourly earnings increase of 4.8% YOY.
6. Energy Prices – The end of 2021 was marked by an energy crisis that hit every kind of fuel type, coal, oil, natural gas, even renewables. As we head into 2022 oil and gas are off their highs, but the winter months are expected to add more upside cost pressure.
7. U.S./China Relations (tariffs) – U.S. domestic frustration over tariffs keeps building as the Trump-era Phase One trade deal with China has expired. Katherine Tai has been negotiating with her Chinese counterpart, Vice Premier Liu He, since the fall, but so far has offered little indication of what will come next.
8. COVID-19 – Conditional forecasts suggests the omicron variant will hit the U.S. GDP hard but short. Activity is expected to dip into February, then rebound in March.
9. Inflation – At the start of 2021, inflation barely registered on global CEOs’ radars. But, as 2022 begins, inflation now ranks 2nd behind Covid disruptions as the top economic concern for business.
10. China Power Crunch – It seems the power rationing measures Beijing put in place to manage their coal shortages and environmental targets has been removed. The government’s effort to rebalance the market has reduced the risk of power outages and rolling blackout for now.
Insights of the Month
- Most economic forecasters think 2022 will be a good year with growth between 3.5% and 4%. That would represent a slowdown from 2021, but historically a strong year.
- For January, the industrial sector remains in a demand-driven, supply chain-constrained environment.
- Pandemic related issues – worker absenteeism, shortages of critical materials, high commodity prices, government restrictions, and difficulties in transporting products both internationally and domestically – continue to plague the industry.
- Sharp spikes in energy prices are continuing into 2022. Gasoline, diesel fuel, heating oil, natural gas, electricity, and coal all cost more than they did a year ago.
- The top 3 economic concerns for CEO’s and business leaders entering 2022 include, inflation, labor, and Covid related disruptions.
- Covid continues to pose a real risk to business. Bank of America estimates there will be more than 4 million U.S. workers under quarantine at the peak of the Omicron wave.
- S. Producer prices rose 9.75 percent in 2021. The increase marks the fastest annual jump in the PPI since the Labor Department began compiling the data in 2010.
- We have started to see signs of raw material and finished good pricing beginning to settle. Albeit at elevated levels over 2019 and 2020.
- The Institute for Supply (ISM®) Prices Index registered 68.2 percent, a decrease of 14.2 percentage points compared to the Novembers reading of 82.4 percent.
- This means, raw material prices increased for the 19th consecutive month, however, at a much slower rate vs December and the rest of 2021.
- In December 16 of 18 industries reported paying increased prices for raw materials. This includes, Apparel, Leather & Allied Products; Textile Mills; Furniture & Related Products; Paper Products; Primary Metals; Miscellaneous Manufacturing; Machinery; Computer & Electronic Products; Chemical Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; Fabricated Metal Products; Transportation Equipment; Wood Products; Electrical Equipment, Appliances & Components; and Plastics & Rubber Products.
- Only one industry, Petroleum & Coal Products, reported paying decreased prices for raw materials.
- The ISM also listed commodities in short supply, which includes, Aluminum (2); Copper Products; Electrical Cables; Electrical Components (15); Plastic Resins (10); Rubber Based Products; Semiconductors (13); and Steel (13)
- The overwhelming consensus for 2022 is that the year will remain extremely strong for ocean carriers and extremely expensive for cargo shippers/importers
- Rates for Asia/U.S. routes are already up to start the year as we lead into China’s LNY celebrations and the Beijing Olympic games.
- Industry experts have identified at least six “known unknowns” that will likely play a significant role in price direction of ocean freight for the coming year.
- How will Omicron and future variants impact U.S. consumer demand, effective shipping capacity and Asia factory output?
- Will U.S. import demand remain strong after the stimulus is withdrawn?
- How much is pricing driven by higher import demand and how much is driven by effective shipping capacity (given vessels tied up in congestion)?
- Can a new West Coast labor contract (which expires July 1) be signed without disruptions?
- If a labor impasse is averted, import demand falls and congestion eases, will liners have the discipline to remove vessel capacity and keep rates strong, as they did during the initial lockdowns in 2020?
- Could China-Taiwan geopolitical tensions devolve into military action?
- Demand is ultimately the backbone of why we’ve seen rates increase as much as we have. So long as import demand stays high, so too will freight rates.
- Trucking load rates start 2022 at all-time highs.
- The national average van load-to-truck ratio increased from 6.0 to 10.4. Meaning there is 10.4 van loads available for every van posted to the DAT
- Exports project rates for 2022 (as a whole) to be about 4% higher than this year. While less-than-truckload rates are projected to flatten or potentially drop slightly.
- There are several factors weighing on rates, which include the driver shortage, chassis shortage and increased operation costs.
- The driver shortage is real and pervasive. Even if the driver pool significantly expanded as new legislation and increased pay lure workers, it’s unlikely carriers can grow their fleets to match it.
- The ongoing chassis shortage is also preventing many in the industry from right sizing their equipment to meet demand.
- Prices are rising throughout the economy, as are wages and other inputs for carriers. Fuel and insurance costs continue to climb, and carriers are increasing prices to offset them.
- Like ocean freight rates, increased demand and reduced supply remain the major underlying driver pushing costs.
- As we start 2022, all the available data shows congestion and bottleneck problems are not easing.
- Expectations for 2022 are to be volatile as most, expect the market conditions to remain pretty much the same as 2021, if not more challenging.
- Marketplace data for the end of 2021 shows the average monthly end to end transit times for China-US ocean shipments hit a record of 80 days in December. That’s 50% longer than in December 2020, and 85% longer than in 2019.
- The congestion situation is particularly challenging at several hub ports and gateway terminals around the world.
- In Europe, ships are having to wait seven to 10 days to berth at Felixstowe in the UK.
- At the ports of LA/Long Beach ships waiting between 38 and 45 days to berth.
- In China, the port of Ningbo (the world’s third largest container port) is once again running normally, however trucking services around the port remain restricted due to lockdowns.
- However, it might not all be doom and gloom, there are reasons for a little cautious optimism. Carriers have been filling gaps in the schedule by organizing extra sailings, and many businesses have learned to plan their orders as far as possible to secure capacity.
- There are also hopes that the February slowdown in manufacturing over China’s LNY and Beijing Olympic games may help ease the congestion situation at some ports.
- Last year it is estimated importers/retailers incurred approximately $321 million in added expenses (above increased shipping costs) on inventory due to port congestion issues.
Labor Costs/ Shortages
- Nearly half of U.S. states rung in the new year with higher minimum wages. In total, 25 states boosted to their minimum hourly pay requirement for 2022.
- 10 states plus D.C. have enacted a $15 minimum wage law earlier this summer, to be phased in over four years.
- A recent survey by Deloitte found that 38% of executives reported attracting new workers is their top priority for the production workforce in 2022. Followed by retention (31%) and re-skilling (13%).
- Job turnover has been largely concentrated in low-wage industries, where strong competition for employees has given workers the leverage to seek better pay.
- In recent months, employees have gone on strike at John Deere, Mondelez and Kellogg’s, as workers find themselves with increased power due to the labor crunch.
- A survey of more than 1,000 companies found one-third expect to raise salaries more than they had anticipated. Nearly three quarters of the respondents cited labor shortages as the reason they increased their salary budgets.
- While many have already raised wages to attract/keep workers in response to The Great Resignation. Increased wages are adding pressure to businesses who are already feeling the pinch from supply chain problems and inflation.
- The short-term energy outlook continues to reflect one of heightened uncertainty around the direction of pricing. The ongoing pandemic, winter weather, consumer demand and geopolitics all play a role in global energy consumption.
- The average of barrel of Brent crude was $71 USD in 2021, up from $42 USD in 2020. This strengthening reflects the success of Opec+ in managing production against rebounding global demand.
- The gas market, however, acts vastly different and prices vary significantly by region. North America is self-sufficient and is enjoying relatively low prices. In contrast, consumers in Europe and Asia must compete for marginal supplies and are paying all-time highs on the open global market.
- In the UK natural gas fell to a low of $0.11 USD in May 2020, then surged nearly 5,500% to a high of $6.15 USD at the end of December 2021.
- Politicians on both sides of the Atlantic have called for increased oil and gas production as a way of lowering prices.
- As we move further into 2022, high energy prices, could keep inflation uncomfortably high, slowing economic recovery in many parts around the globe.
- American companies have grown increasingly agitated that Democrats in Washington have not done more to ease Trump-era tariffs.
- This situation will likely boil over in 2022 as tariff critics hope nagging inflation, which remains an economic thorn in Democrats’ side, will help their case.
- The USTR is expected to unveil its plans to reinstate some exemptions to Section 301 tariffs, which former President Donald Trump imposed on roughly $350 billion of Chinese goods.
- Many industry officials argue the scope of the exemptions is too narrow (some 500 products are under consideration) and are pushing for them to be completely lifted.
- Total trade between the U.S. and China increased by 28.7 percent in 2021.
- As the pandemic enters its third year, businesses across North America are besieged on several fronts due to the Omicron variant: deepening supply chain issues; labor shortages; skyrocketing costs and government-imposed restrictions.
- The economy will likely take an early hit, but the damage is not expected to last beyond the first quarter. The long-run economic impact is a bit less clear but perhaps nothing to panic about just yet.
- If the Covid forecasting models are correct, Omicron will likely peak in most places in Europe and the North America as soon as mid/end-January. Case numbers would be expected to improve slowly at first, then dramatically.
- Economists remain upbeat about U.S. GDP growth for the remainder of the year with a median forecast of 3.8%, which is down just 0.1% from before Omicron’s onset.
- In China the story is slightly different. Recent GDP forecasts have been cut from 4.8% to 4.3% due to the harsher restrictions on businesses under China’s COVID-zero strategy.
- Many analysts expect China will maintain its zero-tolerance policy for controlling the pandemic until at least the fall. This strategy carries a great economic cost as strict controls often means closing entire cities and related infrastructure for as little as a handful of cases.
- At the end of 2021 U.S. inflation hit a 39-year high of 7% and is set to become the premier economic challenge of the new year.
- Strong consumer demand, continuing supply chain troubles and the emergence of the omicron variant all threaten to prolong sharply rising prices.
- Central bankers at the Fed’s December meeting expect inflation will fall to 2.6 percent by the end of 2022. However, 55% of CEO’s expect upward pricing pressure to persist into 2023 and are skeptical prices will turn around so abruptly.
- For its part the Fed has signaled their intention to raise rates three times this year, beginning in March. Fed Chair Powell also stated, “The economy no longer needs or wants the very highly accommodative policy we’ve had in place to deal with the pandemic.”
- With the U.S. unemployment rate at 3.9% and consumer demand strong, Fed policymakers are hoping they can engineer a reduction in inflation without undermining the economic recovery or financial market stability.
Thank you for reading our Industrial Sector Cost Report for January 2022.