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
1. Ocean Freight Rates – Average GCP Container Cost, U.S. Dollars
|Month||Asia/West Coast||Asia/East Coast||40’ Containers|
- This past month we saw the average Asia/WC and Asia/EC rates move lower. However, prices are still 350% higher YOY.
- For 40’ containers from Taiwan – U.S. East Coast, pricing has turned lower as well, now averaging between $20,000-$26,000. This represents a decrease of around 20 percent from the previous month.
2. North American Trucking Rates – Average Cost/Mile, U.S. Dollars
- The volume of freight moving on the spot market has doubled in 2021 compared to pre-pandemic year, representing an average of 24% of the total truckload marketplace.
- The remaining 76% of truckload freight moved on longer-term contract rates. In normal times, the split would typically be 14% spot and 86% contract.
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 ISM® Prices Index registered 85.7 percent, an increase of 4.5 percentage points compared to the September reading of 81.2 percent. Raw materials prices have now increased for the 17th consecutive month. This is also the 14th month in a row that the index has been above 60 percent and the 11th straight month it has exceeded 70 percent.
4. US Dollar – Against Other Currencies ($1 USD equals the values shown in the chart below)
|Month||Chinese Yuan||Mexican Peso||Euro||Canadian Dollar|
- Chinese Yuan – The U.S. dollar has depreciated 3.42% in value from mid-November 2020.
- Mexican Peso – The U.S. dollar has appreciated 0.2% in value from mid-November 2020.
- Euro – The U.S. dollar has appreciated 4.07% in value from mid-November 2020.
- Canadian Dollar – The U.S. dollar has depreciated 4.70% in value from mid-November 2020.
Last month we provided an overview of 9 crucial challenges impacting the world of industrial products. We will continue to update you on those topics so long as they remain applicable.
1.Global Power Crunch – Gasoline prices in the United States are up more than 50 percent this year. Natural gas prices in Europe have risen nearly 500 percent over the same period. In Asia, power companies are buying liquefied natural gas at record prices to try to lock in supply. And in the U.K. plants have been forced to shut down due to high energy costs. Why is this happening? The simplest explanation is that the demand for energy is currently exceeding supply, which causing prices to rise around the globe. More on pg. 5
2. China Power Crunch – Power cuts have disrupted many households and industries throughout the country. As a result, overall factory output growth for the world’s top energy consumer has dropped back to levels last seen in early 2020, when heavy COVID-19 curbs were in place. It is believed industrial production will further moderate in 4Q 2021 as energy consumption restrictions remain in place. More on pg. 5
3. Material Pricing – The producer’s price index for the rubber and plastics industry has reached a new high. The index, which tracks the changes to the cost of production has increased by 17 percent since the start of year. A main reason for the increase remains the difficulty in securing ingredients – raw materials, accelerating agents, chemicals and even filler material. More on pg. 6
4. Ocean Freight – Asia/US West Coast and Asia/US East Coast freight rates remain considerably elevated, although down from their September highs. On average, rates are 350 percent above a year ago and more than 700 percent above pre-pandemic levels. Importers are looking forward to lower rates, but prices are likely to stay high because of port congestions, low inventories, and still-elevated consumer demand. More on pg. 6
5. Port Congestions – Though there are indications that yard congestion at L.A./Long Beach ports is slightly improving, and upcoming federal spending could help some ports in the near term, overall ports remain overwhelmed. The latest NRF analysis of US ocean import volumes shows demand is expected to remain extremely elevated through the end of the year, to the tune of 30% higher over November-December volumes of 2019. More on pg. 7
6. Trucking Shortage – The trucking industry is desperate to get drivers into seats at a time when the supply chain needs them most, but a variety of factors is stalling the industry’s ability to gain traction. Recruiting drivers, remains one of the biggest challenges for many carriers. More on pg. 8
7. US/China Relations (tariffs) – President Biden and China’s leader, Xi Jinping, pledged at a virtual summit to improve cooperation, but offered no concrete action after three and a half hours of talks. The two leaders nevertheless expressed a willingness to manage their differences in a way that avoids aggravated conflict between the world’s two largest powers. More on pg. 8
8. COVID-19 – The Biden administration has suspended enforcement of its vaccination and testing requirements for private businesses after a federal appeals court halted the rules pending a review. Under the Biden policy, businesses with 100 or more employees faced a an. 4 deadline to ensure their workers are vaccinated or undergo regular testing. Unvaccinated employees were required to start wearing masks indoors at the workplace on Dec. 5. More on pg. 9
9. 2022 Beijing Olympics Preparations – The 2022 Beijing Winter Olympic games and Paralympics games will be held from February 4th – 20th 2022. We have held talks with all our factory partners, and they have assured us they do not expect any significant disruption to their manufacturing capability due to the upcoming Olympic restrictions.
INSIGHTS OF THE MONTH
• With global supply uncertainty being a continuing theme, it remains good practice to consider longer term ordering to increase supply assurance and timely delivery.
• Demand for industrial products remains strong, but most industries struggle to secure enough raw material to keep manufacturing lines running.
• China’s Producer Price Index (PPI), which tracks the cost of production, remains elevated at historic levels. October’s PPI rose 13.5% from a year earlier, faster than the 10.7% increase in September, and at the quickest pace since 1995.
• Power rationing measures in China have limited many factories to fewer days of production. The level of disruption to manufacturing will in part depend on the severity of the winter and the corresponding need for electricity and heating purposes.
• The U.S. Consumer Price Index (CPI) increased 0.9% from September to October and was up 6.2% from a year earlier. The latter figure is the highest annual inflation rate since November 1990. The result has been swift increases to the prices of goods and services around the country.
• According to the latest McKinsey Global Survey, uncertainty over COVID-19 is no longer a foremost economic concern to executives. When asked about threats to future growth, business leaders now cite supply chain issues, inflation, and labor shortages.
• An all-time high of 86 container ships was reported waiting offshore of L.A. and Long Beach ports on November 16, 2021.
• General predictions for 2022 from the October ISM® Manufacturing report state, that demand will stay strong, supply availability will remain tight, logistics will stay constricted, and inflation will be rampant.
Sincerely, The GCP Team
GLOBAL POWER CRISIS
• Prices are rising around the world because there is not enough supply to cover the demand.
• Two reasons why a supply imbalance exists include extreme and unpredictable weather as well as bad government decisions about storage, reserves and transmission lines.
• However, the most significant cause centers around much of the world stopping their investments in fossil fuels, which has led to less supply of them. At the same time, we do not have a sufficient source green energy to replace fossil fuels today.
• The numbers are clear. In 2019, over 80 percent of global energy consumption was provided by the three main fossil fuels: oil, coal, and natural gas. Wind was just over 2 percent of power consumption, and solar just over 1 percent. It would require a 2,500 percent increase in production and deployment to have wind and solar fully replace fossil fuels.
• Modern societies cannot run without steady access to energy, so what’s needed is a transition strategy. Without it, every time there is a shock to the system, bad weather, poor storage, etc., we will face an energy crisis.
• As countries around the world deal with this latest shortage, it means many households, businesses and manufacturing facilities are likely to pay significantly more for energy this winter, especially if temperatures drop substantially.
CHINA POWER CRUNCH
• With the post-COVID export led industrial boom causing power demand to surge, energy consumption per unit of GDP dropped 2% in 1H 2021, missing the government’s 3% target, thereby triggering this wave of power rationing.
• Policy intervention from Beijing to address the coal shortage has managed to ease the power crunch since October, but the State Grid Corporation of China has warned winter will still be a challenge and localized shortages are still a possibility.
• It is not only China’s energy security under threat, but also, it’s economic growth. The nation’s gross domestic product (GDP) grew at its slowest pace in a year in 3Q 2021, missing market forecasts. Suggesting the power rationing taking place is weakening China’s post COVID recovery.
• Power rationing will likely remain a constraint for production and supply in the near term. It is anticipated that we may see some relief to the power crunch by the end of 1Q 2022.
• As a result, households, businesses, and factories will likely be subjected to higher electricity prices until the end of the power crunch. China is now allowing prices to rise by as much as 20 percent.
• Product pricing across industry remains volatile.
• The Institute for Supply (ISM®) Prices Index registered 85.7 percent, an increase of 4.5 percentage points compared to the September reading of 81.2 percent.
• This means, raw material prices increased for the 17th consecutive month.
• In October all 18 industries reported paying increased prices for raw materials. This includes, Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Paper Products; Printing & Related Support Activities; Textile Mills; Furniture & Related Products; Machinery; Petroleum & Coal Products; Chemical Products; Computer & Electronic Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Primary Metals; Fabricated Metal Products; Transportation Equipment; Food, Beverage & Tobacco Products; and Wood Products.
• The ISM also listed commodities in short supply, which includes, Adhesives and Paints (4); Caustic Soda; Corrugated Packaging (4); Electrical Components (13); Electronic Components (11); Foam; Freight (2); Labor – Temporary (6); Ocean Freight (7); Ocean Freight Containers; Packaging Supplies; Pallets; Phosphates; Plastic Containers (2); Plastic Products (9); Plastic Resins — Other (8); Polyvinyl Chloride (PVC) (2); Printed Circuit Board Assemblies (PCBAs)
(3); Rubber-Based Products (3); Semiconductors (11); Silane; Silicon; Steel (11); Steel — Hot Rolled (12); Steel — Stainless (8); and Steel Products (9). Note: The number of consecutive months the commodity is listed is indicated after each item.
• Many are asking how much longer will these increased rates last? Experts say it’s likely going to be resolved in two ways: either by consumer demand slowing down or with infrastructure investment increasing. And as we know, infrastructure investment takes time to materialize.
• With factors outside the industry unlikely to change anytime soon, we turn to those in the industry to potentially solve the issue. However, that’s not likely either as there is little incentive for those in the industry to change their behavior.
• There are three groups that control most of the maritime shipping industry:
- Shipping lines, which offer freight rates, purchase and lease ships and containers.
- Container equipment lessors, which order new boxes and offer leasing rates.
- Container factories, which offer the prices for newly constructed boxes.
• Within those three groups only a handful of companies control the lion’s share of capacity. And in each case, the current market is enormously profitable, thereby removing incentives to lower price.
- The top eight ocean liner companies now control 81% of global capacity.
- The top five container-equipment leasing companies control 82% of the world’s leasing capacity.
- The top three Chinese container builders produce 83% of all new boxes.
• Given this heavy concentration, Sea-Intelligence studied the past five downturns to see how long it took for prices to fully decrease. Dating back to 1998 they concluded that the average weekly rate of change fluctuated between minus 0.4 percent and minus 0.9 percent.
• When they applied the percentage change to our current market condition, they estimate it could take as long as 18 to 26 months for rates to normalize.
• Container imports are expected to remain at near-record levels for the remainder of the year as everyone rushes to move merchandise from docks to shelves.
• Dockworkers are unloading ships as fast as they can, but the challenge is moving the containers out of the ports to make room for the next ship.
• Several factors are impacting how quick this can be done. National Retail Federation Vice President for Supply Chain and Customs Policy Jonathan Gold said. “We need better empty return procedures and more chassis, truck drivers, rail capacity and warehouse workers to keep the system moving.”
• So far in November, an average of 78.7 containers ships per day have been stuck offshore the L.A./Long Beach ports, up 37% from the monthly average of 57.4 ships in September.
• As a result, the wait time to offload at twin ports has averaged 14-16 days over the past month. Those delays, in turn, have pushed back vessel arrival times at other ports on their schedules.
• Some carriers have announced plans to divert from L.A./Long Beach to other locations, but congestion is building nationwide.
• Container dwell fees are set to be implemented on November 22, 2021. Ocean carriers will be charged $100 per container, increasing in $100 increments per container per day
(without limit) until leaving the terminal.
• It is expected the ocean carriers will pass the cost on to shippers who will pass it on to consumers.
• American Trucking Associations issued a warning of how severe the trucker shortage is, perhaps hoping to spur some government action. The shortage stands at 80,000 drivers currently and is set to surpass 160,000 in 2030. The nation will need to recruit almost 1 million drivers in the next decade to replace retiring drivers and keep up with growing freight demand, the group said.
• A lack of capacity continues to weigh on freight shipments again this past month. The shortfall in drivers has led to another significant jump in costs during October, according to Cass Information Systems.
• The expenditures component of the Cass Freight Index, which measures the total amount spent on freight, rose to a new record level, up 37% YOY in October.
• A lack of chassis and drivers to move stacks of container at the ports combined with delays unloading equipment at shipper facilities are major factors to the congestion and rise in costs.
• As we transition in to 2022, it is being forecasted that rates will stay high and the possibly of further increases exist.
• Since 2018, the U.S. has imposed additional tariffs covering approximately $370 billion of imports from China.
• When these goods arrive at the U.S. border, companies pay taxes averaging 19% of the value of that product to the U.S. government.
• Studies have shown that nearly all the costs of the tariffs fall on North American businesses, which pass these costs on to consumers through higher prices. Consequently, businesses hit by tariffs translate to fewer jobs, higher prices, and less consumer choice.
• On November 15, 2021, President Biden met virtually with President Xi Jinping of the People’s Republic of China (PRC) to discuss geopolitical and economic relations between the two countries.
• This was the third time the two leaders have spoken since Biden’s inauguration in January.
• The fact these meetings are happening suggests neither side believed the open hostility previously being fostered between the two superpowers was working for either of them.
• During the summit President Xi made comments about relaxing trade restrictions to help both economies recover more quickly.
• While the two leaders did not go into much detail many believe this could be a viable outcome in the near term. Lowering, or eliminating tariffs may help drive down short-term inflation, which is a consistent political thorn in the Biden administration’s side.
• Overall, both sides stated that the meeting was wide-ranging, in-depth, constructive and a productive step towards increased cooperation on economic and trade issues.
• The Biden administration has suspended enforcement of its vaccination and testing requirements for private businesses after a federal appeals court halted the rules pending review.
• Earlier in November the U.S. Court of Appeals for the Fifth Circuit ordered The Occupational Safety and Health Administration to “take no steps to implement or enforce the vaccine Mandate until further court order.”
• This development comes on the heels of the news that only 40 percent of Americans are at their strongest immunity level against Covid-19.
• While about 6 in 10 Americans are fully vaccinated, more than half received their last shot more than six months ago, the threshold currently recommended for those getting a Moderna or a Pfizer booster.
• When combined with the 100 million unvaccinated people, about 60 percent of the population is heading into the winter months with reduced protection against the coronavirus.
• It’s hard to imagine a scenario where we can put the COVID-19 genie back in the bottle. The more likely reality is that the virus will become an endemic problem that countries, economies and businesses will have to get used to.
• This means societies and business around the globe will have to reach a consensus on what an acceptable disease burden looks like from an economic, human perspective.
• For reference, it is estimated the total economic cost for the first year of the pandemic in the U.S. was $16.2 trillion dollars. $7.6T lost GDP, 4.4T attributed to premature death, $2.6T to long-term health impairment and $1.6T to mental health impairment.
Thank you for reading our Industrial Sector Cost Report for November 2021.